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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the quarterly period ended June 30, 2012
 
Or
 
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the transition period from              to              
 
Commission file number: 001-32136
 
Arbor Realty Trust, Inc.
(Exact name of registrant as specified in its charter)
 
Maryland	 	20-0057959	
(State or other jurisdiction of
incorporation)	 	(I.R.S. Employer
Identification No.)	
 	 	 	
333 Earle Ovington Boulevard, Suite 900
Uniondale, NY
(Address of principal executive offices)	 	11553
(Zip Code)	
 
(516) 506-4200
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x   No   o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   x   No   £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o	 	Accelerated filer  x	
 	 	 	
Non-accelerated filer  o	 	Smaller reporting company  o	
(Do not check if a smaller reporting company)	 	 	
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o   No   x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  Common stock, $0.01 par value per share: 27,749,225 outstanding (excluding 2,650,767 shares held in the treasury) as of August 3, 2012.

 

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ARBOR REALTY TRUST, INC.
 
FORM 10-Q
INDEX
 
PART I. FINANCIAL INFORMATION	2	
Item 1. Financial Statements	2	
Consolidated Balance Sheets at June 30, 2012 (Unaudited) and December 31, 2011	2	
Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2012 and 2011	3	
Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2012 and 2011	4	
Consolidated Statement of Changes in Equity (Unaudited) for the Six Months Ended June 30, 2012	5	
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2012 and 2011	6	
Notes to the Consolidated Financial Statements (Unaudited)	8	
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	65	
Item 3. Quantitative and Qualitative Disclosures about Market Risk	97	
Item 4. Controls and Procedures	100	
PART II. OTHER INFORMATION	100	
Item 1. Legal Proceedings	100	
Item 1A. Risk Factors	101	
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds	101	
Item 3. Defaults Upon Senior Securities	102	
Item 4. Reserved	102	
Item 5. Other Information	102	
Item 6. Exhibits	103	
Signatures	109	

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CAUTIONARY STATEMENTS
 
The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in Arbor Realty Trust, Inc.  We urge you to carefully review and consider the various disclosures made by us in this report.
 
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in economic conditions generally and the real estate market specifically; adverse changes in the financing markets we access affecting our ability to finance our loan and investment portfolio; changes in interest rates; the quality and size of the investment pipeline and the rate at which we can invest our cash; impairments in the value of the collateral underlying our loans and investments; changes in the markets; legislative/regulatory changes; completion of pending investments; the availability and cost of capital for future investments; competition within the finance and real estate industries; and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2011. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views as of the date of this report. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement. For a discussion of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Arbor Realty Trust, Inc. and Subsidiaries — Significant Accounting Estimates and Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2011.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.
 
i

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PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
 	 	June 30,	 	December 31,	 	
 	 	2012	 	2011	 	
 	 	(Unaudited)	 	 	 	
Assets:	 	 	 	 	 	
Cash and cash equivalents	 	$	64,281,810	 	$	55,236,479	 	
Restricted cash (includes $75,806,337 and $65,357,993 from consolidated VIEs, respectively)	 	77,691,781	 	67,326,530	 	
Loans and investments, net (includes $1,041,040,686 and $1,093,893,014 from consolidated VIEs, respectively)	 	1,224,753,997	 	1,302,440,660	 	
Available-for-sale securities, at fair value (includes $1,500,000 and $2,000,000 from consolidated VIEs, respectively)	 	3,864,552	 	4,276,368	 	
Securities held-to-maturity, net (includes $734,515 and $742,602 from consolidated VIEs, respectively)	 	64,041,729	 	29,942,108	 	
Investment in equity affiliates	 	60,097,517	 	60,450,064	 	
Real estate owned, net (includes $83,099,540 and $83,099,540 from consolidated VIEs, respectively)	 	127,077,250	 	128,397,612	 	
Real estate held-for-sale, net (includes $0 and $2,550,000 from consolidated VIEs, respectively)	 	—	 	62,084,412	 	
Due from related party (includes $0 and $1,217 from consolidated VIEs, respectively)	 	206,568	 	656,290	 	
Prepaid management fee — related party	 	19,047,949	 	19,047,949	 	
Other assets (includes $10,326,594 and $11,696,071 from consolidated VIEs, respectively)	 	49,906,372	 	46,855,858	 	
Total assets	 	$	1,690,969,525	 	$	1,776,714,330	 	
 	 	 	 	 	 	
Liabilities and Equity:	 	 	 	 	 	
Repurchase agreements and credit facilities	 	$	127,297,594	 	$	76,105,000	 	
Collateralized debt obligations (includes $910,206,205 and $1,002,615,393 from consolidated VIEs, respectively)	 	910,206,205	 	1,002,615,393	 	
Junior subordinated notes to subsidiary trust issuing preferred securities	 	158,509,407	 	158,261,468	 	
Notes payable	 	53,457,708	 	85,457,708	 	
Mortgage note payable — real estate owned	 	53,751,004	 	53,751,004	 	
Mortgage notes payable — held-for-sale	 	—	 	62,190,000	 	
Due to related party	 	1,852,829	 	2,728,819	 	
Due to borrowers (includes $639,644 and $740,809 from consolidated VIEs, respectively)	 	16,400,826	 	2,825,636	 	
Deferred revenue	 	77,123,133	 	77,123,133	 	
Other liabilities (includes $25,064,700 and $27,839,757 from consolidated VIEs, respectively)	 	79,978,223	 	82,595,636	 	
Total liabilities	 	1,478,576,929	 	1,603,653,797	 	
Commitments and contingencies	 	—	 	—	 	
Equity:	 	 	 	 	 	
Arbor Realty Trust, Inc. stockholders’ equity:	 	 	 	 	 	
Preferred stock, $0.01 par value: 100,000,000 shares authorized; no shares issued or outstanding	 	—	 	—	 	
Common stock, $0.01 par value: 500,000,000 shares authorized; 30,399,992 shares issued, 27,749,225 shares outstanding at June 30, 2012 and 26,778,737 shares issued, 24,298,140 shares outstanding at December 31, 2011	 	304,000	 	267,787	 	
Additional paid-in capital	 	474,091,222	 	455,994,695	 	
Treasury stock, at cost — 2,650,767 shares at June 30, 2012 and 2,480,597 shares at December 31, 2011	 	(17,100,916	)	(16,416,152	)	
Accumulated deficit	 	(203,130,388	)	(221,015,880	)	
Accumulated other comprehensive loss	 	(43,704,083	)	(47,704,045	)	
Total Arbor Realty Trust, Inc. stockholders’ equity	 	210,459,835	 	171,126,405	 	
Noncontrolling interest in consolidated entity	 	1,932,761	 	1,934,128	 	
Total equity	 	212,392,596	 	173,060,533	 	
Total liabilities and equity	 	$	1,690,969,525	 	$	1,776,714,330	 	
 
See Notes to Consolidated Financial Statements.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
For the Three and Six Months Ended June 30, 2012 and 2011
(Unaudited)
 
 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	 	
 	 	2012	 	2011	 	2012	 	2011	 	
Interest income	 	$	19,502,713	 	$	18,572,772	 	$	39,109,120	 	$	36,580,339	 	
Interest expense	 	9,770,807	 	15,792,751	 	21,532,207	 	28,833,700	 	
Net interest income	 	9,731,906	 	2,780,021	 	17,576,913	 	7,746,639	 	
Other revenue:	 	 	 	 	 	 	 	 	 	
Property operating income	 	8,312,794	 	7,534,536	 	17,335,955	 	12,207,955	 	
Other income	 	369,609	 	41,556	 	401,639	 	63,432	 	
Total other revenue	 	8,682,403	 	7,576,092	 	17,737,594	 	12,271,387	 	
Other expenses:	 	 	 	 	 	 	 	 	 	
Employee compensation and benefits	 	2,381,817	 	2,285,433	 	4,866,595	 	4,373,487	 	
Selling and administrative	 	2,191,769	 	1,583,793	 	3,852,002	 	2,781,618	 	
Property operating expenses	 	7,574,422	 	6,292,041	 	14,899,729	 	9,148,012	 	
Depreciation and amortization	 	1,540,217	 	1,705,366	 	2,716,972	 	1,944,815	 	
Provision for loan losses (net of recoveries)	 	7,945,453	 	7,560,263	 	15,734,861	 	8,095,398	 	
Loss on sale and restructuring of loans	 	—	 	—	 	—	 	1,000,000	 	
Management fee - related party	 	2,500,000	 	2,050,000	 	5,000,000	 	4,000,000	 	
Total other expenses	 	24,133,678	 	21,476,896	 	47,070,159	 	31,343,330	 	
Loss from continuing operations before gain on extinguishment of debt, (loss) income from equity affiliates and (provision) benefit for income taxes	 	(5,719,369	)	(11,120,783	)	(11,755,652	)	(11,325,304	)	
Gain on extinguishment of debt	 	20,968,214	 	1,926,700	 	26,314,335	 	2,819,200	 	
(Loss) income from equity affiliates	 	(224,136	)	24,446	 	(474,710	)	48,811	 	
Income (loss) before (provision) benefit for income taxes	 	15,024,709	 	(9,169,637	)	14,083,973	 	(8,457,293	)	
(Provision) benefit for income taxes	 	(600,000	)	—	 	801,558	 	—	 	
Income (loss) from continuing operations	 	14,424,709	 	(9,169,637	)	14,885,531	 	(8,457,293	)	
 	 	 	 	 	 	 	 	 	 	
Loss on impairment of real estate held-for-sale	 	—	 	(750,000	)	—	 	(750,000	)	
Gain on sale of real estate held-for-sale	 	—	 	—	 	3,487,145	 	—	 	
Income (loss) from operations of real estate held-for-sale	 	1,175,120	 	(381,220	)	1,442,744	 	(772,719	)	
Income (loss) from discontinued operations	 	1,175,120	 	(1,131,220	)	4,929,889	 	(1,522,719	)	
Net income (loss)	 	15,599,829	 	(10,300,857	)	19,815,420	 	(9,980,012	)	
Net income attributable to noncontrolling interest	 	53,811	 	53,878	 	107,622	 	107,574	 	
Net income (loss) attributable to Arbor Realty Trust, Inc.	 	$	15,546,018	 	$	(10,354,735	)	$	19,707,798	 	$	(10,087,586	)	
 	 	 	 	 	 	 	 	 	 	
Basic earnings (loss) per common share:	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations, net of noncontrolling interest	 	$	0.57	 	$	(0.37	)	$	0.60	 	$	(0.34	)	
Income (loss) from discontinued operations	 	0.05	 	(0.04	)	0.20	 	(0.06	)	
Net income (loss) attributable to Arbor Realty Trust, Inc.	 	$	0.62	 	$	(0.41	)	$	0.80	 	$	(0.40	)	
 	 	 	 	 	 	 	 	 	 	
Diluted earnings (loss) per common share:	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations, net of noncontrolling interest	 	$	0.57	 	$	(0.37	)	$	0.59	 	$	(0.34	)	
Income (loss) from discontinued operations	 	0.05	 	(0.04	)	0.20	 	(0.06	)	
Net income (loss) attributable to Arbor Realty Trust, Inc.	 	$	0.62	 	$	(0.41	)	$	0.79	 	$	(0.40	)	
 	 	 	 	 	 	 	 	 	 	
Dividends declared per common share	 	$	.075	 	$	—	 	$	.075	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	
Weighted average number of shares of common stock outstanding:	 	 	 	 	 	 	 	 	 	
Basic	 	24,977,879	 	25,440,380	 	24,579,022	 	25,202,248	 	
Diluted	 	25,267,459	 	25,440,380	 	24,805,807	 	25,202,248	 	
 
See Notes to Consolidated Financial Statements.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
For the Three and Six Months Ended June 30, 2012 and 2011
(Unaudited)
 
 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	 	
 	 	2012	 	2011	 	2012	 	2011	 	
Net income (loss)	 	$	15,599,829	 	$	(10,300,857	)	$	19,815,420	 	$	(9,980,012	)	
Unrealized (loss) gain on securities available-for-sale, net	 	(411,817	)	(88,184	)	(411,817	)	970,605	 	
Unrealized loss on derivative financial instruments, net	 	(3,468,402	)	(9,026,549	)	(4,734,869	)	(8,403,199	)	
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings	 	3,950,019	 	7,126,716	 	9,146,648	 	14,417,682	 	
Comprehensive income (loss)	 	15,669,629	 	(12,288,874	)	23,815,382	 	(2,994,924	)	
Less:	 	 	 	 	 	 	 	 	 	
Comprehensive income attributable to noncontrolling interest	 	53,811	 	53,878	 	107,622	 	107,574	 	
Comprehensive income (loss) attributable to Arbor Realty Trust, Inc.	 	$	15,615,818	 	$	(12,342,752	)	$	23,707,760	 	$	(3,102,498	)	
 
See Notes to Consolidated Financial Statements.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
 
For the Six Months Ended June 30, 2012
(Unaudited)
 
 	 	Common
Stock
Shares	 	Common
Stock
Par
Value	 	Additional
Paid-in
Capital	 	Treasury
Stock
Shares	 	Treasury
Stock	 	Accumulated
Deficit	 	Accumulated
Other
Comprehensive
Loss	 	Total Arbor
Realty Trust,
Inc.
Stockholders’
Equity	 	Non-
controlling
Interest	 	Total	 	
Balance — January 1, 2012	 	26,778,737	 	$	267,787	 	$	455,994,695	 	(2,480,597	)	$	(16,416,152	)	$	(221,015,880	)	$	(47,704,045	)	$	171,126,405	 	$	1,934,128	 	$	173,060,533	 	
Issuance of common stock	 	3,500,000	 	35,000	 	17,455,500	 	 	 	 	 	 	 	 	 	17,490,500	 	 	 	17,490,500	 	
Purchase of treasury stock	 	 	 	 	 	 	 	(170,170	)	(684,764	)	 	 	 	 	(684,764	)	 	 	(684,764	)	
Stock-based compensation	 	121,255	 	1,213	 	641,027	 	 	 	 	 	 	 	 	 	642,240	 	 	 	642,240	 	
Distributions— common stock	 	 	 	 	 	 	 	 	 	 	 	(1,818,691	)	 	 	(1,818,691	)	 	 	(1,818,691	)	
Distributions— preferred stock of private REIT	 	 	 	 	 	 	 	 	 	 	 	(3,615	)	 	 	(3,615	)	 	 	(3,615	)	
Net income	 	 	 	 	 	 	 	 	 	 	 	19,707,798	 	 	 	19,707,798	 	107,622	 	19,815,420	 	
Distribution to non-controlling interest	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(108,989	)	(108,989	)	
Unrealized loss on securities available-for-sale, net	 	 	 	 	 	 	 	 	 	 	 	 	 	(411,817	)	(411,817	)	 	 	(411,817	)	
Unrealized loss on derivative financial instruments, net	 	 	 	 	 	 	 	 	 	 	 	 	 	(4,734,869	)	(4,734,869	)	 	 	(4,734,869	)	
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings	 	 	 	 	 	 	 	 	 	 	 	 	 	9,146,648	 	9,146,648	 	 	 	9,146,648	 	
Balance — June 30, 2012	 	30,399,992	 	$	304,000	 	$	474,091,222	 	(2,650,767	)	$	(17,100,916	)	$	(203,130,388	)	$	(43,704,083	)	$	210,459,835	 	$	1,932,761	 	$	212,392,596	 	
 
See Notes to Consolidated Financial Statements.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Six Months Ended June 30, 2012 and 2011
(Unaudited)
 
 	 	Six Months Ended June 30,	 	
 	 	2012	 	2011	 	
Operating activities:	 	 	 	 	 	
Net income (loss)	 	$	19,815,420	 	$	(9,980,012	)	
Adjustments to reconcile net income (loss) to net cash used in operating activities:	 	 	 	 	 	
Depreciation and amortization	 	2,716,972	 	2,330,499	 	
Stock-based compensation	 	578,190	 	—	 	
Gain on sale of real estate held-for-sale	 	(3,487,145	)	—	 	
Reversal of liabilities related to discontinued operations	 	(1,175,120	)	—	 	
Impairment loss on real estate held-for-sale	 	—	 	750,000	 	
Gain on extinguishment of debt	 	(26,314,335	)	(2,819,200	)	
Provision for loan losses (net of recoveries)	 	15,734,861	 	8,095,398	 	
Loss on sale and restructuring of loans	 	—	 	1,000,000	 	
Amortization and accretion of interest, fees and intangible assets, net	 	1,816,482	 	6,834,928	 	
Change in fair value of non-qualifying swaps	 	718,788	 	557,842	 	
Loss (income) from equity affiliates	 	474,710	 	(48,811	)	
Changes in operating assets and liabilities:	 	 	 	 	 	
Other assets	 	(4,216,312	)	(1,255,270	)	
Distributions of operations from equity affiliates	 	48,851	 	48,811	 	
Other liabilities	 	1,084,682	 	(2,265,131	)	
Change in restricted cash	 	83,093	 	(312,465	)	
Due to/from related party	 	(719,315	)	(13,619,565	)	
Net cash provided by / (used in) operating activities	 	$	7,159,822	 	$	(10,682,976	)	
 	 	 	 	 	 	
Investing activities:	 	 	 	 	 	
Loans and investments funded, originated and purchased, net	 	(88,248,229	)	(73,028,631	)	
Payoffs and paydowns of loans and investments	 	114,877,983	 	67,298,389	 	
Proceeds from sale of loan	 	17,945,000	 	—	 	
Due to borrowers and reserves	 	(310,788	)	(732,148	)	
Change in restricted cash	 	—	 	(1,050,000	)	
Deferred fees	 	1,441,138	 	1,429,610	 	
Purchase of securities held-to-maturity, net	 	(60,792,951	)	—	 	
Principal collection on securities held-to-maturity, net	 	26,650,036	 	—	 	
Investment in real estate, net	 	(1,749,552	)	(385,636	)	
Proceeds from sale of and investment in real estate, net	 	24,131,557	 	2,629,138	 	
Contributions to equity affiliates	 	(223,532	)	—	 	
Distributions from equity affiliates	 	52,518	 	49,434	 	
Net cash provided by / (used in) investing activities	 	$	33,773,180	 	$	(3,789,844	)	
 	 	 	 	 	 	
Financing activities:	 	 	 	 	 	
Proceeds from repurchase agreements, loan participations, credit facilities and notes payable	 	86,330,470	 	30,800,000	 	
Paydowns and payoffs of repurchase agreements, notes payable and credit facilities	 	(35,137,876	)	(990,997	)	
Payoff of mortgage note payable — held-for-sale	 	(20,750,000	)	(1,600,000	)	
Proceeds from collateralized debt obligations	 	—	 	2,357,959	 	
Payoffs and paydowns of collateralized debt obligations	 	(65,723,348	)	(31,693,684	)	
Change in restricted cash	 	(10,448,344	)	(42,799,944	)	
Payments on financial instruments underlying linked transactions	 	(27,099,099	)	—	 	
Receipts on financial instruments underlying linked transactions	 	24,293,352	 	—	 	
Payments on swaps to hedge counterparties	 	(2,600,000	)	(9,670,000	)	
Receipts on swaps from hedge counterparties	 	3,740,000	 	9,810,000	 	
Purchases of treasury stock	 	(684,764	)	(155,997	)	
Distributions paid to noncontrolling interest	 	(108,989	)	(172,365	)	
Proceeds from issuance of common stock	 	18,900,000	 	—	 	
Expenses paid on issuance of common stock	 	(1,175,746	)	—	 	
Distributions paid on common stock	 	(1,818,691	)	—	 	
Distributions paid on preferred stock of private REIT	 	(3,615	)	(7,190	)	
Payment of deferred financing costs	 	398,979	 	(133,500	)	
Net cash used in financing activities	 	$	(31,887,671	)	$	(44,255,718	)	
Net increase / (decrease) in cash and cash equivalents	 	$	9,045,331	 	$	(58,728,538	)	
Cash and cash equivalents at beginning of period	 	55,236,479	 	101,124,564	 	
Cash and cash equivalents at end of period	 	$	64,281,810	 	$	42,396,026	 	
 
See Notes to Consolidated Financial Statements.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
For the Six Months Ended June 30, 2012 and 2011
(Unaudited)
 
 	 	Six Months Ended June 30,	 	
 	 	2012	 	2011	 	
 	 	 	 	 	 	
Supplemental cash flow information:	 	 	 	 	 	
Cash used to pay interest	 	$	18,064,143	 	$	21,364,179	 	
Cash used for taxes	 	$	136,074	 	$	290,090	 	
Supplemental schedule of non-cash investing and financing activities:	 	 	 	 	 	
Transfer of real estate held-for-sale to first lien holder	 	$	41,440,000	 	$	—	 	
Release of mortgage note payable held-for-sale	 	$	41,440,000	 	$	—	 	
Satisfaction of participation loan	 	$	32,000,000	 	$	—	 	
Retirement of participation liability	 	$	32,000,000	 	$	—	 	
Loans transferred to real estate owned, net	 	$	—	 	$	83,099,540	 	
Assumption of mortgage notes payable — real estate owned	 	$	—	 	$	55,351,004	 	
Issuance of common stock for management incentive fee	 	$	—	 	$	3,974,882	 	
 
See Notes to Consolidated Financial Statements.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 1 —Description of Business / Form of Ownership
 
Arbor Realty Trust, Inc. (the “Company”) is a Maryland corporation that was formed in June 2003 to invest in a diversified portfolio of multi-family and commercial real estate related assets, primarily consisting of bridge loans, mezzanine loans, junior participating interests in first mortgage loans, and preferred and direct equity.  The Company may also directly acquire real property and invest in real estate-related notes and certain mortgage-related securities.  The Company conducts substantially all of its operations through its operating partnership, Arbor Realty Limited Partnership (“ARLP”), and ARLP’s wholly-owned subsidiaries.  The Company is externally managed and advised by Arbor Commercial Mortgage, LLC (“ACM”).
 
The Company is organized and conducts its operations to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.  A REIT is generally not subject to federal income tax on its REIT—taxable income that it distributes to its stockholders, provided that it distributes at least 90% of its REIT—taxable income and meets certain other requirements.  Certain assets of the Company that produce non-qualifying income are owned by its taxable REIT subsidiaries, the income of which is subject to federal and state income taxes.
 
The Company’s charter provides for the issuance of up to 500 million shares of common stock, with a par value of $0.01 per share, and 100 million shares of preferred stock, with a par value of $0.01 per share.  The Company was incorporated in June 2003 and was initially capitalized through the sale of 67 shares of common stock for $1,005.
 
On July 1, 2003, ACM contributed $213.1 million of structured finance assets and $169.2 million of borrowings supported by $43.9 million of equity in exchange for a commensurate equity ownership in ARLP.  In addition, certain employees of ACM were transferred to ARLP.  At that time, these assets, liabilities and employees represented a substantial portion of ACM’s structured finance business.  The Company is externally managed and advised by ACM and pays ACM a management fee in accordance with a management agreement.  ACM also sources originations, provides underwriting services, and services all structured finance assets on behalf of ARLP and its wholly owned subsidiaries.
 
On July 1, 2003, the Company completed a private equity offering of 1,610,000 units (including an overallotment option), each consisting of five shares of common stock and one warrant to purchase one share of common stock at $75.00 per unit.  The Company sold 8,050,000 shares of common stock in the offering.  Gross proceeds from the private equity offering totaled $120.2 million.  Gross proceeds from the private equity offering combined with the concurrent equity contribution by ACM totaled approximately $164.1 million in equity capital.  The Company paid and accrued offering expenses of $10.1 million resulting in Arbor Realty Trust, Inc. stockholders’ equity and noncontrolling interest of $154.0 million as a result of the private placement.
 
In April 2004, the Company sold 6,750,000 shares of its common stock in a public offering at a price of $20.00 per share, for net proceeds of approximately $124.4 million after deducting the underwriting discount and other offering expenses.  The Company used the proceeds to pay down its indebtedness.  In May 2004, the underwriters exercised a portion of their over-allotment option, which resulted in the issuance of 524,200 additional shares.  The Company received net proceeds of approximately $9.8 million after deducting the underwriting discount.  In October 2004, ARLP received proceeds of approximately $9.4 million from the exercise of warrants for 629,345 operating partnership units.  Additionally, in 2004 and 2005, the Company issued 973,354 and 282,776 shares of common stock, respectively, from the exercise of warrants under its Warrant Agreement dated July 1, 2003 and received net proceeds of $12.9 million and $4.2 million, respectively.
 
In June 2007, the Company completed a public offering in which it sold 2,700,000 shares of its common stock registered for $27.65 per share, and received net proceeds of approximately $73.6 million after deducting the underwriting discount and other offering expenses.  The Company used the proceeds to pay down debt and finance its loan and investment portfolio.
 
In June 2008, the Company’s external manager exercised its right to redeem its approximate 3.8 million operating partnership units in the Company’s operating partnership for shares of the Company’s common stock on a
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
one-for-one basis.  In addition, the special voting preferred shares paired with each operating partnership unit, pursuant to a pairing agreement, were redeemed simultaneously and cancelled by the Company.
 
In June 2010, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “1933 Act”) with respect to an aggregate of $500.0 million of debt securities, common stock, preferred stock, depositary shares and warrants that may be sold by the Company from time to time pursuant to Rule 415 of the 1933 Act.  On June 23, 2010, the SEC declared this shelf registration statement effective.
 
In June 2012, the Company completed a public offering in which it sold 3,500,000 shares of its common stock for $5.40 per share, and received net proceeds of approximately $17.5 million after deducting the underwriting discount and other offering expenses.  The Company intends to use the net proceeds from the offering to make investments, to repurchase or pay liabilities and for general corporate purposes, which may include the repayment of indebtedness under its credit facilities.  The underwriter did not exercise its over-allotment option for additional shares which expired in July 2012 and $481.1 million currently remains available under the shelf registration.
 
The Company had 27,749,225 shares of common stock outstanding at June 30, 2012 and 24,298,140 shares of common stock outstanding at December 31, 2011.
 
Note 2 — Summary of Significant Accounting Policies
 
Basis of Presentation and Principles of Consolidation
 
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™, the authoritative reference for accounting principles generally accepted in the United States (“GAAP”), for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, although management believes that the disclosures presented herein are adequate to prevent the accompanying unaudited consolidated interim financial statements presented from being misleading.
 
The accompanying unaudited consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries, partnerships or other joint ventures in which the Company owns a voting interest of greater than 50 percent, and Variable Interest Entities (“VIEs”) of which the Company is the primary beneficiary.  VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  Current accounting guidance requires the Company to present a) assets of a consolidated VIE that can be used only to settle obligations of the consolidated VIE, and b) liabilities of a consolidated VIE for which creditors (or beneficial interest holders) do not have recourse to the general credit of the primary beneficiary.  As a result of this guidance, the Company has separately disclosed parenthetically the assets and liabilities of its three collateralized debt obligation (“CDO”) subsidiaries on its Consolidated Balance Sheets.  Entities in which the Company owns a voting interest of 20 percent to 50 percent are accounted for primarily under the equity method.
 
In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.  All significant inter-company transactions and balances have been eliminated in consolidation.  Certain prior year amounts have been reclassified to conform to current period presentation.  During the third and fourth quarters of 2011, the Company reclassified two real estate investments from real estate owned to real estate held-for-sale, resulting in a reclassification of the operating activity from property operating income and expenses as well as impairment loss to discontinued operations for all prior periods
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
presented.  Also, comprehensive income has been presented in a separate Statement of Comprehensive Income and is no longer presented on the Statement of Changes in Stockholders’ Equity.
 
The preparation of consolidated interim financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated interim financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.  Further, in connection with the preparation of the consolidated interim financial statements, the Company evaluated events subsequent to the balance sheet date of June 30, 2012 through the issuance of the Consolidated Financial Statements.
 
The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2012.  The accompanying unaudited consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated annual financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
Cash and Cash Equivalents
 
All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  The Company places its cash and cash equivalents in high quality financial institutions.  The consolidated account balances at each institution periodically exceed Federal Deposit Insurance Corporation (FDIC) insurance coverage and the Company believes that this risk is not significant.
 
Restricted Cash
 
At June 30, 2012 and December 31, 2011, the Company had restricted cash of $77.7 million and $67.3 million, respectively.  Restricted cash primarily represents proceeds from loan repayments on deposit with the trustees for the Company’s CDOs which will be used for principal repayments, unfunded loan commitments and interest payments received from loans.  As of January 2012, all three of the CDOs have reached their replenishment dates and principal repayments are remitted quarterly to the bond holders and the Company in the month following the quarter.  See Note 7 — “Debt Obligations.”  The Company’s real estate owned assets also have restricted cash balances totaling $1.9 million and $2.0 million as of June 30, 2012 and December 31, 2011, respectively, due to escrow requirements.  See Note 6 — “Real Estate Owned and Held-For-Sale.”
 
Loans, Investments and Securities
 
At the time of purchase, the Company designates a security as available-for-sale, held-to-maturity, or trading depending on the Company’s ability and intent to hold it to maturity.  The Company does not have any securities designated as trading as of June 30, 2012.  Securities available-for-sale are reported at fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive loss, while securities held-to-maturity are reported at amortized cost.  Unrealized losses that are determined to be other-than-temporary are recognized in earnings up to their credit component.  The determination of other-than-temporary impairment is a subjective process requiring judgments and assumptions.  The process may include, but is not limited to, assessment of recent market events and prospects for near-term recovery, assessment of cash flows, internal review of the underlying assets securing the investments, credit of the issuer and the rating of the security, as well as the Company’s ability and intent to hold the investment to maturity.  Management closely monitors market conditions on which it bases such decisions.
 
The Company also assesses certain of its securities, other than those of high credit quality, to determine whether significant changes in estimated cash flows or unrealized losses on these securities, if any, reflect a decline in value which is other-than-temporary and, accordingly, should be written down to their fair value against earnings.  On a quarterly basis, the Company reviews these changes in estimated cash flows, which could occur due to actual prepayment and credit loss experience, to determine if an other-than-temporary impairment is deemed to have occurred.  The determination of other-than-temporary impairment is a subjective process requiring judgments and
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
assumptions and is not necessarily intended to indicate a permanent decline in value.  The Company calculates a revised yield based on the current amortized cost of the investment, including any other-than-temporary impairments recognized to date, and the revised yield is then applied prospectively to recognize interest income.
 
Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and net of the allowance for loan losses when such loan or investment is deemed to be impaired.  The Company invests in preferred equity interests that, in some cases, allow the Company to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing.  At the inception of each such investment, management must determine whether such investment should be accounted for as a loan, joint venture or as real estate.  To date, management has determined that all such investments are properly accounted for and reported as loans.
 
From time to time the Company may enter into an agreement to sell a loan.  These loans are considered held-for-sale and are valued at the lower of the loan’s carrying amount or fair value less costs to sell.  For the sale of loans, recognition occurs when ownership passes to the buyer.
 
Impaired Loans, Allowance for Loan Losses, Loss on Sale and Restructuring of Loans and Charge-offs
 
The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement.  The Company evaluates each loan in its portfolio on a quarterly basis.  The Company’s loans are individually specific and unique as it relates to product type, geographic location, and collateral type, as well as to the rights and remedies and the position in the capital structure the Company’s loans and investments have in relation to the underlying collateral.  The Company evaluates all of this information as well as general market trends related to specific classes of assets, collateral type and geographic locations, when determining the appropriate assumptions such as capitalization and market discount rates, as well as the borrower’s operating income and cash flows, in estimating the value of the underlying collateral when determining if a loan is impaired.  The Company utilizes internally developed valuation models and techniques primarily consisting of discounted cash flow and direct capitalization models in determining the fair value of the underlying collateral on an individual loan.  The Company may also obtain a third party appraisal, which may value the collateral through an “as-is” or “stabilized value” methodology.  Such appraisals may be used as an additional source of valuation information only and no adjustments are made to appraisals.  Included in the evaluation of the capitalization and market discount rates, the Company considers not only assumptions specific to the collateral but also considers geographical and industry trends that could impact the collateral’s value.
 
If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses.  The allowance for each loan is maintained at a level that is believed to be adequate by management to absorb probable losses.  The Company had an allowance for loan losses of $188.3 million relating to 20 loans with an aggregate carrying value, before loan loss reserves, of approximately $271.7 million at June 30, 2012 and $185.4 million in allowance for loan losses relating to 24 loans with an aggregate carrying value, before loan loss reserves, of approximately $282.9 million at December 31, 2011.
 
Loan terms may be modified if the Company determines that based on the individual circumstances of a loan and the underlying collateral, a modification would more likely increase the total recovery of the combined principal and interest from the loan.  Any loan modification is predicated upon a goal of maximizing the collection of the loan.  Typical triggers for a modification would include situations where the projected cash flow is insufficient to cover required debt service, when asset performance is lagging the initial projections, where there is a requirement for rebalancing, where there is an impending maturity of the loan, and where there is an actual loan default.  Loan terms that have been modified have included, but are not limited to interest rate, maturity date and in certain cases, principal amount.  Length and amounts of each modification have varied based on individual circumstances and are determined on a case by case basis.  If the loan modification constitutes a concession whereas the Company does not receive ample consideration in return for the modification, and the borrower is experiencing financial difficulties and cannot repay the loan under the current terms, then the modification is considered by the
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Company to be a troubled debt restructuring.  If the Company receives a benefit, either monetary or strategic, and the above criteria are not met, the modification is not considered to be a troubled debt restructuring.
 
The Company records interest on modified loans on an accrual basis to the extent that the modified loan is contractually current.  To date, the Company has not recorded interest income on a modified loan where the Company has not subsequently received the cash.
 
Loss on restructured loans is recorded when the Company has granted a concession to a borrower in the form of principal forgiveness related to a payoff or the substitution or addition of a new debtor for the original borrower or when the Company incurs costs on behalf of the borrower related to the modification, payoff or the substitution or addition of a new debtor for the original borrower.  When a loan is restructured, the Company records its investment at net realizable value, taking into account the cost of all concessions at the date of restructuring.  The reduction in the recorded investment is recorded as a charge to the Consolidated Statement of Operations in the period in which the loan is restructured.  In addition, a gain or loss may be recorded upon the sale of a loan to a third party as a charge to the Consolidated Statement of Operations in the period in which the loan was sold.  No loss on sale and restructuring of loans was recorded for the six months ended June 30, 2012.  The Company recorded loss on sale and restructuring of loans of $1.0 million for the six months ended June 30, 2011 as a result of the execution of a forbearance agreement in the first quarter of 2011 on a loan modified in the second quarter of 2011.
 
Charge-offs to the allowance for loan losses occur when losses are confirmed through the receipt of cash or other consideration from the completion of a sale; when a modification or restructuring takes place in which the Company grants a concession to a borrower or agrees to a discount in full or partial satisfaction of the loan; when the Company takes ownership and control of the underlying collateral in full satisfaction of the loan; when loans are reclassified as other investments; or when significant collection efforts have ceased and it is highly likely that a loss has been realized.  For the six months ended June 30, 2012 and 2011, the Company recorded charge-offs to the allowance for loan losses of $12.8 million and $42.4 million, respectively.
 
Real Estate Owned and Held-For-Sale
 
Real estate owned, shown net of accumulated depreciation and impairment charges, is comprised of real property acquired by foreclosure or through partial or full settlement of mortgage debt.  The real estate acquired is recorded at the estimated fair value at the time of acquisition.
 
Costs incurred in connection with the foreclosure of the properties collateralizing the real estate loans are expensed as incurred and costs subsequently incurred to extend the life or improve the assets subsequent to foreclosure are capitalized.
 
The Company allocates the purchase price of operating properties to land, building, tenant improvements, deferred lease cost for the origination costs of the in-place leases, intangibles for the value of the above or below market leases at fair value and to any other identified intangible assets or liabilities.  The Company finalizes its purchase price allocation on these assets within one year of the acquisition date.  The Company amortizes the value allocated to the in-place leases over the remaining lease term.  The value allocated to the above or below market leases are amortized over the remaining lease term as an adjustment to rental income.
 
Real estate assets, including assets acquired by foreclosure or through partial or full settlement of mortgage debt, that are operated for the production of income are depreciated using the straight-line method over their estimated useful lives.  Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred.  Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their estimated useful life.
 
The Company’s properties are individually reviewed for impairment each quarter, if events or circumstances change indicating that the carrying amount of the assets may not be recoverable.  The Company recognizes impairment if the undiscounted estimated cash flows to be generated by the assets are less than the carrying amount of those assets.  Measurement of impairment is based upon the estimated fair value of the asset.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Upon evaluating a property for impairment, many factors are considered, including estimated current and expected operating cash flows from the property during the projected holding period, costs necessary to extend the life or improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of such real estate owned in the ordinary course of business.  Valuation adjustments may be necessary in the event that effective interest rates, rent-up periods, future economic conditions, and other relevant factors vary significantly from those assumed in valuing the property.  If future evaluations result in a diminution in the value of the property, the reduction will be recognized as an impairment charge at that time.
 
Real estate is classified as held-for-sale when management commits to a plan of sale, the asset is available for immediate sale, there is an active program to locate a buyer, and it is probable the sale will be completed within one year.  Properties classified as held-for-sale are not depreciated and the results of their operations are shown in discontinued operations.  Real estate assets that are expected to be disposed of are valued, on an individual asset basis, at the lower of their carrying amount or their fair value less costs to sell.
 
The Company recognizes sales of real estate properties upon closing.  Payments received from purchasers prior to closing are recorded as deposits.  Profit on real estate sold is recognized upon closing using the full accrual method when the collectability of the sale price is reasonably assured and the Company is not obligated to perform significant activities after the sale.  Profit may be deferred in whole or in part until collectability of the sales price is reasonably assured and the earnings process is complete.
 
Revenue Recognition
 
Interest income— Interest income is recognized on the accrual basis as it is earned from loans, investments, and securities.  In certain instances, the borrower pays an additional amount of interest at the time the loan is closed, an origination fee, a prepayment fee and/or deferred interest upon maturity.  In some cases, interest income may also include the amortization or accretion of premiums and discounts arising from the purchase or origination of the loan or security.  This additional income, net of any direct loan origination costs incurred, is deferred and accreted into interest income on an effective yield or “interest” method adjusted for actual prepayment activity over the life of the related loan or security as a yield adjustment.  Income recognition is suspended for loans when, in the opinion of management, a full recovery of all contractual principal is not probable.  Income recognition is resumed when the loan becomes contractually current and performance is resumed.  The Company records interest income on certain impaired loans to the extent cash is received, in which a loan loss reserve has been recorded, as the borrower continues to make interest payments.  The Company recorded loan loss reserves related to these loans as it was deemed that full recovery of principal and interest was not probable.
 
Several of the Company’s loans provide for accrual of interest at specified rates, which differ from current payment terms.  Interest is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible, based on the underlying collateral and operations of the borrower.  If management cannot make this determination, interest income above the current pay rate is recognized only upon actual receipt.  The Company currently has no loans in its portfolio accruing such interest.  Therefore, interest income is recorded on all of the Company’s loans and investments only to the extent that the current pay rate is received.
 
Given the transitional nature of some of the Company’s real estate loans, the Company may require funds to be placed into an interest reserve, based on contractual requirements, to cover debt service costs.  The Company will analyze these interest reserves on a periodic basis and determine if any additional interest reserves are needed.  Recognition of income on loans with funded interest reserves are accounted for in the same manner as loans without funded interest reserves.  The Company will not recognize any interest income on loans in which the borrower has failed to make the contractual interest payment due or has not replenished the interest reserve account.  As of June 30, 2012, the Company had total interest reserves of $7.2 million on 38 loans with an aggregate unpaid principal balance of $487.7 million and had three non-performing loans with an aggregate unpaid principal balance of $38.4 million with a funded interest reserve of $0.1 million.  Income from non-performing loans is generally recognized on a cash basis only to the extent it is received.  Full income recognition will resume when the loan becomes contractually current and performance has recommenced.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Additionally, interest income is recorded when earned from equity participation interests, referred to as equity kickers.  These equity kickers have the potential to generate additional revenues to the Company as a result of excess cash flow distributions and/or as appreciated properties are sold or refinanced.  The Company did not record interest income from such investments for the three and six month periods ended June 30, 2012 and 2011.
 
Property operating income— Property operating income represents income associated with the operations of commercial real estate properties classified as real estate owned.  The Company recognizes revenue for these activities when the fees are fixed or determinable, or are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided.  For the three and six months ended June 30, 2012, the Company recorded approximately $8.3 million and $17.3 million, respectively, of property operating income relating to its real estate owned properties, as compared to approximately $7.5 million and $12.2 million, respectively, for the three and six months ended June 30, 2011.  As of June 30, 2012 and 2011, the Company had two real estate owned properties, a portfolio of multifamily assets that was purchased by the Company out of bankruptcy and a portfolio of hotel assets that was transferred to the Company by the owner, a creditor trust.  Both of these portfolios were acquired in the first quarter of 2011.  Additionally, real estate investments were reclassified from real estate owned to real estate held-for-sale in 2011, resulting in the reclassification of all of the operating activity from these properties from property operating income and expenses into discontinued operations for all prior periods.  See Note 6 — “Real Estate Owned and Held-For-Sale” for further details.
 
Other income— Other income represents net interest income and gains and losses recorded on the Company’s linked transactions, as well as loan structuring, defeasance, and miscellaneous asset management fees associated with the Company’s loans and investments portfolio.  The Company recognizes these forms of income when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided.
 
Investment in Equity Affiliates
 
The Company invests in joint ventures that are formed to acquire, develop, and/or sell real estate assets.  These joint ventures are not majority owned or controlled by the Company, or are VIEs for which the Company is not the primary beneficiary, and are not consolidated in its financial statements.  These investments are recorded under either the equity or cost method of accounting as deemed appropriate.  The Company records its share of the net income and losses from the underlying properties of its equity method investments and any other-than-temporary impairment on these investments on a single line item in the Consolidated Statements of Operations as income or losses from equity affiliates.
 
Stock-Based Compensation
 
The Company has granted certain of its employees, directors, and employees of ACM, stock awards consisting of shares of the Company’s common stock that vest immediately or annually over a multi-year period, subject to the recipient’s continued service to the Company.  The Company records stock-based compensation expense at the grant date fair value of the related stock-based award with subsequent remeasurement for any unvested shares granted to non-employees of the Company with such amounts expensed against earnings, at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.  Dividends are paid on restricted stock as dividends are paid on shares of the Company’s common stock whether or not they are vested.  Stock-based compensation is disclosed in the Company’s Consolidated Statements of Operations under “employee compensation and benefits” for employees and under “selling and administrative” expense for non-employees.
 
Income Taxes
 
The Company is organized and conducts its operations to qualify as a REIT and to comply with the provisions of the Internal Revenue Code with respect thereto.  A REIT is generally not subject to federal income tax on taxable income which is distributed to its stockholders, provided that the Company distributes at least 90% of its taxable income and meets certain other requirements.  Certain REIT income may be subject to state and local
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
income taxes.  The Company’s assets or operations that would not otherwise comply with the REIT requirements, are owned or conducted by the Company’s taxable REIT subsidiaries, the income of which is subject to federal and state income tax.  Under current federal tax law, the income and the tax on such income attributable to certain debt extinguishment transactions realized in 2009 and 2010 have been deferred to future periods at the Company’s election.
 
Current accounting guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.  This guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This guidance also provides clarity on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
 
Other Comprehensive Income / (Loss)
 
The Company divides comprehensive income or loss into net income (loss) and other comprehensive income (loss), which includes unrealized gains and losses on available-for-sale securities.  In addition, to the extent the Company’s derivative instruments qualify as hedges, net unrealized gains or losses are reported as a component of accumulated other comprehensive income (loss).  See “Derivatives and Hedging Activities” below.  At June 30, 2012, accumulated other comprehensive loss was $43.7 million and consisted of $44.4 million of net unrealized losses on derivatives designated as qualifying hedging instruments and a $0.7 million unrealized gain related to available-for-sale securities.  At December 31, 2011, accumulated other comprehensive loss was $47.7 million and consisted of $48.8 million of net unrealized losses on derivatives designated as cash flow hedges and a $1.1 million unrealized gain related to available-for-sale securities.
 
Hedging Activities and Derivatives
 
Hedging Activities
 
The Company recognizes all derivatives as either assets or liabilities at fair value and these amounts are recorded in other assets or other liabilities in the Consolidated Balance Sheets.  Additionally, the fair value adjustments will affect either accumulated other comprehensive income (loss) until the hedged item is recognized in earnings, or net income (loss) depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.  The Company uses derivatives for hedging purposes rather than speculation.  The Company utilizes quotations from a third party to assist in the determination of these fair values.
 
Derivatives
 
The Company records all derivatives in the Consolidated Balance Sheets at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.  Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.  Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.  Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
 
In the normal course of business, the Company may use a variety of derivative financial instruments to manage, or hedge, interest rate risk.  These derivative financial instruments must be effective in reducing its interest rate risk exposure in order to qualify for hedge accounting.  When the terms of an underlying transaction are
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income (loss) for each period until the derivative instrument matures or is settled.  Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market with the changes in value included in net income (loss).  In cases where a derivative financial instrument is terminated early, any gain or loss is generally amortized over the remaining life of the hedged item.
 
In certain circumstances, the Company may finance the purchase of RMBS investments through a repurchase agreement with the same counterparty which may qualify as a linked transaction.  If both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed to be linked transactions unless certain criteria are met, and the Company accounts for the purchase of such securities and the repurchase agreement on a combined basis as a forward contract derivative at fair value which is reported in other assets on the Consolidated Balance Sheet with changes in the fair value of the assets and liabilities underlying linked transactions and associated interest income and expense reported in other income on the Consolidated Statement of Operations.  The analysis of transactions under these rules requires management’s judgment and experience.  See Note 8 — “Derivative Financial Instruments” for further details.
 
Variable Interest Entities
 
The Company has evaluated its loans and investments, mortgage related securities, investments in equity affiliates, junior subordinated notes and CDOs, in order to determine if they qualify as VIEs or as variable interests in VIEs.  This evaluation resulted in the Company determining that its bridge loans, junior participation loans, mezzanine loans, preferred equity investments, investments in equity affiliates, junior subordinated notes, CDOs, and investments in debt securities were potential VIEs or variable interests in VIEs.  A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties.  A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  See Note 9 — “Variable Interest Entities” for further details.
 
Recently Issued Accounting Pronouncements
 
In December 2011, the FASB issued updated guidance on disclosure about offsetting assets and liabilities which amends U.S. GAAP to conform more to the disclosure requirements of International Financial Reporting Standards (“IFRS”).  This guidance is effective as of the first quarter of 2013 and the Company is currently evaluating the impact it may have on its financial disclosure.
 
In June 2011, the FASB issued updated guidance on comprehensive income which amends U.S. GAAP to conform to IFRS disclosure requirements.  The amendment eliminates the option to present components of other comprehensive income as part of the Statement of Changes in Stockholders’ Equity and requires a separate Statement of Comprehensive Income or two consecutive statements in the Statement of Operations and in a separate Statement of Comprehensive Income.  The guidance also requires the presentation of reclassification adjustments for each component of other comprehensive income on the face of the financial statements rather than in the notes to the financial statements.  This guidance was effective as of the first quarter of 2012, except for the disclosure of reclassification adjustments which was postponed for re-deliberation by the FASB, and early adoption was permitted.  The Company early adopted the guidance in the fourth quarter of 2011, with the exception of the disclosure of reclassification adjustments postponed for re-deliberation by the FASB.  As the guidance only amends existing disclosure requirements, its adoption did not have a material effect on the Company’s Consolidated Financial Statements.
 
In May 2011, the FASB issued updated guidance on fair value measurement which amends U.S. GAAP to conform to IFRS measurement and disclosure requirements.  The guidance amends certain fair value measurement principles and enhances disclosure requirements by requiring a description of the process for valuing items categorized as Level 3 in the fair value hierarchy, quantitative disclosure of unobservable inputs used to make these
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
measurements and, in certain cases, the sensitivity of the measurements to changes in these inputs.  This guidance was effective as of the first quarter of 2012, applied prospectively, and its adoption did not have a material effect on the Company’s Consolidated Financial Statements.
 
In April 2011, the FASB issued updated guidance on the transfer of financial assets which primarily removes certain criteria from the consideration of effective control over assets subject to repurchase agreements when determining the recognition of a sale.  The removal of these criteria will generally result in the assets transferred pursuant to the repurchase agreement being accounted for as a secured borrowing, with both the transferred asset and repurchase liability recorded on the transferor’s balance sheet.  This guidance was effective as of the first quarter of 2012, applied prospectively to transactions which occur subsequent to the effective date, and its adoption did not have a material effect on the Company’s Consolidated Financial Statements.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 3 — Loans and Investments
 
The following table sets forth the composition of the Company’s loan and investment portfolio at June 30, 2012 and December 31, 2011:
 
 	 	June 30,
2012	 	Percent
of Total	 	Loan
Count	 	Wtd.
Avg. Pay
Rate (1)	 	Wtd. Avg.
Remaining
Months to
Maturity	 	First
Dollar
LTV
Ratio (2)	 	Last
Dollar
LTV
Ratio (3)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bridge loans	 	$	937,421,556	 	66%	 	72	 	5.08%	 	29.5	 	0%	 	78%	 	
Mezzanine loans	 	128,048,514	 	9%	 	25	 	4.15%	 	36.3	 	72%	 	93%	 	
Junior participation loans	 	280,788,217	 	20%	 	9	 	3.96%	 	33.4	 	59%	 	80%	 	
Preferred equity investments	 	80,940,628	 	5%	 	12	 	3.72%	 	92.8	 	90%	 	98%	 	
 	 	1,427,198,915	 	100%	 	118	 	4.70%	 	34.5	 	23%	 	82%	 	
Unearned revenue	 	(14,128,003	)	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for loan losses	 	(188,316,915	)	 	 	 	 	 	 	 	 	 	 	 	 	
Loans and investments, net	 	$	1,224,753,997	 	 	 	 	 	 	 	 	 	 	 	 	 	
 
 	 	December 31,
2011	 	Percent
of Total	 	Loan
Count	 	Wtd.
Avg. Pay
Rate (1)	 	Wtd. Avg.
Remaining
Months to
Maturity	 	First
Dollar
LTV
Ratio (2)	 	Last
Dollar
LTV
Ratio (3)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bridge loans	 	$	933,033,598	 	62%	 	66	 	4.88%	 	29.6	 	0%	 	80%	 	
Mezzanine loans	 	187,663,976	 	12%	 	27	 	4.25%	 	31.7	 	79%	 	96%	 	
Junior participation loans	 	280,945,639	 	19%	 	9	 	3.99%	 	36.3	 	60%	 	81%	 	
Preferred equity investments	 	100,751,231	 	7%	 	17	 	4.18%	 	89.0	 	89%	 	97%	 	
 	 	1,502,394,444	 	100%	 	119	 	4.59%	 	35.1	 	27%	 	84%	 	
Unearned revenue	 	(14,571,929	)	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for loan losses	 	(185,381,855	)	 	 	 	 	 	 	 	 	 	 	 	 	
Loans and investments, net	 	$	1,302,440,660	 	 	 	 	 	 	 	 	 	 	 	 	 	

(1)         “Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balances of each loan in the Company’s portfolio, of the interest rate that is required to be paid monthly as stated in the individual loan agreements.  Certain loans and investments that require an additional rate of interest “Accrual Rate” to be paid at the maturity are not included in the weighted average pay rate as shown in the table.  At June 30, 2012 and December 31, 2011 the Company had no such loans in its portfolio that were currently accruing such interest.
(2)        The “First Dollar LTV Ratio” is calculated by comparing the total of the Company’s senior most dollar and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which the Company will absorb a total loss of its position.
(3)        The “Last Dollar LTV Ratio” is calculated by comparing the total of the carrying value of the Company’s loan and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which the Company will initially absorb a loss.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Concentration of Credit Risk
 
The Company operates in one portfolio segment, commercial mortgage loans and investments.  Commercial mortgage loans and investments can potentially subject the Company to concentrations of credit risk.  The Company is subject to concentration risk in that, as of June 30, 2012, the unpaid principal balance related to 22 loans with five unrelated borrowers represented approximately 29% of total assets.  At December 31, 2011 the unpaid principal balance related to 21 loans with five different borrowers represented approximately 26% of total assets.  As of June 30, 2012 and December 31, 2011, the Company had 118 and 119 loans and investments, respectively.
 
As a result of the loan review process, the Company identified loans and investments that it considers higher-risk loans that had a carrying value, before loan loss reserves, of approximately $269.9 million and a weighted average last dollar loan-to-value (“LTV”) ratio of 93%, compared to lower-risk loans with a carrying value, before loan loss reserves, of $1.1 billion and a weighted average last dollar LTV ratio of 79% at June 30, 2012.
 
The Company measures its relative loss position for its mezzanine loans, junior participation loans, and preferred equity investments by determining the point where the Company will be exposed to losses based on its position in the capital stack as compared to the fair value of the underlying collateral.  The Company determines its loss position on both a first dollar LTV and a last dollar LTV basis.  First dollar LTV is calculated by comparing the total of the Company’s senior most dollar and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which the Company will absorb a total loss of its position.  Last dollar LTV is calculated by comparing the total of the carrying value of the Company’s loan and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which the Company will initially absorb a loss.
 
As a component of the Company’s policies and procedures for loan valuation and risk assessment, each loan and investment is assigned a credit risk rating.  Individual ratings range from one to five, with one being the lowest risk and five being the highest.  Each credit risk rating has benchmark guidelines which pertain to debt-service coverage ratios, LTV ratios, borrower strength, asset quality, and funded cash reserves.  Other factors such as guarantees, market strength, remaining loan term, and borrower equity are also reviewed and factored into determining the credit risk rating assigned to each loan.  This metric provides a helpful snapshot of portfolio quality and credit risk.  Given the Company’s asset management approach, however, the risk rating process does not result in differing levels of diligence contingent upon credit rating.  That is because all portfolio assets are subject to the level of scrutiny and ongoing analysis consistent with that of a ‘high-risk” loan.  All assets are subject to, at minimum, a thorough quarterly financial evaluation in which historical operating performance is reviewed, and forward-looking projections are created.  Generally speaking, given the Company’s typical loan and investment profile, a risk rating of three suggests that the Company expects the loan to make both principal and interest payments according to the contractual terms of the loan agreement, and is not considered impaired.  A risk rating of four indicates the Company anticipates that the loan will require a modification of some kind.  A risk rating of five indicates the Company expects the loan to underperform over its term, and that there could be loss of interest and/or principal.  Ratings of 3.5 and 4.5 generally indicate loans that have characteristics of both the immediately higher and lower classifications.  Further, while the above are the primary guidelines used in determining a certain risk rating, subjective items such as borrower strength, condition of the market of the underlying collateral, additional collateral or other credit enhancements, or loan terms, may result in a rating that is higher or lower than might be indicated by any risk rating matrix.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
A summary of the loan portfolio’s weighted average internal risk ratings and LTV ratios by asset class as of June 30, 2012 and December 31, 2011 is as follows:
 
 	 	As of June 30, 2012	 	
Asset Class	 	Unpaid
Principal
Balance	 	Percentage
of Portfolio	 	Wtd. Avg.
Internal
Risk Rating	 	First Dollar
LTV Ratio	 	Last Dollar
LTV Ratio	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Multi-family	 	$	643,113,682	 	45.1%	 	3.4	 	21%	 	82%	 	
Office	 	438,738,341	 	30.7%	 	3.2	 	30%	 	80%	 	
Land	 	138,722,462	 	9.7%	 	4.2	 	0%	 	88%	 	
Hotel	 	135,989,533	 	9.5%	 	3.8	 	43%	 	85%	 	
Commercial	 	23,584,897	 	1.7%	 	3.0	 	0%	 	73%	 	
Retail	 	21,050,000	 	1.5%	 	2.9	 	0%	 	67%	 	
Condo	 	26,000,000	 	1.8%	 	4.2	 	36%	 	67%	 	
Total	 	$	1,427,198,915	 	100.0%	 	3.4	 	23%	 	82%	 	
 
 	 	As of December 31, 2011	 	
Asset Class	 	Unpaid
Principal
Balance	 	Percentage
of Portfolio	 	Wtd. Avg.
Internal
Risk Rating	 	First Dollar
LTV Ratio	 	Last Dollar
 LTV Ratio	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Multi-family	 	$	673,570,720	 	44.8%	 	3.4	 	21%	 	82%	 	
Office	 	497,422,786	 	33.1%	 	3.2	 	39%	 	83%	 	
Land	 	136,110,014	 	9.1%	 	4.2	 	0%	 	96%	 	
Hotel	 	135,839,357	 	9.0%	 	3.8	 	46%	 	87%	 	
Commercial	 	23,751,567	 	1.6%	 	3.0	 	0%	 	95%	 	
Retail	 	21,050,000	 	1.4%	 	2.9	 	0%	 	66%	 	
Condo	 	14,650,000	 	1.0%	 	3.9	 	64%	 	87%	 	
Total	 	$	1,502,394,444	 	100.0%	 	3.4	 	27%	 	84%	 	
 
Geographic Concentration Risk
 
As of June 30, 2012, 36%, 11%, and 8% of the outstanding balance of the Company’s loans and investments portfolio had underlying properties in New York, California, and Florida, respectively.  As of December 31, 2011, 37%, 14%, and 7% of the outstanding balance of the Company’s loans and investments portfolio had underlying properties in New York, California and Florida, respectively.
 
Impaired Loans and Allowance for Loan Losses
 
The Company performs evaluations of the loan portfolio quarterly to assess the performance of its loans and whether a reserve for impairment should be recorded.  The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement.
 
During the three months ended June 30, 2012, the Company determined that the fair value of the underlying collateral securing one impaired loan with a carrying value of $20.6 million was less than the net carrying value of the loan, resulting in an $8.6 million provision for loan losses.  As a result, combined with accumulated reserves in prior years, this loan was fully reserved as of June 30, 2012.  During the six months ended June 30, 2012, the Company determined that the fair value of the underlying collateral securing three impaired loans with an aggregate carrying value of $55.4 million was less than the net carrying value of the loans, resulting in a $16.4 million provision for loan losses.  In addition, during the three and six months ended June 30, 2012, the Company recorded $0.6 million and $0.7 million, respectively of net recoveries of previously recorded loan loss reserves.  These recoveries were recorded in provision for loan losses on the Consolidated Statement of Operations.  The effect of the recoveries resulted in a provision for loan losses, net of recoveries, of $8.0 million and $15.7 million for the three and six months ended June 30, 2012, respectively.  Of the $8.6 million and $16.4 million of loan loss reserves recorded during the three and six months ended June 30, 2012, $8.6 million and $13.6 million, respectively, was attributable to a loan on which the Company had previously recorded reserves, while $2.8 million of reserves related to another loan in the Company’s portfolio.  The Company recorded an $11.4 million and $12.9 million provision for loan losses for the three and six months ended June 30, 2011, respectively, when it performed an evaluation of its loan portfolio and determined that the fair value of the underlying collateral securing three and
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
six impaired loans, respectively, with an aggregate carrying value of $50.5 million and $72.3 million, respectively, were less than the net carrying value of the loans.  In addition, during the three and six months ended June 30, 2011, the Company recorded $3.8 million and $4.8 million, respectively of net recoveries of previously recorded loan loss reserves.  The effect of these recoveries resulted in a provision for loan losses, net of recoveries, of $7.6 million and $8.1 million for the three and six months ended June 30, 2011, respectively.    There were no loans for which the value of the collateral securing the loan was less than the carrying value of the loan for which the Company had not recorded a provision for loan loss as of June 30, 2012.
 
At June 30, 2012, the Company had a total of 20 loans with an aggregate carrying value, before reserves, of $271.7 million for which impairment reserves have been recorded.  At December 31, 2011, the Company had a total of 24 loans with an aggregate carrying value, before reserves, of $282.9 million for which impairment reserves have been recorded.
 
A summary of the changes in the allowance for loan losses is as follows:
 
 	 	For the Six
Months Ended	 	For the Six
Months Ended	 	
 	 	June 30,
 2012	 	June 30,
 2011	 	
 	 	 	 	 	 	
Allowance at beginning of the period	 	$	185,381,855	 	$	205,470,302	 	
Provision for loan losses	 	16,396,064	 	12,900,000	 	
Charge-offs	 	(12,763,663	)	(10,724,862	)	
Charge-offs on loans reclassified to real estate owned, net	 	—	 	(31,710,929	)	
Recoveries of reserves	 	(697,341	)	(4,703,146	)	
Allowance at end of the period	 	$	188,316,915	 	$	171,231,365	 	
 
A summary of charge-offs and recoveries is as follows:
 
 	 	For the Six Months Ended	 	
 	 	June 30, 2012	 	June 30, 2011	 	
 	 	 	 	 	 	
Charge-offs:	 	 	 	 	 	
Multi-family	 	$	(6,951,004	)	$	(21,971,114	)	
Office	 	(5,812,659	)	(7,114,677	)	
Hotel	 	—	 	(13,350,000	)	
Total	 	$	(12,763,663	)	$	(42,435,791	)	
 	 	 	 	 	 	
Recoveries:	 	 	 	 	 	
Multi-family	 	$	(10,000	)	$	(821,389	)	
Office	 	(687,341	)	(3,881,757	)	
Total	 	$	(697,341	)	$	(4,703,146	)	
 	 	 	 	 	 	
Net Charge-offs	 	$	(12,066,322	)	$	(37,732,645	)	
 	 	 	 	 	 	
Ratio of net charge-offs during the period to average loans and investments outstanding during the period	 	0.8	%	2.4	%	
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
A summary of the Company’s impaired loans by asset class is as follows:
 
 	 	June 30, 2012	 	Three Months Ended
 June 30, 2012	 	Six Months Ended
 June 30, 2012	 	
Asset Class	 	Unpaid
Principal
Balance	 	Carrying
Value (1)	 	Allowance
for Loan
Losses	 	Average
Recorded
Investment (2)	 	Interest
Income
Recognized	 	Average
Recorded
Investment (2)	 	Interest
Income
Recognized	 	
Multi-family	 	$	60,239,135	 	$	60,153,645	 	$	55,418,666	 	$	61,930,906	 	$	126,996	 	$	63,717,216	 	$	250,942	 	
Office	 	38,468,158	 	33,330,074	 	28,637,794	 	41,755,321	 	387,241	 	41,785,210	 	812,136	 	
Land	 	136,483,194	 	134,583,223	 	61,518,270	 	135,177,024	 	—	 	134,909,285	 	—	 	
Hotel	 	33,671,507	 	33,671,507	 	33,671,515	 	33,671,507	 	244,935	 	33,671,507	 	491,637	 	
Condo	 	10,000,000	 	10,000,000	 	9,070,670	 	10,000,000	 	86,306	 	10,000,000	 	172,566	 	
Total	 	$	278,861,994	 	$	271,738,449	 	$	188,316,915	 	$	282,534,758	 	$	845,478	 	$	284,083,218	 	$	1,727,281	 	
 
 	 	December 31, 2011	 	Three Months Ended
 June 30, 2011	 	Six Months Ended
 June 30, 2011	 	
Asset Class	 	Unpaid
Principal
Balance	 	Carrying
Value (1)	 	Allowance
for Loan
Losses	 	Average
Recorded
Investment (2)	 	Interest
Income
Recognized	 	Average
Recorded
Investment (2)	 	Interest
Income
Recognized	 	
Multi-family	 	$	67,195,296	 	$	67,149,845	 	$	57,379,670	 	$	122,437,326	 	$	381,302	 	$	152,597,720	 	$	1,287,009	 	
Office	 	45,102,262	 	39,972,420	 	26,560,000	 	59,219,128	 	506,554	 	62,712,473	 	1,599,669	 	
Land	 	133,335,376	 	132,142,122	 	58,700,000	 	130,255,660	 	8,622	 	130,255,661	 	16,978	 	
Hotel	 	33,671,507	 	33,671,507	 	33,671,515	 	33,671,507	 	242,422	 	76,171,507	 	486,209	 	
Condo	 	10,000,000	 	10,000,000	 	9,070,670	 	10,000,000	 	77,125	 	10,000,000	 	137,125	 	
Total	 	$	289,304,441	 	$	282,935,894	 	$	185,381,855	 	$	355,583,621	 	$	1,216,025	 	$	431,737,361	 	$	3,526,990	 	

(1) Represents the unpaid principal balance of impaired loans less unearned revenue and other holdbacks and adjustments by asset class.
 
(2) Represents an average of the beginning and ending unpaid principal balance of each asset class.
 
During the quarter ended June 30, 2012, the Company wrote off two preferred equity investments with a total carrying value of $3.4 million and a mezzanine loan with a carrying value of $6.5 million and recorded charge-offs to previously recorded reserves totaling $9.2 million as well as a cash recovery of $0.7 million. During the quarter ended March 31, 2012, the Company wrote off two preferred equity investments with a total carrying value of $3.6 million and recorded charge-offs to previously recorded reserves totaling $3.6 million.
 
During the quarter ended June 30, 2011, the Company entered into a $32.0 million non-recourse junior loan participation, at a discount, on a mezzanine loan with an unpaid principal balance of $50.0 million.  The Company received proceeds of $28.8 million and recorded a non-cash recovery of a previously recorded reserve of $3.2 million as well as a $3.2 million charge to interest expense as a result of the amortization of discount on the participation during the second quarter of 2011.  In June 2012, the Company sold the $50.0 million mezzanine loan at par to the same third party for the remaining $18.0 million, which relieved the Company’s $32.0 million junior loan participation liability.  See Note 7 — “Debt Obligations.” During the quarter ended March 31, 2011, the Company sold a mezzanine loan with a carrying value of $7.0 million, which had been fully reserved for in a prior period, for $0.2 million and wrote down a bridge loan with a carrying value of $44.5 million to $2.9 million, after principal paydowns of $38.0 million, and recorded charge-offs to previously recorded reserves of $10.4 million.  The Company also charged-off $31.7 million of loan loss reserves related to two loans with carrying values totaling approximately $77.2 million, net of reserves and assumed debt, on properties that were transferred to the Company by the owner, a creditor trust as well as purchased by the Company out of bankruptcy and recorded to real estate owned, net on the Company’s Consolidated Balance Sheet in the first quarter of 2011.  See Note 6 — “Real Estate Owned and Held-For-Sale” for further details.  Loss on sale and restructuring of loans of $1.0 million was recorded during the six months ended June 30, 2011 as a result of the execution of a forbearance agreement on a loan modified in the second quarter of 2011.
 
As of June 30, 2012, eight loans with an aggregate net carrying value of approximately $15.2 million, net of related loan loss reserves of $31.1 million, were classified as non-performing, of which one loan with a carrying value of $1.4 million did not have a loan loss reserve.  Income from non-performing loans is generally recognized on a cash basis only to the extent it is received.  Full income recognition will resume when the loan becomes
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
contractually current and performance has recommenced.  As of December 31, 2011, 12 loans with an aggregate net carrying value of approximately $15.3 million, net of related loan loss reserves of $42.6 million, were classified as non-performing, of which one loan with a carrying value of $1.4 million did not have a loan loss reserve.
 
A summary of the Company’s non-performing loans by asset class as of June 30, 2012 and December 31, 2011 is as follows:
 
 	 	As of June 30, 2012	 	As of December 31, 2011	 	
Asset Class	 	Carrying
Value	 	Less Than
90 Days
Past Due	 	Greater
Than 90
Days Past
Due	 	Carrying
Value	 	Less Than
 90 Days
 Past Due	 	Greater
Than 90
Days Past
Due	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Multi-family	 	$	7,350,404	 	$	—	 	$	7,350,404	 	$	14,328,862	 	$	1,392,325	 	$	12,936,537	 	
Office	 	10,322,280	 	1,881,131	 	8,441,149	 	14,948,138	 	6,506,663	 	8,441,475	 	
Land	 	24,999,972	 	—	 	24,999,972	 	24,999,972	 	—	 	24,999,972	 	
Hotel	 	3,671,507	 	—	 	3,671,507	 	3,671,507	 	—	 	3,671,507	 	
Total	 	$	46,344,163	 	$	1,881,131	 	$	44,463,032	 	$	57,948,479	 	$	7,898,988	 	$	50,049,491	 	
 
At June 30, 2012, the Company did not have any loans contractually past due 90 days or more that are still accruing interest.  During the quarter ended June 30, 2012, the Company refinanced and/or modified one loan with a unpaid principal balance of $8.4 million which was not considered by the Company to be a troubled debt restructuring.  During the six months ended June 30, 2012, the Company refinanced and/or modified two loans with a combined unpaid principal balance $43.8 million loan which were not considered by the Company to be troubled debt restructurings.  In addition, during the three and six months ended June 30, 2012, one loan with an unpaid principal balance of $35.0 million and two loans with a combined unpaid principal balance of $37.8 million, respectively, that were extended during the periods were considered to be a trouble debt restructurings.  During the quarter ended June 30, 2011, the Company refinanced and/or modified three loans totaling $112.0 million, none of which were considered by the Company to be troubled debt restructurings.  During the six months ended June 30, 2011, the Company refinanced and/or modified nine loans totaling $208.8 million, of which two loans totaling $17.2 million were considered by the Company to be troubled debt restructurings.  In addition, the Company had unfunded commitments totaling $0.2 million on modified loans which were considered troubled debt restructurings as of June 30, 2011.  The Company had no unfunded commitments on the modified loan which was considered a troubled debt restructuring as of June 30, 2012.
 
A summary of loan modifications and extensions by asset class that the Company considered to be troubled debt restructurings during the three and six months ended June 30, 2012 were as follows:
 
 	 	For the Three Months Ended June 30, 2012	 	For the Six Months Ended June 30, 2012	 	
Asset Class	 	Number
of Loans	 	Original
Unpaid
Principal
Balance	 	Original
Rate of
Interest	 	Extended
Unpaid
Principal
Balance	 	Extended
Rate of
Interest	 	Number
of Loans	 	Original
Unpaid
Principal
Balance	 	Original
Weighted
Average
Rate of
Interest	 	Modified
Unpaid
Principal
Balance	 	Modified
Weighted
Average
Rate of
Interest	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Land	 	—	 	$	—	 	—	 	$	—	 	—	 	1	 	$	2,818,270	 	—	 	$	2,818,270	 	—	 	
Hotel	 	1	 	35,000,000	 	2.00	%	35,000,000	 	2.00	%	1	 	35,000,000	 	2.00	%	35,000,000	 	2.00	%	
Total	 	1	 	$	35,000,000	 	2.00	%	$	35,000,000	 	2,00	%	2	 	$	37,818,270	 	1.85	%	$	37,818,270	 	1.85	%	
 
A summary of loan modifications and extensions by asset class that the Company considered to be troubled debt restructurings during the three and six months ended June 30, 2011 were as follows:
 
 	 	For the Three Months Ended June 30, 2011	 	For the Six Months Ended June 30, 2011	 	
Asset Class	 	Number
of Loans	 	Original
Unpaid
Principal
Balance	 	Original
Rate of
Interest	 	Extended
Unpaid
Principal
Balance	 	Extended
Rate of
Interest	 	Number
of Loans	 	Original
Unpaid
Principal
Balance	 	Original
Weighted
Average
Rate of
Interest	 	Modified
Unpaid
Principal
Balance	 	Modified
Weighted
Average
Rate of
Interest	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Multi-family	 	—	 	$	—	 	—	 	$	—	 	—	 	2	 	$	17,209,370	 	2.26	%	$	17,211,171	 	2.83	%	

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
There were no loans which the Company considered the modifications to be troubled debt restructurings that were subsequently considered non-performing as of June 30, 2012 and 2011 and no additional loans were considered to be impaired due to the Company’s troubled debt restructuring analysis for the three and six months ended June 30, 2012 and 2011.  These loans were modified to increase the total recovery of the combined principal and interest from the loan.  Any loan modification is predicated upon a goal of maximizing the collection of the loan.  Loan terms that have been modified have included, but are not limited to interest rate, maturity date and in certain cases, principal amount.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 4 — Securities
 
The following is a summary of the Company’s securities classified as available-for-sale at June 30, 2012:
 
 	 	Face	 	Amortized	 	Cumulative
Unrealized	 	Carrying
Value /
Estimated	 	
 	 	Value	 	Cost	 	Gain	 	Fair Value	 	
Common equity securities	 	$	—	 	$	58,789	 	$	205,763	 	$	264,552	 	
Collateralized debt obligation (CDO) bond	 	10,000,000	 	1,000,000	 	500,000	 	1,500,000	 	
Commercial mortgage-backed security (CMBS)	 	2,100,000	 	2,100,000	 	—	 	2,100,000	 	
 	 	 	 	 	 	 	 	 	 	
Total available-for-sale securities	 	$	12,100,000	 	$	3,158,789	 	$	705,763	 	$	3,864,552	 	
 
The following is a summary of the Company’s securities classified as available-for-sale at December 31, 2011:
 
 	 	Face	 	Amortized	 	Cumulative
Unrealized	 	Carrying
Value /
Estimated	 	
 	 	Value	 	Cost	 	Gain	 	Fair Value	 	
Common equity securities	 	$	—	 	$	58,789	 	$	117,579	 	$	176,368	 	
Collateralized debt obligation (CDO) bond	 	10,000,000	 	1,000,000	 	1,000,000	 	2,000,000	 	
Commercial mortgage-backed security (CMBS)	 	2,100,000	 	2,100,000	 	—	 	2,100,000	 	
 	 	 	 	 	 	 	 	 	 	
Total available-for-sale securities	 	$	12,100,000	 	$	3,158,789	 	$	1,117,579	 	$	4,276,368	 	
 
The following is a summary of the underlying credit rating of the Company’s CDO bond and CMBS investments available-for-sale at June 30, 2012 and December 31, 2011:
 
 	 	At June 30, 2012	 	At December 31, 2011	 	
 	 	 	 	Amortized	 	Percent	 	 	 	Amortized	 	Percent	 	
Rating (1)	 	#	 	Cost	 	of Total	 	#	 	Cost	 	of Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CCC-	 	2	 	$	3,100,000	 	100%	 	2	 	$	3,100,000	 	100%	 	

(1) Based on the rating published by Standard & Poor’s for each security.
 
The Company owns 2,939,465 shares of common stock of Realty Finance Corporation, formerly CBRE Realty Finance, Inc., a commercial real estate specialty finance company, which it purchased in 2007 for $16.7 million, and which had a fair value of $0.3 million at June 30, 2012.  As of June 30, 2012, a net unrealized gain totaling $0.2 million was recorded in accumulated other comprehensive loss related to these securities.
 
The Company owns a CDO bond security, purchased at a discount in 2008 for $7.5 million, which bears interest at a spread of 30 basis points over LIBOR, has a stated maturity of 39.9 years, but has an estimated remaining life of 3.9 years based on the maturities of the underlying assets.  As of the second quarter of 2010, the Company is no longer accreting income on this security which had $2.0 million of original discount and a fair value of $1.5 million at June 30, 2012.  As of June 30, 2012, an unrealized gain of $0.5 million was recorded in accumulated other comprehensive loss related to this security.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The Company owns a CMBS investment, purchased at a premium in 2010 for $2.1 million, which is collateralized by a portfolio of hotel properties.  The Company currently has two mezzanine loans with a carrying value before loan loss reserves of $30.0 million related to this portfolio.  The CMBS investment bears interest at a spread of 89 basis points over LIBOR, has a stated maturity of 8.0 years, but has an estimated life of 0.1 years based on the extended maturity of the underlying asset and a fair value of $2.1 million at June 30, 2012.
 
Available-for-sale securities are carried at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive loss.  The Company does not intend to sell its investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be at maturity.  The Company evaluates these securities periodically to determine whether a decline in their value is other-than-temporary, though such a determination is not intended to indicate a permanent decline in value.  The Company’s evaluation is based on its assessment of cash flows which is supplemented by third-party research reports, internal review of the underlying assets securing the investments, levels of subordination and the ratings of the securities and the underlying collateral.  The Company’s estimation of cash flows expected to be generated by the securities portfolio is based upon an internal review of the underlying mortgage loans securing the investments both on an absolute basis and compared to the Company’s initial underwriting for each investment and efforts are supplemented by third party research reports, third party market assessments and dialogue with market participants.  Management closely monitors market conditions on which it bases such decisions.  No impairment was recorded on the Company’s available-for-sale securities for the three and six months ended June 30, 2012 and 2011.
 
For the three and six months ended June 30, 2011, the Company amortized less than $0.1 million of premium into interest income from its CMBS investment and the premium was fully amortized as of December 31, 2011.  For the three and six months ended June 30, 2012 and 2011, no discount was accreted from the CDO bond investment.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The following is a summary of the Company’s securities classified as held-to-maturity at June 30, 2012:
 
 	 	Face	 	Amortized	 	Carrying	 	Unrealized	 	Unrealized	 	Estimated	 	
 	 	Value	 	Cost	 	Value	 	Gain	 	Loss	 	Fair Value	 	
Residential mortgage-backed securities (RMBS)	 	$	64,449,021	 	$	63,307,214	 	$	63,307,214	 	$	211,009	 	$	(20,734	)	$	63,497,489	 	
Commercial mortgage-backed security (CMBS)	 	727,838	 	734,515	 	734,515	 	2,093	 	—	 	736,608	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total securities held-to-maturity	 	$	65,176,859	 	$	64,041,729	 	$	64,041,729	 	$	213,102	 	$	(20,734	)	$	64,234,097	 	
 
The following is a summary of the Company’s securities classified as held-to-maturity at December 31, 2011:
 
 	 	Face	 	Amortized	 	Carrying	 	Unrealized	 	Unrealized	 	Estimated	 	
 	 	Value	 	Cost	 	Value	 	Gain	 	Loss	 	Fair Value	 	
Residential mortgage-backed securities (RMBS)	 	$	29,192,262	 	$	29,199,506	 	$	29,199,506	 	$	57,704	 	$	(419	)	$	29,256,791	 	
Commercial mortgage-backed security (CMBS)	 	734,969	 	742,602	 	742,602	 	—	 	(5,179	)	737,423	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total securities held-to-maturity	 	$	29,927,231	 	$	29,942,108	 	$	29,942,108	 	$	57,704	 	$	(5,598	)	$	29,994,214	 	
 
The following is a summary of the underlying credit ratings of the Company’s RMBS and CMBS investments held-to-maturity at June 30, 2012 and December 31, 2011:
 
 	 	At June 30, 2012	 	At December 31, 2011	 	
 	 	 	 	Amortized	 	Percent	 	 	 	Amortized	 	Percent	 	
Rating (1)	 	#	 	Cost	 	of Total	 	#	 	Cost	 	of Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
AAA	 	3	 	$	1,571,108	 	2%	 	2	 	$	817,810	 	3%	 	
AA	 	1	 	608,608	 	1%	 	—	 	—	 	—	 	
BB	 	3	 	13,999,227	 	22%	 	—	 	—	 	—	 	
BB-	 	1	 	321,061	 	1%	 	2	 	1,462,483	 	5%	 	
CCC	 	1	 	10,352,053	 	16%	 	—	 	—	 	—	 	
NR	 	11	 	37,189,672	 	58%	 	4	 	27,661,815	 	92%	 	
 	 	20	 	$	64,041,729	 	100%	 	8	 	$	29,942,108	 	100%	 	

(1) Based on the rating published by Standard & Poor’s for each security.  NR stands for “not rated”.
 
During the six months ended June 30, 2012, the Company purchased six RMBS investments, at par, for a total of $27.0 million, eight RMBS investments, at a premium of $0.2 million, for a total of $22.9 million, and an RMBS investment, at a discount of $1.3 million, for $10.9 million, and received total principal paydowns of $26.6 million on the portfolio.  During the year ended December 31, 2011, the Company purchased four RMBS investments, at par, for a total of $33.0 million and three RMBS investments, at a premium of less than $0.1 million, for a total of $2.7 million, and received total principal paydowns of $6.5 million on the portfolio.  The total carrying value of the RMBS investments was $63.3 million and $29.2 million at June 30, 2012 and December 31, 2011, respectively.  The RMBS investments are collateralized by portfolios of residential properties, bear interest at a weighted average fixed rate of 5.80%, have a weighted average stated maturity of 31.0 years, but have weighted average estimated lives of 3.6 years based on the estimated maturity of the RMBS investments, and had a total fair value of $63.5 million at June 30, 2012.  Approximately $26.8 million is estimated to mature within one year, $26.2 million is estimated to mature after one year through five years, and $10.3 million is estimated to mature after ten
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
years.  The RMBS investments were financed with two repurchase agreements with financial institutions which generally finance between 80% to 90% of the value of each individual investment.  During the six months ended June 30, 2012, the Company financed $49.9 million of the RMBS investments and paid down the total debt by $20.7 million due to the principal paydowns received on the RMBS investments.  During the year ended December 31, 2011, the Company financed $30.0 million of the RMBS investments and paid down the total debt by $3.9 million due to the principal paydowns received on the RMBS investments.  The total debt balance was $55.4 million and $26.1 million at June 30, 2012 and December 31, 2011, respectively.  See Note 7 — “Debt Obligations” for further details.
 
The Company purchased a CMBS investment, at par, in the fourth quarter of 2011 for $0.7 million, which is collateralized by a portfolio of commercial properties.  The CMBS investment bears interest at a fixed rate of 2.95%, has a stated maturity of 15.4 years, but has an estimated life of 3.4 years based on the extended maturity of the underlying assets and a fair value of $0.7 million at June 30, 2012.
 
Securities held-to-maturity are carried at cost, net of unamortized premiums and discounts.  The Company does not intend to sell its investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its cost basis, which may be at maturity.  The Company evaluates these securities periodically to determine whether a decline in their value is other-than-temporary, though such a determination is not intended to indicate a permanent decline in value.  The Company’s evaluation is based on its assessment of cash flows which is supplemented by third-party research reports, internal review of the underlying assets securing the investments, levels of subordination and the ratings of the securities and the underlying collateral.  The Company’s estimation of cash flows expected to be generated by the securities portfolio is based upon an internal review of the underlying mortgage loans securing the investments both on an absolute basis and compared to the Company’s initial underwriting for each investment and efforts are supplemented by third party research reports, third party market assessments and dialogue with market participants.  Management closely monitors market conditions on which it bases such decisions.  As of June 30, 2012, no impairment was recorded on the Company’s securities held-to-maturity.
 
For the three and six months ended June 30, 2012, $0.1 million of premium was amortized and less than $0.1 million of discount was accreted from the Company’s held-to-maturity investments.
 
The weighted average yield on the Company’s CDO bond, CMBS and RMBS investments available-for-sale and held-to-maturity based on their face values was 3.70% and 0.40%, including the amortization of premium and the accretion of discount, for the three months ended June 30, 2012 and 2011, respectively, and 4.62% and 0.37%, including the amortization of premium and the accretion of discount, for the six months ended June 30, 2012 and 2011, respectively.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 5 — Investment in Equity Affiliates
 
The following is a summary of the Company’s investment in equity affiliates at June 30, 2012 and December 31, 2011:
 
 	 	Investment in Equity Affiliates at	 	Unpaid Principal
Balance to Equity
Affiliates at	 	
 	 	June 30,	 	December 31,	 	June 30,	 	
Equity Affiliates	 	2012	 	2011	 	2012	 	
 	 	 	 	 	 	 	 	
930 Flushing & 80 Evergreen	 	$	370,726	 	$	229,476	 	$	23,584,897	 	
 	 	 	 	 	 	 	 	
450 West 33rd Street	 	—	 	—	 	—	 	
 	 	 	 	 	 	 	 	
St. John’s Development	 	—	 	—	 	25,000,000	 	
 	 	 	 	 	 	 	 	
Lightstone Value Plus REIT L.P	 	55,988,409	 	55,988,409	 	—	 	
 	 	 	 	 	 	 	 	
JT Prime	 	851,000	 	851,000	 	—	 	
 	 	 	 	 	 	 	 	
West Shore Café	 	1,908,680	 	2,053,079	 	5,500,000	 	
 	 	 	 	 	 	 	 	
Ritz-Carlton Club	 	400,602	 	750,000	 	—	 	
 	 	 	 	 	 	 	 	
Lexford Portfolio	 	100	 	100	 	78,190,000	 	
 	 	 	 	 	 	 	 	
Issuers of Junior Subordinated Notes	 	578,000	 	578,000	 	—	 	
 	 	 	 	 	 	 	 	
Total	 	$	60,097,517	 	$	60,450,064	 	$	132,274,897	 	
 
The Company accounts for the 450 West 33rd Street and Lightstone Value Plus REIT L.P. investments under the cost method of accounting and the remaining investments under the equity method.
 
The following represents the change in the Company’s investments in equity affiliates:
 
930 Flushing & 80 Evergreen
 
In June 2003, ACM invested approximately $0.8 million in exchange for a 12.5% preferred interest in a joint venture that owns and operates two commercial properties.  The Company purchased this investment from ACM in August 2003.  In 2007, the Company had contributed an additional $1.2 million to this joint venture.  The Company had a $4.8 million bridge loan and a $3.5 million mezzanine loan outstanding to affiliated entities of the joint venture.  The loans required monthly interest payments based on one month LIBOR and matured in November 2006 and June 2006, respectively.  The bridge loan was extended for two one-year periods and during the second quarter of 2008, the Company was repaid in full.  In addition, in August 2005, the joint venture refinanced one of these properties with a $25.0 million amortizing bridge loan provided by the Company.  The loan matures in April 2016, has a fixed rate of 6.45%, and has an outstanding principal balance of $23.8 million at December 31, 2011.  Proceeds from this loan were used to pay off senior debt as well as the Company’s $3.5 million mezzanine loan.  Excess proceeds were distributed to each of the members in accordance with the operating agreement of which the Company received $1.3 million, which was recorded as a return of capital in 2005.  During 2008, the Company received a $0.2 million return of capital from contribution made in 2007.  In addition, during 2010, the Company contributed an additional $0.1 million of capital, resulting in a balance of $0.6 million at December 31, 2010.  In the fourth quarter of 2011, the Company recorded $0.3 million of losses from the entity against the equity investment, which was also recorded in loss from equity affiliates in the Company’s 2011 Consolidated Statement of Operations, reducing the balance of the investment to $0.2 million at December 31, 2011. In the second quarter of 2012, the Company contributed an additional $0.2 million of capital and during the three and six months ended June 30, 2012, the Company recorded less than $0.1 million of losses from the entity against the equity investment, which was also
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
recorded in loss from equity affiliates in the Company’s 2012 Consolidated Statement of Operations.  The balance of the investment was $0.4 million at June 30, 2012.
 
450 West 33rd Street
 
In May 2007, the Company, as part of an investor group for the 450 West 33rd Street partnership, transferred control of the underlying property (an office building) to Broadway Partners for a value of approximately $664.0 million.  The investor group, on a pro-rata basis, retained an approximate 2% ownership interest in the property and 50% of the property’s air rights which resulted in the Company retaining an investment in equity affiliates of approximately $1.1 million related to its 29% interest in the 2% retained ownership.  In accordance with this transaction, the joint venture members agreed to guarantee $258.1 million of the $517.0 million of new debt outstanding on the property.  The guarantee expires at the earlier of maturity or prepayment of the debt and was allocated to the members in accordance with their ownership percentages.  The guarantee is callable, on a pro-rata basis, if the market value of the property declines below the $258.1 million of guaranteed debt.  The Company’s portion of the guarantee is $76.3 million.  The transaction was structured to provide for a tax deferral for an estimated period of seven years.  The Company recorded deferred revenue of approximately $77.1 million as a result of the guarantee on a portion of the new debt, and $19.0 million as prepaid management fees related to the incentive compensation management fee on the deferred revenue recognized on the transfer of control of the 450 West 33 rd  Street property.  See Note 16 — “Management Agreement” for further details.  In July 2007, the Company purchased a $50.0 million mezzanine loan secured by this property which had a maturity of July 2012 and bore interest at LIBOR plus 4.35%.  In April 2011, the Company entered into a non-recourse junior loan participation in the amount of $32.0 million on the $50.0 million mezzanine loan.  The loan was participated out to a subordinate lender at a discount and the Company received $28.8 million of proceeds.  The Company also had the right to sell its $18.0 million senior participation to the subordinate lender, at face value, in the event of default or if the loan was not repaid by July 9, 2012.  In May 2012, the Company sold the $50.0 million mezzanine loan to the same third party which relieved the Company’s $32.0 million junior loan participation liability.  See Note 7 — “Debt Obligations” for further details.  Additionally, current accounting guidance requires these investments to be evaluated periodically to determine whether a decline in their value is other-than-temporary, though it is not intended to indicate a permanent decline in value.  In the fourth quarter of 2010, the Company recorded an other-than-temporary impairment of $1.1 million for the remaining amount of this investment in loss from equity affiliates in the Company’s Consolidated Statements of Operations, reducing the balance of the investment to $0 as of December 31, 2010.
 
West Shore Café
 
In August 2010, the Company invested approximately $2.1 million in exchange for a 50% non-controlling interest with a 20% preferred return subject to certain conditions in the West Shore Café, a restaurant / inn on an approximate 12,463 square foot lakefront property in Lake Tahoe, California.  The Company also provided a $5.5 million first mortgage loan, $5.5 million of which was funded as of June 30, 2012, that matures in August 2013 and bears interest at a yield of 10.5%.  During the year ended December 31, 2011 and in the second quarter of 2012, the Company received distributions of approximately $0.1 million related to the preferred return, which were recorded as a return of investment.  During the three and six months ended June 30, 2012, the Company recorded $0.1 million of losses from the entity against the equity investment, which was also recorded in loss from equity affiliates in the Company’s 2012 Consolidated Statement of Operations, reducing the balance of the investment to $1.9 million at June 30, 2012.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Ritz-Carlton Club
 
In October 2011, the Company invested approximately $0.8 million in exchange for a 19.41% non-controlling interest with a 10.00% return subject to certain conditions in the Ritz-Carlton Club, a condominium project in Lake Tahoe, California.  In the second quarter of 2012, the Company contributed an additional $0.1 million of capital.  During the three and six months ended June 30, 2012, the Company recorded $0.2 million and $0.4 million, respectively, of losses from the entity against the equity investment, which was also recorded in loss from equity affiliates in the Company’s 2012 Consolidated Statement of Operations, reducing the balance of the investment to $0.4 million at June 30, 2012.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 6 — Real Estate Owned and Held-For-Sale
 
Real Estate Owned
 
The Company had a $29.8 million loan secured by a portfolio of multifamily assets in various locations of the United States that had a maturity date of June 2010 and a weighted average interest rate of approximately 4.26%.  In prior years, the Company established an $18.4 million provision for loan loss related to this portfolio reducing its carrying value to $11.4 million as of December 31, 2010.  In March 2011, the Company purchased the portfolio of multifamily assets (the “Multifamily Portfolio”) securing this loan out of bankruptcy and assumed a $55.4 million first mortgage loan secured by the portfolio of assets.  As of the date of this transaction, as well as at December 31, 2010, the loan was past due and non-performing.  The Company recorded this transaction as real estate owned in its first quarter 2011 Consolidated Financial Statements at a fair value of $65.3 million and the carrying value of the loan represented the fair value of the underlying collateral at the time of the transfer.  For the first quarter of 2011, the Company did not record any property operating income or expenses from this portfolio because ownership did not pass to the Company until the end of the quarter and the Company believed that any operating activity that occurred were immaterial to the Company’s interim Consolidated Financial Statements.  In the second quarter of 2011, one of the properties in the Multifamily Portfolio was sold to a third party for $1.6 million and the proceeds were used to pay down the first lien mortgage.  No gain or loss was recorded on the transaction as the asset was sold for its historical cost basis.  For the three and six months ended June 30, 2012, the Company recorded property operating income of $2.8 million and $5.3 million, respectively, property operating expense of $2.5 million and $5.1 million, respectively, and depreciation of $0.7 million and $1.1 million, respectively.  For the three and six months ended June 30, 2011, the Company recorded property operating income of $2.5 million, property operating expense of $2.0 million and depreciation of $0.7 million.  At June 30, 2012, this investment’s balance sheet was comprised of land of $15.7 million, building, net of accumulated depreciation, totaling approximately $46.7 million, cash of $0.4 million, restricted cash of $0.7 million due to a first mortgage escrow requirement, other assets of $0.4 million, other liabilities of $1.4 million and a mortgage note payable of $53.8 million.  The Company finalized the purchase price allocation in the first quarter of 2012.
 
As of June 30, 2012, the Company’s seven multifamily properties classified as real estate owned had weighted average occupancy rates of approximately 86%.
 
The Company had an $85.0 million loan secured by a portfolio of six hotel assets in Florida that had a maturity date of July 2014 and a weighted average interest rate of approximately 3.75%.  During 2010, the Company established a $13.4 million provision for loan loss related to this portfolio reducing its carrying value to $71.6 million as of December 31, 2010.  In February 2011, the portfolio of hotel assets (the “Hotel Portfolio”) securing this loan were transferred to the Company by the owner, a creditor trust.  As of the date of this transaction, as well as at December 31, 2010, the loan was contractually current.  The Company recorded this transaction as real estate owned in its first quarter 2011 Consolidated Financial Statements at a fair value of $67.3 million and the carrying value of the loan represented the fair value of the underlying collateral at the time of the transfer.  For the three and six months ended June 30, 2012, the Company recorded property operating income of $5.5 million and $12.0 million, respectively, property operating expense of $5.0 million and $9.8 million, respectively, and depreciation of $0.8 million and $1.6 million, respectively.  For the three and six months ended June 30, 2011, the Company recorded property operating income of $5.1 million and $9.8 million, respectively, property operating expense of $4.3 million and $7.2 million, respectively, and depreciation of $1.0 million and $1.3 million, respectively.  The operating results of the Hotel Portfolio are seasonal with the majority of revenues earned in the first two quarters of the calendar year.  At June 30, 2012, this investment’s balance sheet was comprised of land of $12.0 million, building, net of accumulated depreciation, totaling approximately $52.7 million, cash of $1.0 million, restricted cash of $1.2 million, other assets of $3.2 million, receivable from related party of $0.2 million and other liabilities of $4.7 million.  The Company finalized the purchase price allocation in the first quarter of 2012.
 
For the six months ended June 30, 2012, the Company’s six hotel properties classified as real estate owned had weighted average occupancy rates of approximately 59%.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Real Estate Held-For-Sale
 
The Company had a $5.6 million junior participating interest in a first mortgage loan secured by an apartment building in Tucson, Arizona that had a maturity date of July 2012 and bore interest at a fixed rate of 10%.  During 2009, the Company established a $5.6 million provision for loan loss related to this property equal to the carrying value of the loan and in the second quarter of 2010, the Company purchased the property securing this loan by deed-in-lieu of foreclosure and assumed the $20.8 million interest in a first mortgage loan.  The Company recorded this transaction as real estate owned in its Consolidated Financial Statements at a fair value of $20.8 million and the carrying value of the loan represented the fair value of the underlying collateral at the time of the transfer.  During the fourth quarter of 2011, the Company entered into negotiations to sell the property to a third party at which time it was determined that the property met the held-for-sale requirements pursuant to the accounting guidance.  As a result, the Company reclassified this investment from real estate owned to real estate held-for-sale at a value of $19.4 million and reclassified property operating income and expenses and impairment loss for current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements.  In addition, discontinued operations have not been segregated in the Company’s Consolidated Statements of Cash Flows.  The Company sold the property in March 2012 and recorded a gain on sale of real estate held-for-sale of $3.5 million in its Consolidated Statement of Operations and the $20.8 million first mortgage loan was paid off.  For the six months ended June 30, 2012, income from discontinued operations consisted of property operating income of $0.6 million and property operating expense of $0.5 million.  For the three and six months ended June 30, 2011, income from discontinued operations consisted of property operating income of $0.6 million and $1.2 million, respectively, property operating expense of $0.6 million and $1.2 million, respectively, and depreciation of $0.2 million and $0.4 million, respectively.
 
The Company had a $4.0 million bridge loan secured by a hotel located in St. Louis, Missouri that matured in 2009 and bore interest at a variable rate of LIBOR plus 5.00%.  In April 2009, the borrower delivered a deed-in-lieu of foreclosure to the Company.  As a result, during the second quarter of 2009 the Company recorded this investment on its Consolidated Balance Sheet as real estate owned at a fair value of $2.9 million.  The carrying value represented the fair value of the underlying collateral at the time of the transfer.  During the second quarter of 2011, through site visits and discussion with market participants, the Company determined that the asset exhibited indicators of impairment and performed an impairment analysis.  As a result of the impairment analysis based on the indicators of value from the market participants, the Company recorded an impairment loss of $0.8 million in the Consolidated Statement of Operations.  During the third quarter of 2011, the Company entered into negotiations to sell the property to a third party at which time it was determined that the property met the held-for-sale requirements pursuant to the accounting guidance.  As a result, the Company reclassified this investment from real estate owned to real estate held-for-sale at a value of $1.9 million and reclassified property operating income and expenses and impairment loss for current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements.  In addition, discontinued operations have not been segregated in the Company’s Consolidated Statements of Cash Flows.  In the fourth quarter of 2011, the Company recorded an additional impairment loss of $0.7 million in the Consolidated Statement of Operations, reducing the carrying value of the investment to $1.2 million. The Company sold the property in March 2012 and recorded a gain on sale of real estate held-for-sale of less than $0.1 million in its Consolidated Statement of Operations.  For the six months ended June 30, 2012, loss from discontinued operations consisted of net property operating income of $0.2 million.  For the three and six months ended June 30, 2011, income on operations of real estate held-for-sale consisting of property operating income of $0.1 million and $0.2 million, respectively, property operating expense of $0.3 million and $0.7 million, respectively, and depreciation of less than $0.1 million for both periods.
 
The Company had a $5.0 million mezzanine loan secured by an office building located in Indianapolis, Indiana that was scheduled to mature in June 2012 and bore interest at a fixed rate of 10.72%.  During the first quarter of 2008, the Company established a $1.5 million provision for loan loss related to this property reducing the carrying value to $3.5 million at March 31, 2008.  In April 2008, the Company was the winning bidder at a UCC foreclosure sale of the entity which owns the equity interest in the property securing this loan, subject to a $41.4 million first mortgage on the property.  As a result, during the second quarter of 2008, the Company recorded this investment on its Consolidated Balance Sheet as real estate owned at fair value, which included the Company’s $3.5 million carrying value of the mezzanine loan and the $41.4 million first lien mortgage note payable.  During the
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
third quarter of 2009, the Company mutually agreed with a first mortgage lender to appoint a receiver to operate the property and the Company was working to assist in the transfer of title to the first mortgage lender.  As a result, the Company reclassified this investment from real estate owned to real estate held-for-sale at a fair value of $41.4 million, reclassified property operating income and expenses for current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements, and recorded an impairment loss of $4.9 million in 2009.  The real estate held-for-sale investment consisted of land and building, net of accumulated depreciation, of approximately $41.4 million, a mortgage note payable held-for-sale of $41.4 million and other liabilities of $1.2 million.  The Company did not record interest expense related to the note payable, as the interest expense was non-recourse and the Company was in the process of cooperating with the receiver and the first lien holder in order for the first lien holder to take title to the office building.  The Company also did not believe that net income for the office building was realizable and, as such, did not record any income or loss on this held-for-sale investment up to its transfer.  In May 2012, the Company surrendered the property to the first mortgage lender in full satisfaction of the mortgage note payable and recorded income from discontinued operations of $1.2 million related to the reversal of accrued liabilities which were not incurred.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 7 — Debt Obligations
 
The Company utilizes a repurchase agreement, a warehouse credit facility, a revolving credit facility, collateralized debt obligations, junior subordinated notes, a note payable, loan participations and mortgage notes payable to finance certain of its loans and investments.  Borrowings underlying these arrangements are primarily secured by a significant amount of the Company’s loans and investments.
 
Repurchase Agreements and Credit Facilities
 
The following table outlines borrowings under the Company’s repurchase agreements and credit facilities as of June 30, 2012 and December 31, 2011:
 
 	 	June 30, 2012	 	December 31, 2011	 	
 	 	Debt	 	Collateral	 	Debt	 	Collateral	 	
 	 	Carrying	 	Carrying	 	Carrying	 	Carrying	 	
 	 	Value	 	Value	 	Value	 	Value	 	
 	 	 	 	 	 	 	 	 	 	
Repurchase agreement, financial institution, rolling monthly term, interest is variable based on one-month LIBOR; the weighted average note rate was 1.72% and 1.69%, respectively	 	$	54,563,000	 	$	63,474,916	 	$	26,105,000	 	$	29,192,267	 	
 	 	 	 	 	 	 	 	 	 	
Repurchase agreement, financial institution, rolling monthly term, interest is variable based on one-month LIBOR; the weighted average note rate was 1.77%	 	800,000	 	974,105	 	—	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Warehousing credit facility, financial institution, $50.0 million committed line, expiration July 2013, interest is variable based on one-month LIBOR, the weighted average note rate was 3.04% and 3.09%, respectively	 	49,334,594	 	69,242,000	 	50,000,000	 	70,192,000	 	
 	 	 	 	 	 	 	 	 	 	
Warehousing credit facility, financial institution, $12.6 million committed line, expiration December 2013, interest is variable based on LIBOR or Prime, the weighted average note rate was 3.04%	 	12,600,000	 	18,000,000	 	—	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Revolving credit facility, financial institution, $15.0 million committed line, expiration May 2013, interest is fixed at 8.00% with a 1.00% non-use fee, the weighted average note rate was 8.11%	 	10,000,000	 	—	 	—	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Total repurchase agreements and credit facilities	 	$	127,297,594	 	$	151,691,021	 	$	76,105,000	 	$	99,384,267	 	
 
At June 30, 2012 and December 31, 2011, the weighted average note rate for the Company’s repurchase agreements and credit facilities was 2.87% and 2.61%, respectively.  There were no interest rate swaps on these facilities at June 30, 2012 and December 31, 2011.
 
During the six months ended June 30, 2012, the Company financed the purchase of 14 RMBS investments with a repurchase agreement with a financial institution for a total of $49.1 million and paid down the total debt by $20.7 million due to principal paydowns received on the RMBS investments.  During the year ended December 31, 2011, the Company financed the purchase of seven RMBS investments with this repurchase agreement for a total of $30.0 million and paid down the total debt by $3.9 million due to principal paydowns received on the RMBS investments.  See Note 4 — “Securities” for further details.  The total debt balance was $54.6 million and $26.1 million at June 30, 2012 and December 31, 2011, respectively.  The facility finances between 80% and 90% of the value of each investment, has a rolling monthly term, and bears interest at a rate of 125 to 150 basis points over LIBOR.  The facility also includes a minimum net worth covenant of $100.0 million.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
In June 2012, the Company financed the purchase of an RMBS investment with another repurchase agreement with a financial institution for $0.8 million and the debt balance was $0.8 million at June 30, 2012.  See Note 4 — “Securities” for further details.  The facility finances 80% of the value of the investment, has a rolling monthly term, and bears interest at a rate of 185 basis points over LIBOR.
 
In July 2011, the Company entered into a two year, $50.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties.  The facility bears interest at a rate of 275 basis points over LIBOR, required a 1% commitment fee upon closing, matures in July 2013 with a one year extension option that requires two 5% paydowns and has warehousing and non-use fees.  The facility also has a maximum advance rate of 75% and contains several restrictions including full repayment of an advance if a loan becomes 60 days past due, is in default or is written down by the Company.  The facility also includes various financial covenants including a minimum liquidity requirement of $20.0 million, minimum tangible net worth which includes junior subordinated notes as equity of $150.0 million, maximum total liabilities less subordinate debt of $2.0 billion, as well as certain other debt service coverage ratios and debt to equity ratios.  The facility also has a compensating balance requirement of $50.0 million to be maintained by the Company and its affiliates.  At June 30, 2012, the outstanding balance of this facility was $49.3 million.
 
In June 2012, the Company entered into a $12.6 million warehouse facility with a financial institution to finance the first mortgage loan on a multifamily property.  The facility bears interest at a rate of 275 basis points over LIBOR or Prime at the Company’s election, required a 1% commitment fee upon closing, matures in December 2013 and has a non-use fee.  The facility also has a maximum advance rate of 70%, which can be increased to 75% under certain specified conditions, and contains several restrictions including full repayment of an advance if the loan becomes 60 days past due, is in default or is written down by the Company.  The facility also includes various financial covenants including a minimum liquidity requirement of $20.0 million, minimum tangible net worth which includes junior subordinated notes as equity of $150.0 million, maximum total liabilities less subordinate debt of $2.0 billion, as well as certain other debt service coverage ratios and debt to equity ratios.  At June 30, 2012, the outstanding balance of this facility was $12.6 million.
 
In May 2012, the Company entered into a $15.0 million committed revolving line of credit with a one year term maturing in May 2013, which is secured by a portion of the bonds originally issued by the Company’s CDO entities that have been repurchased by the Company.  This facility has a 1% commitment fee, a 1% non-use fee and pays interest at a fixed rate of 8% on any drawn portion of the line.  The facility also includes a debt service coverage ratio requirement for the posting of collateral.  At June 30, 2012, the outstanding balance of this facility was $10.0 million.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Collateralized Debt Obligations
 
The following table outlines borrowings and the corresponding collateral under the Company’s collateralized debt obligations as of June 30, 2012:

 	 	Debt	 	Collateral	 	 	 	
 	 	 	 	 	 	Loans	 	Securities	 	Cash	 	 	 	
 	 	Face	 	Carrying	 	Unpaid	 	Carrying	 	Face	 	Carrying	 	Fair	 	Restricted	 	Collateral	 	
 	 	Value	 	Value	 	Principal (1)	 	Value (1)	 	Value	 	Value	 	Value (2)	 	Cash (3)	 	At-Risk (4)	 	
CDO I — Issued four investment grade tranches January 19, 2005. Reinvestment period through April 2009. Stated maturity date of February 2040. Interest is variable based on three-month LIBOR; the weighted average note rate was 3.56%	 	$	158,122,932	 	$	164,094,082	 	$	303,088,410	 	$	244,272,906	 	$	727,838	 	$	734,515	 	$	736,608	 	$	21,026,090	 	$	207,548,894	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO II — Issued nine investment grade tranches January 11, 2006. Reinvestment period through April 2011. Stated maturity date of April 2038. Interest is variable based on three-month LIBOR; the weighted average note rate was 3.07%	 	244,948,957	 	251,084,147	 	413,011,403	 	348,382,202	 	10,000,000	 	1,500,000	 	1,500,000	 	11,453,407	 	141,010,635	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO III — Issued ten investment grade tranches December 14, 2006. Reinvestment period through January 2012. Stated maturity date of January 2042. Interest is variable based on three-month LIBOR; the weighted average note rate was 0.77%	 	485,944,553	 	495,027,976	 	578,078,693	 	531,485,118	 	—	 	—	 	—	 	25,285,706	 	187,071,847	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total CDOs	 	$	889,016,442	 	$	910,206,205	 	$	1,294,178,506	 	$	1,124,140,226	 	$	10,727,838	 	$	2,234,515	 	$	2,236,608	 	$	57,765,203	 	$	535,631,376	 	
 
The following table outlines borrowings and the corresponding collateral under the Company’s collateralized debt obligations as of December 31, 2011:
 
 	 	Debt	 	Collateral	 	 	 	
 	 	 	 	 	 	Loans	 	Securities	 	Cash	 	 	 	
 	 	Face	 	Carrying	 	Unpaid	 	Carrying	 	Face	 	Carrying	 	Fair	 	Restricted	 	Collateral	 	
 	 	Value	 	Value	 	Principal (1)	 	Value (1)	 	Value	 	Value	 	Value (2)	 	Cash (3)	 	At-Risk (4)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO I — Issued four investment grade tranches January 19, 2005. Reinvestment period through April 2009. Stated maturity date of February 2040. Interest is variable based on three-month LIBOR; the weighted average note rate was 4.49%	 	$	160,435,201	 	$	166,513,982	 	$	329,771,834	 	$	267,636,713	 	$	734,969	 	$	742,602	 	$	737,423	 	$	22,136	 	$	152,303,041	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO II — Issued nine investment grade tranches January 11, 2006. Reinvestment period through April 2011. Stated maturity date of April 2038. Interest is variable based on three-month LIBOR; the weighted average note rate was 2.83%	 	285,827,267	 	292,073,302	 	443,418,527	 	380,782,546	 	10,000,000	 	2,000,000	 	2,000,000	 	17,136,397	 	131,932,659	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO III — Issued ten investment grade tranches December 14, 2006. Reinvestment period through January 2012. Stated maturity date of January 2042. Interest is variable based on three-month LIBOR; the weighted average note rate was 1.24%	 	534,791,657	 	544,028,109	 	579,343,579	 	531,123,295	 	—	 	—	 	—	 	24,795,495	 	171,427,137	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total CDOs	 	$	981,054,125	 	$	1,002,615,393	 	$	1,352,533,940	 	$	1,179,542,554	 	$	10,734,969	 	$	2,742,602	 	$	2,737,423	 	$	41,954,028	 	$	455,662,837	 	
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

(1) Amounts include loans to real estate assets consolidated by the Company that were reclassified to real estate owned and held-for-sale, net on the Consolidated Financial Statements.
(2) The security with a fair value of $736,608 was rated AAA at June 30, 2012 and December 31, 2011 by Standard & Poor’s.  The security with a fair value of $1,500,000 was rated a CCC- at June 30, 2012 and December 31, 2011 by Standard & Poor’s.
(3) Represents restricted cash held for reinvestment and/or principal repayments in the CDOs.  Does not include restricted cash related to interest payments, delayed fundings and expenses.
(4) Amounts represent the face value of collateral in default, as defined by the CDO indenture, as well as assets deemed to be “credit risk”.  Credit risk assets are reported by each of the CDOs and are generally defined as one that, in the CDO collateral manager’s reasonable business judgment, has a significant risk of declining in credit quality or, with a passage of time, becoming a defaulted asset.
 
At June 30, 2012 and December 31, 2011, the aggregate weighted average note rate for the Company’s collateralized debt obligations, including the cost of interest rate swaps on assets financed in these facilities, was 1.90% and 2.23%, respectively.  Excluding the effect of swaps, the weighted average note rate at June 30, 2012 and December 31, 2011 was 1.00% and 1.14%, respectively.
 
As of April 15, 2009, CDO I has reached the end of its replenishment date and will no longer make $2.0 million amortization payments to investors that were made quarterly prior to the replenishment date.  Investor capital is repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CDO.  Proceeds distributed are recorded as a reduction of the CDO liability.
 
As of April 15, 2011, CDO II has reached the end of its replenishment date and will no longer make $1.2 million amortization payments to investors that were made quarterly prior to the replenishment date.  Investor capital is repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CDO.  Proceeds distributed are recorded as a reduction of the CDO liability.
 
As of January 15, 2012, CDO III has reached the end of its replenishment date.  Investor capital will be repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CDO.  Proceeds distributed are recorded as a reduction of the CDO liability.  CDO III has a $100.0 million revolving note class that provides a revolving note facility.  The outstanding note balance for CDO III was $495.0 million at June 30, 2012 which included $100.0 million outstanding under the revolving note facility.
 
In the second quarter of 2012, the Company purchased, at a discount, $42.7 million of investment grade rated Class C, D, E, F, G and H notes originally issued by its CDO II and CDO III issuing entities for a price of $21.7 million from third party investors and recorded a net gain on extinguishment of debt of $21.0 million in its 2012 Consolidated Statement of Operations.
 
In the first quarter of 2012, the Company purchased, at a discount, $14.5 million of investment grade rated Class B and E notes originally issued by its CDO II and CDO III issuing entities for a price of $9.2 million from third party investors and recorded a net gain on extinguishment of debt of $5.3 million in its 2012 Consolidated Statement of Operations.
 
In the third quarter of 2012, the Company purchased, at a discount, $9.0 million of investment grade rated Class D and E notes originally issued by its CDO III issuing entity for a price of $4.9 million from third party investors and will record a net gain on extinguishment of debt of $4.1 million in its Consolidated Statement of Operations for the three months ended September 30, 2012.
 
During the three and six months ended June 30, 2011, the Company had purchased, at a discount, $3.5 million and $5.0 million, respectively, of investment grade rated Class C and F notes originally issued by its CDO III issuing entity for a price of $1.6 million and $2.2 million, respectively, from third party investors and recorded a gain on extinguishment of debt of $1.9 million and $2.8 million, respectively, in its 2011 Consolidated Statements of Operations.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The following table sets forth the face amount and gain on extinguishment of the Company’s CDO bonds repurchased in the following periods by bond class:
 
 	 	For the Three Months Ended June 30,	 	For the Six Months Ended June 30,	 	
 	 	2012	 	2011	 	2012	 	2011	 	
Class:	 	Face
Amount	 	Gain	 	Face
Amount	 	Gain	 	Face
Amount	 	Gain	 	Face
Amount	 	Gain	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
B	 	$	—	 	$	—	 	$	—	 	$	—	 	$	13,000,000	 	$	4,615,000	 	$	—	 	$	—	 	
C	 	3,329,509	 	1,200,182	 	1,630,000	 	757,950	 	3,329,509	 	1,200,182	 	1,630,000	 	757,950	 	
D	 	10,350,000	 	4,537,503	 	—	 	—	 	10,350,000	 	4,537,503	 	—	 	—	 	
E	 	6,250,000	 	2,850,787	 	—	 	—	 	7,765,276	 	3,581,908	 	—	 	—	 	
F	 	9,708,556	 	5,048,417	 	1,870,000	 	1,168,750	 	9,708,556	 	5,048,417	 	3,370,000	 	2,061,250	 	
G	 	8,672,039	 	4,777,138	 	—	 	—	 	8,672,039	 	4,777,138	 	—	 	—	 	
H	 	4,403,771	 	2,554,187	 	—	 	—	 	4,403,771	 	2,554,187	 	—	 	—	 	
Total	 	$	42,713,875	 	$	20,968,214	 	$	3.500,000	 	$	1,926,700	 	$	57,229,151	 	$	26,314,335	 	$	5,000,000	 	$	2,819,200	 	
 
In 2010, the Company re-issued its own CDO bonds it had acquired throughout 2009 with an aggregate face amount of approximately $42.8 million as part of an exchange for the retirement of $114.1 million of its junior subordinated notes.  This transaction resulted in the recording of $65.2 million of additional CDO debt, of which $42.3 million represents the portion of the Company’s CDO bonds that were exchanged and $22.9 million represents the estimated interest due on the reissued bonds through their maturity, of which $21.2 million remains at June 30, 2012.  See “Junior Subordinated Notes” below for further details.
 
The Company intends to own these portfolios of real estate-related assets until their maturities and accounts for these transactions on its Consolidated Balance Sheet as financing facilities.  The Company’s CDOs are VIEs for which the Company is the primary beneficiary and are consolidated in the Company’s Financial Statements accordingly.  The investment grade tranches are treated as secured financings, and are non-recourse to the Company.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Junior Subordinated Notes
 
The following table outlines borrowings under the Company’s junior subordinated notes as of June 30, 2012 and December 31, 2011:
 
 	 	June 30, 2012	 	December 31, 2011	 	
 	 	Debt	 	Debt	 	
 	 	Carrying	 	Carrying	 	
 	 	Value	 	Value	 	
 	 	 	 	 	 	
Junior subordinated notes, maturity March 2034, unsecured, face amount of $28.0 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 3.34% and 0.50%, respectively	 	$	25,245,994	 	$	25,203,958	 	
 	 	 	 	 	 	
Junior subordinated notes, maturity April 2035, unsecured, face amount of $7.0 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 3.67% and 0.50%, respectively	 	6,286,455	 	6,277,218	 	
 	 	 	 	 	 	
Junior subordinated notes, maturity March 2034, unsecured, face amount of $28.0 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 3.34% and 0.50%, respectively	 	25,245,994	 	25,203,958	 	
 	 	 	 	 	 	
Junior subordinated notes, maturity March 2034, unsecured, face amount of $27.3 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 3.34% and 0.50%, respectively	 	24,614,154	 	24,573,169	 	
 	 	 	 	 	 	
Junior subordinated notes, maturity June 2036, unsecured, face amount of $14.6 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 2.99% and 0.50%, respectively	 	13,140,578	 	13,121,735	 	
 	 	 	 	 	 	
Junior subordinated notes, maturityApril 2037, unsecured, face amount of $15.7 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 2.90% and 0.50%, respectively	 	14,120,940	 	14,100,534	 	
 	 	 	 	 	 	
Junior subordinated notes, maturityApril 2037, unsecured, face amount of $31.5 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 2.90% and 0.50%, respectively	 	28,368,178	 	28,327,185	 	
 	 	 	 	 	 	
Junior subordinated notes, maturityApril 2035, unsecured, face amount of $21.2 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 3.67% and 0.50%, respectively	 	19,117,026	 	19,087,154	 	
 	 	 	 	 	 	
Junior subordinated notes, maturityJune 2036, unsecured, face amount of $2.6 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 2.99% and 0.50%, respectively	 	2,370,088	 	2,366,557	 	
 	 	 	 	 	 	
Total junior subordinated notes	 	$	158,509,407	 	$	158,261,468	 	
 
The carrying value under these facilities was $158.5 million at June 30, 2012 and $158.3 million at December 31, 2011, which is net of a deferred amount of $17.4 million and $17.6 million, respectively.  The current weighted average note rate was 3.24% and 0.50% at June 30, 2012 and December 31, 2011, respectively, however, based upon the accounting treatment for the restructuring mentioned below, the effective rate was 3.85% at June 30, 2012 and December 31, 2011.  The impact of these variable interest entities with respect to consolidation is discussed in Note 9 — “Variable Interest Entities.”
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
In 2010, the Company retired $114.1 million of its junior subordinated notes, with a carrying value of $102.1 million, in exchange for the re-issuance of its own CDO bonds it had acquired throughout 2009 with an aggregate face amount of $42.8 million, CDO bonds of other issuers it had acquired in the second quarter of 2008 with an aggregate face amount of $25.0 million and a carrying value of $0.4 million, and $10.5 million in cash.
 
In 2009, the Company retired $265.8 million of its then outstanding trust preferred securities, primarily consisting of $258.4 million of junior subordinated notes issued to third party investors and $7.4 million of common equity issued to the Company in exchange for $289.4 million of newly issued unsecured junior subordinated notes, representing 112% of the original face amount.  The notes bore a fixed interest rate of 0.50% per annum until March 31, 2012 or April 30, 2012 (the “Modification Period”).  Thereafter, interest is to be paid at the rates set forth in the existing trust agreements until maturity, equal to three month LIBOR plus a weighted average spread of 2.90%, which was reduced to 2.77% after the exchange in 2010 mentioned above.  The 12% increase to the face amount due upon maturity, which had a balance of $17.4 million at June 30, 2012, is being amortized into expense over the life of the notes.
 
During the Modification Periods, the Company was permitted to make distributions of up to 100% of taxable income to common shareholders.  The Company had agreed that such distributions would be paid in the form of the Company’s stock to the maximum extent permissible under the Internal Revenue Service rules and regulations in effect at the time of such distribution, with the balance payable in cash.  This requirement regarding distributions in stock could have been terminated by the Company at any time, provided that the Company paid the note holders the original rate of interest from the time of such termination.  These terms of the Modification Period expired in April 2012.
 
The junior subordinated notes are unsecured, have original maturities of 25 to 28 years, pay interest quarterly at a fixed rate or floating rate of interest based on three-month LIBOR and, absent the occurrence of special events, were not redeemable during the first two years.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Notes Payable
 
The following table outlines borrowings under the Company’s notes payable as of June 30, 2012 and December 31, 2011:
 
 	 	June 30, 2012	 	December 31, 2011	 	
 	 	Debt	 	Collateral	 	Debt	 	Collateral	 	
 	 	Carrying	 	Carrying	 	Carrying	 	Carrying	 	
 	 	Value	 	Value	 	Value	 	Value	 	
 	 	 	 	 	 	 	 	 	 	
Note payable relating to investment in equity affiliates, $50.2 million, expiration July 2016, interest is fixed, the weighted average note rate was 4.06%	 	$	50,157,708	 	$	55,988,411	 	$	50,157,708	 	$	55,988,411	 	
 	 	 	 	 	 	 	 	 	 	
Junior loan participation secured by the Company’s interest in a mezzanine loan with a principal balance of $32.0 million, participation interest was based on a portion of the interest received from the loan which has a variable rate of LIBOR plus 4.35%	 	—	 	—	 	32,000,000	 	32,000,000	 	
 	 	 	 	 	 	 	 	 	 	
Junior loan participation, maturity of August 2012, secured by the Company’s interest in a mezzanine loan with a principal balance of $11.8 million. The participation has a 0% rate of interest	 	2,000,000	 	2,000,000	 	2,000,000	 	2,000,000	 	
 	 	 	 	 	 	 	 	 	 	
Junior loan participation, secured by the Company’s interest in a first mortgage loan with a principal balance of $1.3 million, participation interest was based on a portion of the interest received from the loan which has a fixed rate of 9.57%	 	1,300,000	 	1,300,000	 	1,300,000	 	1,300,000	 	
 	 	 	 	 	 	 	 	 	 	
Total notes payable	 	$	53,457,708	 	$	59,288,411	 	$	85,457,708	 	$	91,288,411	 	
 
At June 30, 2012 and December 31, 2011, the aggregate weighted average note rate for the Company’s notes payable was 3.81% and 4.14%, respectively.  There were no interest rate swaps on the notes payable at June 30, 2012 and December 31, 2011.
 
In 2008, the Company recorded a $49.5 million note payable after receiving cash related to a transaction with Lightstone Value Plus REIT, L.P. to exchange the Company’s profits interest in Prime Outlets Member, LLC (“POM”) for operating partnership units in Lightstone Value Plus REIT, L.P.  The note, which was paid down to $48.5 million as of December 31, 2008, was initially secured by the Company’s interest in POM, matures in July 2016 and bears interest at a fixed rate of 4.06% with payment deferred until the closing of the transaction.  Upon the closing of the POM transaction in March 2009, the note balance was increased to $50.2 million and is secured by the Company’s investment in common and preferred operating partnership units in Lightstone Value Plus REIT, L.P.  In March 2009, the Company also recorded a gain on exchange of profits interest of $56.0 million.  At June 30, 2012, the outstanding balance of this note was $50.2 million.
 
In April 2011, the Company entered into a non-recourse junior loan participation in the amount of $32.0 million on a $50.0 million mezzanine loan.  The loan was participated out to a subordinate lender at a discount and the Company received $28.8 million of proceeds.  The subordinate lender will receive its proportionate share of the interest received from the loan, which has a variable rate of LIBOR plus 4.35% and a maturity of July 2012.  The Company also had the right to sell its $18.0 million senior participation to the subordinate lender, at face value, in the event of default or if the loan was not repaid by July 9, 2012.  In May 2012, the Company sold the $50.0 million mezzanine loan to the same third party which relieved the Company’s $32.0 million junior loan participation liability.  In June 2011, the Company entered into a non-recourse junior loan participation in the amount of $2.0 million on an $11.8 million mezzanine loan.  The participation has a 0% rate of interest and a maturity of August 2012.  The outstanding balance of this junior loan participation was $2.0 million at June 30, 2012.  The Company also has a junior loan participation with an outstanding balance at June 30, 2012 of $1.3 million on a $1.3 million bridge loan.  Participations have a maturity date equal to the corresponding mortgage loan and are secured
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
by the participant’s interest in the mortgage loan.  Interest expense is based on the portion of the interest received from the loan that is paid to the junior participant.  The Company’s obligation to pay interest on the participation is based on the performance of the related loan.
 
Mortgage Note Payable — Real Estate Owned
 
During 2011, the Company assumed a $55.4 million interest-only first lien mortgage in connection with the acquisition of real property pursuant to bankruptcy proceedings for an entity in which the Company had a $29.8 million loan secured by a portfolio of multifamily assets (the “Multifamily Portfolio”).  The real estate investment was classified as real estate owned in the Company’s Consolidated Balance Sheet in March 2011.  The mortgage bears interest at a variable rate of one-month LIBOR plus 1.23% and has a maturity date of March 2014 with a one year and three month extension option.  In June 2011, one of the properties in the Multifamily Portfolio was sold to a third party for $1.6 million and the proceeds were used to pay down the first lien mortgage to a balance of $53.8 million at June 30, 2012.
 
Mortgage Notes Payable - Held-For-Sale
 
During 2010, the Company assumed a $20.8 million interest-only first lien mortgage related to a deed in lieu of foreclosure agreement for an entity in which the Company had a $5.6 million junior participation loan secured by an apartment building.  The real estate investment was originally classified as real estate owned and was reclassified to real estate held-for-sale in December 2011.  The mortgage bore interest at a fixed rate of 6.23% and had a maturity date of December 2013 with a five year extension option.  In March 2012, the Company sold the property to a third party and the first lien mortgage was paid off.
 
During 2008, the Company assumed a $41.4 million interest-only first lien mortgage related to the foreclosure of an entity in which the Company had a $5.0 million mezzanine loan.  The real estate investment was originally classified as real estate owned and was reclassified as real estate held-for-sale at September 30, 2009.  The mortgage bore interest at a fixed rate of 6.13% and had a maturity date of June 2012.  In May 2012, the Company surrendered the property to the first mortgage lender in full satisfaction of the first lien mortgage.
 
Debt Covenants
 
The Company’s debt facilities contain various financial covenants and restrictions, including minimum net worth, minimum liquidity and maximum debt balance requirements, as well as certain other debt service coverage ratios and debt to equity ratios.  The Company was in compliance with all financial covenants and restrictions at June 30, 2012.
 
The Company’s CDO vehicles contain interest coverage and asset overcollateralization covenants that must be met as of the waterfall distribution date in order for the Company to receive such payments.  If the Company fails these covenants in any of its CDOs, all cash flows from the applicable CDO would be diverted to repay principal and interest on the outstanding CDO bonds and the Company would not receive any residual payments until that CDO regained compliance with such tests.  The Company’s CDOs were in compliance with all such covenants as of June 30, 2012, as well as on the most recent determination date in July 2012.  In the event of a breach of the CDO covenants that could not be cured in the near-term, the Company would be required to fund its non-CDO expenses, including management fees and employee costs, distributions required to maintain REIT status, debt costs, and other expenses with (i) cash on hand, (ii) income from any CDO not in breach of a CDO covenant test, (iii) income from real property and loan assets, (iv) sale of assets, (v) or accessing the equity or debt capital markets, if available.  The Company has the right to cure covenant breaches which would resume normal residual payments to it by purchasing non-performing loans out of the CDOs.  However, the Company may not have sufficient liquidity available to do so at such time.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The chart below is a summary of the Company’s CDO compliance tests as of the most recent determination date in July 2012:
 
Cash Flow Triggers	 	CDO I	 	CDO II	 	CDO III	 	
 	 	 	 	 	 	 	 	
Overcollateralization (1)	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Current	 	212.94	%	191.93	%	106.96	%	
 	 	 	 	 	 	 	 	
Limit	 	184.00	%	169.50	%	105.60	%	
 	 	 	 	 	 	 	 	
Pass / Fail	 	Pass	 	Pass	 	Pass	 	
 	 	 	 	 	 	 	 	
Interest Coverage (2)	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Current	 	394.01	%	449.45	%	510.13	%	
 	 	 	 	 	 	 	 	
Limit	 	160.00	%	147.30	%	105.60	%	
 	 	 	 	 	 	 	 	
Pass / Fail	 	Pass	 	Pass	 	Pass	 	

(1) The overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total principal balance of the bonds associated with the applicable ratio.  To the extent an asset is considered a defaulted security, the asset’s principal balance for purposes of the overcollateralization test is the lesser of the asset’s market value or the principal balance of the defaulted asset multiplied by the asset’s recovery rate which is determined by the rating agencies.  Rating downgrades of CDO collateral will generally not have a direct impact on the principal balance of a CDO asset for purposes of calculating the CDO’s overcollateralization test unless the rating downgrade is below a significantly low threshold (e.g. CCC-) as defined in each CDO vehicle.
 
(2) The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by the Company.
 
As of the determination dates in July 2012, April 2012, January 2012, October 2011 and July 2011, the Company’s overcollateralization ratios were 212.94%, 211.21%, 211.18%, 207.53% and 196.92%, respectively, for CDO I; 191.93%, 185.89%, 179.31%, 181.78% and 181.74%, respectively, for CDO II; and 106.96%, 107.59%, 107.59%, 108.47% and 109.50%, respectively, for CDO III.  The ratio will fluctuate based on the performance of the underlying assets, transfers of assets into the CDOs prior to the expiration of their respective replenishment dates, purchase or disposal of other investments, and loan payoffs.
 
Also, no payment due under the Junior Subordinated Indentures may be paid if there is a default under any senior debt and the senior lender has sent notice to the trustee.  The Junior Subordinated Indentures are also cross-defaulted with each other.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 8 — Derivative Financial Instruments
 
Hedging Activities
 
The Company recognizes all derivatives as either assets or liabilities in the Consolidated Balance Sheets and measures those instruments at fair value.  Additionally, the fair value adjustments will affect either accumulated other comprehensive loss until the hedged item is recognized in earnings, or net income (loss) attributable to Arbor Realty Trust, Inc., depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.  The ineffective portion of a derivative’s change in fair value is recognized immediately in earnings.
 
Derivatives
 
In connection with the Company’s interest rate risk management, the Company periodically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts.  Specifically, the Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of its expected cash receipts and its expected cash payments principally related to its investments and borrowings.  The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements.  To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  The Company has entered into various interest rate swap agreements to hedge its exposure to interest rate risk on (i) variable rate borrowings as it relates to fixed rate loans; (ii) the difference between the CDO investor return being based on the three-month LIBOR index while the supporting assets of the CDO are based on the one-month LIBOR index; and (iii) use of a LIBOR rate caps in loan agreements.
 
Derivative financial instruments must be effective in reducing the Company’s risk exposure in order to qualify for hedge accounting.  When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income for each period until the derivative instrument matures or is settled.  In cases where a derivative financial instrument is terminated early, any gain or loss is generally amortized over the remaining life of the hedged item.  Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market with the changes in value included in net income.  The Company does not use derivatives for trading or speculative purposes.
 
In certain circumstances, the Company may finance the purchase of RMBS investments through a repurchase agreement with the same counterparty which may qualify as a linked transaction if certain criteria are met.  The Company’s linked transactions are evaluated on a combined basis, reported as forward contract derivative instruments and included in other assets on the Consolidated Balance Sheets at fair value.  The fair value of linked transactions reflect the value of the underlying RMBS, linked repurchase agreement borrowings and accrued interest receivable/payable on such instruments.  The Company’s linked transactions are not designated as hedging instruments and, as a result, the change in the fair value and net interest income from linked transactions is reported in other income on the Consolidated Statement of Operations.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The following is a summary of the derivative financial instruments held by the Company as of June 30, 2012 and December 31, 2011 (dollars in thousands):
 
 	 	 	 	Notional Value	 	 	 	Balance	 	Fair Value	 	
Designation\	 	 	 	 	 	June 30,	 	 	 	December 31,	 	Expiration	 	Sheet	 	June 30,	 	December 31,	 	
Cash Flow	 	Derivative	 	Count	 	2012	 	Count	 	2011	 	Date	 	Location	 	2012	 	2011	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non- Qualifying	 	Basis Swaps	 	8	 	$	634,524	 	9	 	$	854,079	 	2013 - 2015	 	Other Assets	 	$	845	 	$	1,563	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non- Qualifying	 	LIBOR Caps	 	2	 	$	13,000	 	2	 	$	13,000	 	2012 - 2013	 	Other Assets	 	$	—	 	$	1	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Qualifying	 	LIBOR Cap	 	1	 	$	73,301	 	1	 	$	73,301	 	2013	 	Other Assets	 	$	—	 	$	1	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Qualifying	 	Interest Rate Swaps	 	16	 	$	337,572	 	24	 	$	515,327	 	2012 - 2017	 	Other Liabilities	 	$	(41,880	)	$	(45,890	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non- Qualifying	 	Forward Contracts	 	5	 	$	—	 	—	 	$	—	 	2013 - 2030	 	Other Assets	 	$	2,860	 	$	—	 	
 
The fair value of Non-Qualifying Basis Swap Hedges was $0.8 million and $1.6 million as of June 30, 2012 and December 31, 2011, respectively, and was recorded in other assets in the Consolidated Balance Sheets.  These basis swaps are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet hedge accounting requirements.  The Company is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in benchmark interest rates and uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate.  These interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount.  The fair value of the Non-Qualifying LIBOR Cap Hedges was less than $0.1 million at June 30, 2012 and December 31, 2011, and was recorded in other assets in the Consolidated Balance Sheets.  The Company entered into these hedges in the fourth quarter of 2010 and the first quarter of 2011 due to loan agreements which required LIBOR Caps of 1% to 2%.  During the six months ended June 30, 2012, a basis swap matured with a notional value of approximately $110.1 million and the notional value of two basis swaps decreased by approximately $109.4 million pursuant to the contractual terms of the respective swap agreements.  During the six months ended June 30, 2011, the notional value of two basis swaps decreased by approximately $119.0 million pursuant to the contractual terms of the respective swap agreements.  For the three months ended June 30, 2012 and 2011, the change in fair value of the Non-Qualifying Basis Swaps and LIBOR Caps was $(0.3) million and for the six months ended June 30, 2012 and 2011, the change in fair value of the Non-Qualifying Basis Swaps and LIBOR Caps was $(0.7) million and $(0.6) million, respectively, and was recorded in interest expense on the Consolidated Statements of Operations.
 
The fair value of Qualifying Interest Rate Swap Cash Flow Hedges as of June 30, 2012 and December 31, 2011 was $(41.9) million and $(45.9) million, respectively, and was recorded in other liabilities in the Consolidated Balance Sheets.  The change in the fair value of Qualifying Interest Rate Swap Cash Flow Hedges was recorded in accumulated other comprehensive loss in the Consolidated Balance Sheets.  These interest rate swaps are used to hedge the variable cash flows associated with existing variable-rate debt, and amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.  During the first quarter of 2011, the Company entered into a LIBOR Cap with a notional value of approximately $73.3 million that qualifies as a cash flow hedge.  The fair value of the Qualifying LIBOR Cap Hedge was less than $0.1 million at June 30, 2012 and is recorded in other assets in the Consolidated Balance Sheet.  The Company entered into this hedge due to a loan agreement which required a LIBOR Cap of 2%.  During the six months ended June 30, 2012, eight interest rate swaps matured with a combined notional value of
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
approximately $171.2 million and the notional value on an interest rate swap decreased by approximately $6.4 million pursuant to the contractual terms of the respective swap agreement.  During the six months ended June 30, 2011, the notional value on three interest rate swaps decreased by approximately $53.5 million pursuant to the contractual terms of the respective swap agreements and two interest rate swaps matured with a combined notional value of approximately $24.8 million.  As of June 30, 2012, the Company expects to reclassify approximately $(14.5) million of other comprehensive loss from Qualifying Cash Flow Hedges to interest expense over the next twelve months assuming interest rates on that date are held constant.  Gains and losses on terminated swaps are being deferred and recognized in earnings over the original life of the hedged item.  These swap agreements must be effective in reducing the variability of cash flows of the hedged items in order to qualify for the aforementioned hedge accounting treatment.  As of June 30, 2012 and December 31, 2011, the Company has a net deferred loss of $2.5 million and $2.9 million, respectively, in accumulated other comprehensive loss.  The Company recorded $0.2 million and $0.4 million as additional interest expense related to the amortization of the loss for the three months ended June 30, 2012 and 2011, respectively, and $0.1 million and less than $0.1 million as a reduction to interest expense related to the accretion of the net gains for the three months ended June 30, 2012 and 2011, respectively.  The Company recorded $0.5 million and $0.9 million as additional interest expense related to the amortization of the loss for the six months ended June 30, 2012 and 2011, respectively, and $0.1 million as a reduction to interest expense related to the accretion of the net gains for the six months ended June 30, 2012 and 2011, respectively.  The Company expects to record approximately $0.7 million of net deferred loss to interest expense over the next twelve months.
 
The fair value of Non-Qualifying Forward Contracts was $2.9 million as of June 30, 2012 and was recorded in other assets in the Consolidated Balance Sheets.  There were no forward contracts as of December 31, 2011.  During the six months ended June 30, 2012, the Company purchased five RMBS investments for $25.9 million and financed 80% - 90% of the purchases with repurchase agreements totaling $22.4 million, which are accounted for as linked transactions and considered forward contracts. The repurchase agreements bear interest at a rate of 125 to 175 basis points over LIBOR. The Company received total principal paydowns on the RMBS of $1.9 million and paid down the associated repurchase agreement by $1.2 million.  For the six months ended June 30, 2012, $0.3 million of net interest income and a $0.1 million increase in fair value was recorded to other income in the Consolidated Statement of Operations.  The RMBS investments bear interest at a weighted average fixed rate of 6.28%, have a weighted average stated maturity of 28.2 years, but have weighted average estimated lives of 3.7 years based on the estimated maturities of the RMBS investments, and have a combined fair value at June 30, 2012 of $2.9 million which is recorded in other assets on the Consolidated Balance Sheet.
 
The following table presents the effect of the Company’s derivative financial instruments on the Statements of Operations as of June 30, 2012 and 2011 (dollars in thousands):
 
 	 	 	 	Amount of Loss
Recognized in
Other Comprehensive
Loss
(Effective Portion)
For the Six Months Ended	 	Amount of Loss
Reclassified from
Accumulated Other
Comprehensive Loss into
Interest Expense
(Effective Portion)
For the Six Months Ended	 	Amount of
Gain (Loss) Recognized
in Interest Expense
(Ineffective Portion)
For the Six Months Ended	 	Amount of
Gain Recognized
in Other Income
For the Six Months Ended	 	
Designation
\Cash Flow	 	Derivative	 	June 30,
2012	 	June 30,
2011	 	June 30,
2012	 	June 30,
2011	 	June 30,
2012	 	June 30,
2011	 	June 30,
2012	 	June 30,
2011	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non- Qualifying	 	Basis Swaps / Caps	 	$	—	 	$	—	 	$	—	 	$	—	 	$	159	 	$	(344	)	$	—	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Qualifying	 	Interest Rate Swaps / Cap	 	$	4,735	 	$	8,403	 	$	(9,147	)	$	(14,418	)	$	—	 	$	—	 	$	—	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non- Qualifying	 	Forward Contracts	 	$	—	 	$	—	 	$	—	 	$	—	 	$	—	 	$	—	 	$	65	 	$	—	 	
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The cumulative amount of other comprehensive loss related to net unrealized losses on derivatives designated as qualifying hedges as of June 30, 2012 and December 31, 2011 of approximately $(44.3) million and approximately $(48.8) million, respectively, is a combination of the fair value of qualifying hedges of $(41.8) million and $(45.9) million, respectively, deferred losses on terminated interest swaps of $(3.2) million and $(3.7) million as of June 30, 2012 and December 31, 2011, respectively, and deferred net gains on termination of interest swaps of $0.7 million and $0.8 million as of June 30, 2012 and December 31, 2011, respectively.
 
The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.  As of June 30, 2012 and December 31, 2011, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $(20.4) million and $(22.0) million, respectively.  As of June 30, 2012 and December 31, 2011, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted collateral of $20.8 million and $21.9 million, respectively, which is recorded in other assets in the Company’s Consolidated Balance Sheets.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 9 — Variable Interest Entities
 
The Company has evaluated its loans and investments, mortgage related securities, investments in equity affiliates, junior subordinated notes and CDOs, in order to determine if they qualify as VIEs or as variable interests in VIEs.  This evaluation resulted in the Company determining that its bridge loans, junior participation loans, mezzanine loans, preferred equity investments, investments in equity affiliates, junior subordinated notes, CDOs, and investments in mortgage related securities are potential VIEs.  A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties.
 
 A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  The Company’s involvement with VIEs primarily affects its financial performance and cash flows through amounts recorded in interest income, interest expense, provision for loan losses and through activity associated with its derivative instruments.
 
Consolidated VIEs
 
The Company consolidates its three CDO subsidiaries, which qualify as VIEs, of which the Company is the primary beneficiary.  These CDOs invest in real estate and real estate-related securities and are financed by the issuance of CDO debt securities.  The Company, or one of its affiliates, is named collateral manager, servicer, and special servicer for all CDO collateral assets which the Company believes gives it the power to direct the most significant economic activities of the entity.  The Company also has exposure to CDO losses to the extent of its equity interests and also has rights to waterfall payments in excess of required payments to CDO bond investors.  As a result of consolidation, equity interests in these CDOs have been eliminated, and the Consolidated Balance Sheet reflects both the assets held and debt issued by the CDOs to third parties.  The Company’s operating results and cash flows include the gross amounts related to CDO assets and liabilities as opposed to the Company’s net economic interests in the CDO entities.
 
Assets held by the CDOs are restricted and can be used only to settle obligations of the CDOs.  The liabilities of the CDOs are non-recourse to the Company and can only be satisfied from each CDO’s respective asset pool.  Assets and liabilities related to the CDOs are disclosed parenthetically, in the aggregate, in the Company’s Consolidated Balance Sheets.  See Note 7 — “Debt Obligations” for further details.
 
The Company is not obligated to provide, has not provided, and does not intend to provide financial support to any of the consolidated CDOs.
 
Unconsolidated VIEs
 
The Company determined that it is not the primary beneficiary of 52 VIEs in which it has a variable interest as of June 30, 2012 because it does not have the ability to direct the activities of the VIEs that most significantly impact each entity’s economic performance.  VIEs, of which the Company is not the primary beneficiary, have an aggregate carrying amount of $581.1 million and exposure to real estate debt of approximately $5.5 billion at June 30, 2012.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The following is a summary of the Company’s variable interests in identified VIEs, of which the Company is not the primary beneficiary, as of June 30, 2012:
 
Type	 	Carrying
Amount (1)	 	Maximum
Exposure to
Loss (2)	 	
 	 	 	 	 	 	
Loans	 	$	407,634,747	 	$	407,634,747	 	
Loans and equity investments	 	78,195,769	 	78,195,769	 	
RMBS	 	81,856,978	 	81,856,978	 	
CMBS	 	2,827,838	 	2,827,838	 	
CDO Bond	 	10,000,000	 	10,000,000	 	
Junior subordinated notes (3)	 	578,000	 	578,000	 	
Total	 	$	581,093,332	 	$	581,093,332	 	

(1) Represents the carrying amount of loans and investments before reserves.  At June 30, 2012, $208.3 million of loans to VIEs had corresponding loan loss reserves of approximately $128.3 million and $39.3 million of loans to VIEs were related to loans classified as non-performing.  See Note 3 — “Loans and Investments” for further details.
 
(2) The Company’s maximum exposure to loss as of June 30, 2012 would not exceed the carrying amount of its investment.
 
(3) These entities that issued the junior subordinated notes are VIEs.  It is not appropriate to consolidate these entities as equity interests are variable interests only to the extent that the investment is considered to be at risk.  Since the Company’s investments were funded by the entities that issued the junior subordinated notes, it is not considered to be at risk.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 10 — Fair Value
 
Fair Value of Financial Instruments
 
Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions.  The following table summarizes the carrying values and the estimated fair values of the Company’s financial instruments as of June 30, 2012 and December 31, 2011:
 
 	 	June 30, 2012	 	December 31, 2011	 	
 	 	 	 	Estimated	 	 	 	Estimated	 	
 	 	Carrying Value	 	Fair Value	 	Carrying Value	 	Fair Value	 	
Financial assets:	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Loans and investments, net	 	$	1,224,753,997	 	$	1,211,659,766	 	$	1,302,440,660	 	$	1,262,157,792	 	
Available-for-sale securities	 	3,864,552	 	3,864,552	 	4,276,368	 	4,276,368	 	
Securities held-to-maturity, net	 	64,041,729	 	64,234,097	 	29,942,108	 	29,994,214	 	
Derivative financial instruments	 	3,705,157	 	3,705,157	 	1,565,063	 	1,565,063	 	
 	 	 	 	 	 	 	 	 	 	
Financial liabilities:	 	 	 	 	 	 	 	 	 	
Repurchase agreements and credit facilities	 	$	127,297,594	 	$	127,042,132	 	$	76,105,000	 	$	75,976,340	 	
Collateralized debt obligations	 	910,206,205	 	585,793,308	 	1,002,615,393	 	606,929,771	 	
Junior subordinated notes	 	158,509,407	 	48,544,918	 	158,261,468	 	48,464,677	 	
Notes payable	 	53,457,708	 	48,169,911	 	85,457,708	 	78,860,307	 	
Mortgage note payable - real estate owned	 	53,751,004	 	48,621,985	 	53,751,004	 	51,251,004	 	
Mortgage notes payable - held-for-sale	 	—	 	—	 	62,190,000	 	61,957,869	 	
Derivative financial instruments	 	41,880,177	 	41,880,177	 	45,889,539	 	45,889,539	 	
 
The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument:
 
Loans and investments, net:  Fair values of loans and investments that are not impaired are estimated using discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality.  Fair values of loans and investments that are impaired are estimated by the Company using significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management.
 
Available-for-sale securities:  Fair values are approximated based on current market quotes received from financial sources that trade such securities and are based on prevailing market data and, in some cases, are derived from third party proprietary models based on well recognized financial principles and reasonable estimates about relevant future market conditions.  The fair values of certain CMBS securities are estimated by the Company using significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management.
 
Securities held-to-maturity, net:  Fair values are approximated based on current market quotes received from financial sources that trade such securities and are based on prevailing market data and, in some cases, are derived from third party proprietary models based on well recognized financial principles and reasonable estimates about relevant future market conditions.
 
Derivative financial instruments:  Fair values of interest rate swap derivatives are approximated based on current market data received from financial sources that trade such instruments and are based on prevailing market
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
data and derived from third party proprietary models based on well recognized financial principles and reasonable estimates about relevant future market conditions.  These items are included in other assets and other liabilities on the Consolidated Balance Sheets.  The Company incorporates credit valuation adjustments in the fair values of its derivative financial instruments to reflect counterparty nonperformance risk.  The RMBS underlying linked transactions are valued estimated based on broker quotations.  The value of the underlying RMBS is then netted against the carrying amount (which approximates fair value) of the repurchase agreement borrowing at the valuation date.  The fair value of linked transactions also includes accrued interest receivable on the RMBS and accrued interest payable on the underlying repurchase agreement borrowings.
 
Repurchase agreements, credit facilities, notes payable and mortgage notes payable:  Fair values are estimated using discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates for financing with similar characteristics and credit quality.
 
Collateralized debt obligations:  Fair values are estimated based on broker quotations, representing the discounted expected future cash flows at a yield which reflects current market interest rates and credit spreads.
 
Junior subordinated notes: Fair values are estimated based on broker quotations, representing the discounted expected future cash flows at a yield which reflects current market interest rates and credit spreads.
 
Fair Value Measurement
 
Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties.  A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor.  Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters.  Where observable prices or inputs are not available, valuation models are applied.  These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
 
Assets and liabilities disclosed at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities are as follows:
 
·                 Level 1 — Inputs are unadjusted and quoted prices exist in active markets for identical assets or liabilities at the measurement date.  The types of assets and liabilities carried at Level 1 fair value generally are government and agency securities, equities listed in active markets, investments in publicly traded mutual funds with quoted market prices and listed derivatives.
 
·                 Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.  Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability.  Fair valued assets and liabilities that are generally included in this category are non-government securities, municipal bonds, certain hybrid financial instruments, certain mortgage and asset-backed securities, certain corporate debt, certain commitments and guarantees, certain private equity investments and certain derivatives.
 
·                 Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions.  Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.  Generally, assets and liabilities carried at fair value and included in this category are certain mortgage and asset-backed
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
securities, certain corporate debt, certain private equity investments, certain municipal bonds, certain commitments and guarantees and certain derivatives.
 
Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter.
 
The Company measures certain financial assets and financial liabilities at fair value on a recurring basis, including available—for—sale securities and derivative financial instruments.  The fair value of these financial assets and liabilities was determined using the following inputs as of June 30, 2012:
 
 	 	 	 	 	 	Fair Value Measurements	 	
 	 	Carrying	 	Fair	 	Using Fair Value Hierarchy	 	
 	 	Value	 	Value	 	Level 1	 	Level 2	 	Level 3	 	
Financial assets:	 	 	 	 	 	 	 	 	 	 	 	
Available-for-sale securities (1)	 	$	3,864,552	 	$	3,864,552	 	$	264,552	 	$	—	 	$	3,600,000	 	
Derivative financial instruments (2)	 	3,705,157	 	3,705,157	 	—	 	845,384	 	2,859,773	 	
Financial liabilities:	 	 	 	 	 	 	 	 	 	 	 	
Derivative financial instruments	 	$	41,880,177	 	$	41,880,177	 	$	—	 	$	41,880,177	 	$	—	 	

(1) For the six months ended June 30, 2012, the Company’s equity securities available-for-sale were measured using Level 1 inputs and the Company’s CDO bond and CMBS investments available-for-sale were measured using Level 3 inputs.
 
(2) For the six months ended June 30, 2012, the Company’s basis swap derivatives were measured using Level 2 inputs and the Company’s forward contract derivatives were measured using Level 3 inputs.
 
Available-for-sale securities:  Fair values are approximated based on current market quotes received from financial sources that trade such securities.  The fair values of available-for-sale equity securities traded in active markets are approximated using Level 1 inputs, while the fair values of available-for-sale debt securities that are approximated using current, non-binding market quotes received from financial sources that trade such investments are valued using Level 3 inputs.  The fair values of certain CMBS and CDO securities are estimated by the Company using Level 3 inputs that require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management.
 
Derivative financial instruments:  Fair values of interest rate swap derivatives are approximated using Level 2 inputs based on current market data received from financial sources that trade such instruments and are based on prevailing market data and derived from third party proprietary models based on well recognized financial principles including counterparty risks, credit spreads and interest rate projections, as well as reasonable estimates about relevant future market conditions.  These items are included in other assets and other liabilities on the Consolidated Balance Sheet.  The Company incorporates credit valuation adjustments in the fair values of its derivative financial instruments to reflect counterparty nonperformance risk.  The fair values of forward contract derivatives that are approximated using Level 3 inputs, including current, non-binding market quotes for the underlying RMBS received from financial sources that trade such investments.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The following roll forward table reconciles the beginning and ending balances of financial assets measured at fair value on a recurring basis using Level 3 inputs:
 
 	 	Available-for-sale	 	Derivative	 	
 	 	Securities	 	Financial Instruments	 	
 	 	 	 	 	 	
Balance as of December 31, 2011	 	$	4,100,000	 	$	—	 	
Adjustments to fair value:	 	 	 	 	 	
Additions: (1)	 	—	 	2,859,773	 	
Changes in unrealized gain (2)	 	(500,000	)	—	 	
 	 	 	 	 	 	
Balance as of June 30, 2012	 	$	3,600,000	 	$	2,859,773	 	

(1)  Represents forward contract derivatives recorded at fair value in the quarter ended June 30, 2012.
 
(2)  Represents the change in unrealized gain on the Company’s debt securities available-for-sale recorded in accumulated other comprehensive loss on the Consolidated Balance Sheet.
 
The Company measures certain financial and non-financial assets at fair value on a nonrecurring basis, such as impaired loans.  The fair value of these financial assets was determined using the following inputs as of June 30, 2012:
 
 	 	Net	 	 	 	Fair Value Measurements	 	
 	 	Carrying	 	Fair	 	Using Fair Value Hierarchy	 	
 	 	Value	 	Value	 	Level 1	 	Level 2	 	Level 3	 	
Financial assets:	 	 	 	 	 	 	 	 	 	 	 	
Impaired loans, net (1)	 	$	85,521,534	 	$	102,176,921	 	$	—	 	$	—	 	$	102,176,921	 	

(1) The Company had an allowance for loan losses of $188.3 million relating to 20 loans with an aggregate carrying value, before loan loss reserves, of approximately $271.7 million at June 30, 2012.
 
Loan impairment assessments:  Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and net of the allowance for loan losses when such loan or investment is deemed to be impaired.  The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement.  The Company performs evaluations of its loans to determine if the value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, which may result in an allowance and corresponding charge to the provision for loan losses.  These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management.  The table above includes all impaired loans, regardless of the period in which an impairment was recognized.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Quantitative information about Level 3 Fair Value Measurements on a recurring and non-recurring basis:
 
 	 	At June 30, 2012	 	
 	 	 	 	Valuation	 	Unobservable	 	Range	 	
 	 	Fair Value	 	Technique(s)	 	Inputs	 	(Weighted Average)	 	
Financial assets:	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Impaired loans (1):	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Multi-family	 	$	12,726,356	 	Direct capitalization analysis
and discounted cash flows	 	Discount rate
Capitalization rate
Revenue growth rate	 	7.50% to 8.00% (7.92%)
6.00% to 9.50% (7.04%)
2.00% to 3.00% (2.17%)	 	
 	 	 	 	 	 	 	 	 	 	
Office	 	5,424,456	 	Discounted cash flows	 	Discount rate
Capitalization rate
Revenue growth rate	 	9.00% to 11.00% (9.41%)
7.50% to 10.00% (8.15%)
0.00% to 3.00% (2.46%)	 	
 	 	 	 	 	 	 	 	 	 	
Land	 	71,500,000

9,999,972	 	Discounted cash flows

Comparable sales	 	Discount rate
Capitalization rate
Revenue growth rate
Dollar per acre	 	15.50% to 15.50% (15.50%)
9.73% to 9.73% (9.73%)
5.40% to 5.40% (5.40%)
$488K/Acre	 	
 	 	 	 	 	 	 	 	 	 	
Hotel	 	—	 	Discounted cash flows	 	Discount rate
Capitalization rate
Revenue growth rate	 	12.74%
9.00%
3.00%	 	
 	 	 	 	 	 	 	 	 	 	
Condo	 	2,526,137	 	Discounted cash flows	 	Discount rate
Revenue growth rate	 	13.00% to 13.00% (13.00%)
3.00% to 3.00% (3.00%)	 	
 	 	 	 	 	 	 	 	 	 	
CMBS	 	2,100,000	 	Discounted cash flows	 	Discount rate
Capitalization rate
Revenue growth rate	 	12.40%
10.00%
4.80%	 	
 	 	 	 	 	 	 	 	 	 	
CDO Bond	 	1,500,000	 	Broker quotes	 	N/A	 	N/A	 	
 	 	 	 	 	 	 	 	 	 	
Forward Contract Derivatives	 	2,859,773	 	Broker quotes	 	N/A	 	N/A	 	

(1) Includes all impaired loans regardless of the period in which provision was recorded.
 
Impaired Loans and CMBS:  The Asset Management department is responsible for the Company’s valuation policies and procedures and reports to the Audit Committee of the Board of Directors.  The Asset Management department analyzes changes in fair value from period to period through its quarterly impairment analysis.  Many methods are used to develop and substantiate unobservable inputs such as analyzing discount and capitalization rates as well as researching revenue and expense growth. Significant increases in discount or capitalization rates in isolation would result in a significantly lower fair value measurement while significant increases in revenue growth rates in isolation would result in a significantly higher fair value measurement.  Significant decreases in discount or capitalization rates in isolation would result in a significantly higher fair value measurement while significant decreases in revenue growth rates in isolation would result in a significantly lower fair value measurement.
 
CDO Bond and Forward Contract Derivatives:  Fair value is approximated based on current market quotes received from financial sources that trade such securities which are not adjusted by the Company.  Significant unobservable inputs used to calculate the quotes are not readily available to the Company.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The Company measures certain assets and liabilities for which fair value is only disclosed.  The fair value of these assets and liabilities was determined using the following inputs as of June 30, 2012:
 
 	 	 	 	 	 	Fair Value Measurements	 	
 	 	Carrying	 	Fair	 	Using Fair Value Hierarchy	 	
 	 	Value	 	Value	 	Level 1	 	Level 2	 	Level 3	 	
Financial assets:	 	 	 	 	 	 	 	 	 	 	 	
Loans and investments, net	 	$	1,224,753,997	 	$	1,211,659,766	 	$	—	 	$	—	 	$	1,211,659,766	 	
Securities held-to-maturity, net	 	64,041,729	 	64,234,097	 	—	 	—	 	64,234,097	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Financial liabilities:	 	 	 	 	 	 	 	 	 	 	 	
Repurchase agreements and credit facilities	 	$	127,297,594	 	$	127,042,132	 	$	—	 	$	—	 	$	127,042,132	 	
Collateralized debt obligations	 	910,206,205	 	585,793,308	 	—	 	—	 	585,793,308	 	
Junior subordinated notes	 	158,509,407	 	48,544,918	 	—	 	—	 	48,544,918	 	
Notes payable	 	53,457,708	 	48,169,911	 	—	 	—	 	48,169,911	 	
Mortgage note payable — real estate owned	 	53,751,004	 	48,621,985	 	—	 	—	 	48,621,985	 	
 
Loans and investments, net:  Fair values of loans and investments that are not impaired are estimated using Level 3 inputs in a discounted cash flow model, using discount rates, which, in the opinion of management, best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality.  Fair values of loans and investments that are impaired are estimated at Level 3 by the Company using significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management.
 
Securities held-to-maturity, net:  Fair values are approximated at Level 3 based on current market quotes received from financial sources that trade such securities and are based on prevailing market data and, in some cases, are derived from third party proprietary models based on well recognized financial principles and reasonable estimates about relevant future market conditions.
 
Repurchase agreements, credit facilities, notes payable and mortgage notes payable:  Fair values are estimated at Level 3 using discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates for financing with similar characteristics and credit quality.
 
Collateralized debt obligations:  Fair values are estimated at Level 3 based on broker quotations, representing the discounted expected future cash flows at a yield which reflects current market interest rates and credit spreads.
 
Junior subordinated notes: Fair values are estimated at Level 3 based on broker quotations, representing the discounted expected future cash flows at a yield which reflects current market interest rates and credit spreads.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 11 — Commitments and Contingencies
 
Contractual Commitments
 
As of June 30, 2012, the Company had the following material contractual obligations (dollars in thousands):
 
 	 	Payments Due by Period (1)	 	
Contractual 	 	 	 	
Obligations	 	2012	 	2013	 	2014	 	2015	 	2016	 	Thereafter	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repurchase agreements and credit facilities	 	$	55,363	 	$	71,935	 	$	—	 	$	—	 	$	—	 	$	—	 	$	127,298	 	
Collateralized debt obligations (2)	 	45,870	 	153,265	 	263,096	 	108,758	 	232,356	 	106,861	 	910,206	 	
Junior subordinated notes (3)	 	—	 	—	 	—	 	—	 	—	 	175,858	 	175,858	 	
Notes payable	 	3,300	 	—	 	—	 	—	 	50,158	 	—	 	53,458	 	
Mortgage note payable — real estate owned (4)	 	—	 	—	 	53,751	 	—	 	—	 	—	 	53,751	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Totals	 	$	104,533	 	$	225,200	 	$	316,847	 	$	108,758	 	$	282,514	 	$	282,719	 	$	1,320,571	 	

(1)      Represents principal amounts due based on contractual maturities.
 
(2)      Comprised of $164.1 million of CDO I debt, $251.1 million of CDO II debt and $495.0 million of CDO III debt with a weighted average remaining maturity of 2.12, 2.53 and 2.49 years, respectively, as of June 30, 2012.  The balance of estimated interest due through maturity on CDO bonds reissued in 2010, which is included in the carrying values of the CDOs, totaled $21.2 million at June 30, 2012.  During the six months ended June 30, 2012, the Company repurchased, at a discount, $57.2 million of investment grade notes originally issued by the Company’s CDO II and CDO III issuers and recorded a reduction of the outstanding debt balance of $57.2 million.
 
(3)      Represents the face amount due upon maturity.  The carrying value is $158.5 million, which is net of a deferred amount of $17.4 million at June 30, 2012.
 
(4)      Represents a $55.4 million mortgage note payable with a contractual maturity in 2014, related to a real estate investment purchased out of bankruptcy in March 2011, which was paid down in the second quarter of 2011 and had a balance of $53.8 million at June 30, 2012.
 
In accordance with certain loans and investments, the Company has outstanding unfunded commitments of $13.9 million as of June 30, 2012, that the Company is obligated to fund as the borrowers meet certain requirements.  Specific requirements include, but are not limited to, property renovations, building construction, and building conversions based on criteria met by the borrower in accordance with the loan agreements.  In relation to the $13.9 million outstanding balance at June 30, 2012, the Company’s restricted cash balance and CDO III revolver capacity contained approximately $9.1 million available to fund the portion of the unfunded commitments for loans financed by the Company’s CDO vehicles.
 
Litigation
 
The Company currently is neither subject to any material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company other than the following:
 
On June 15, 2011, three related lawsuits were filed by the Extended Stay Litigation Trust (the “Trust”), a post-bankruptcy litigation trust alleged to have standing to pursue claims that previously had been held by Extended Stay, Inc. and the Homestead Village L.L.C. family of companies (together “ESI”) (formerly Chapter 11 debtors, together the “Debtors”) that have emerged from bankruptcy.  Two of the lawsuits were filed in the United States Bankruptcy Court for the Southern District of New York, and the third in the Supreme Court of the State of New York, New York County.  (The New York State Court action has been removed to the Bankruptcy Court).  There are 73 defendants in the three lawsuits, including 55 corporate and partnership entities and 18 individuals.  A subsidiary of the Company and certain other entities that are affiliates of the Company are included as defendants.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The lawsuits all allege, as a factual basis and background certain facts surrounding the June 2007 leveraged buyout of ESI from affiliates of Blackstone Capital.  The Company’s subsidiary, Arbor ESH II, LLC, had a $115.0 million investment in the Series A1 Preferred Units of a holding company of Extended Stay, Inc.  The New York State Court action and one of the two federal court actions name as defendants, Arbor ESH II, LLC, Arbor Commercial Mortgage, LLC and ABT-ESI LLC, an entity in which the Company has a membership interest, among the broad group of defendants.  These two actions were commenced by substantially identical complaints.  The defendants are alleged in these complaints, among other things, to have breached fiduciary and contractual duties by causing or allowing the Debtors to pay illegal dividends or other improper distributions of value at a time when the Debtors were insolvent.  These two complaints also allege that the defendants aided and abetted, induced, or participated in breaches of fiduciary duty, waste, and unjust enrichment (“Fiduciary Duty Claims”) and name a director of the Company, and a former general counsel of Arbor Commercial Mortgage, LLC, each of whom had served on the Board of Directors of ESI for a period of time.  The Company is defending these two defendants and paying the costs of such defense.  On the basis of the foregoing allegations, the Trust has asserted claims under a number of common law theories, seeking the return of assets transferred by the Debtors prior to the Debtors’ bankruptcy filing.
 
In the third action, filed in Bankruptcy Court, the same plaintiff, the Trust, has named Arbor Commercial Mortgage, LLC and ABT-ESI LLC, together with a number of other defendants and asserts claims, including constructive and fraudulent conveyance claims under state and federal statutes, as well as a claim under the Federal Debt Collection Procedure Act.
 
The complaints seek among other things, damages of not less than $2.1 billion, plus punitive damages, on a joint and several basis, from each defendant in connection with the Fiduciary Duty Claims and the return of in excess of $50.0 million which is alleged to have been wrongfully received by the holders of the Series A1 Preferred Units, including Arbor ESH II, LLC.  The Company has moved to dismiss the referenced actions and intends to vigorously defend against the claims asserted therein.
 
The Company has not made a loss accrual for this litigation because it believes that is not probable that a loss has been incurred and an amount cannot be reasonably estimated.
 
Note 12 — Equity
 
Common Stock
 
The Company’s charter provides for the issuance of up to 500 million shares of common stock, par value $0.01 per share, and 100 million shares of preferred stock, par value $0.01 per share.
 
In June 2010, the Company filed a shelf registration statement on Form S-3 with the SEC under the 1933 Act with respect to an aggregate of $500.0 million of debt securities, common stock, preferred stock, depositary shares and warrants that may be sold by the Company from time to time pursuant to Rule 415 of the 1933 Act.  On June 23, 2010, the SEC declared this shelf registration statement effective.
 
In June 2012, the Company completed a public offering in which it sold 3,500,000 shares of its common stock for $5.40 per share, and received net proceeds of approximately $17.5 million after deducting the underwriting discount and other offering expenses.  The Company intends to use the net proceeds from the offering to make investments, to repurchase or pay liabilities and for general corporate purposes, which may include the repayment of indebtedness under its credit facilities.  The underwriter did not exercise its over-allotment option for additional shares which expired in July 2012 and $481.1 million currently remains available under the shelf registration.
 
In December 2011, the Board of Directors authorized a stock repurchase plan that enables the Company to buy up to 0.5 million shares of its common stock beginning January 3, 2012.  At management’s discretion, shares may be acquired from time to time on the open market, through privately negotiated transactions or pursuant to a Rule 10b5-1 plan.  A Rule 10b5-1 plan permits the Company to repurchase shares at times when it might otherwise be prevented from doing so.  The program expired on July 3, 2012.  As of June 30, 2012, the Company had
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
repurchased a total of 170,170 shares of its common stock under this stock repurchase plan at a total cost of $0.7 million and an average cost of $4.02 per share and no additional shares were repurchased up to the expiration date.
 
The Company had 27,749,225 and 24,298,140 shares of common stock outstanding atJune 30, 2012 and December 31, 2011, respectively.
 
Deferred Compensation
 
The Company has a stock incentive plan under which the Board of Directors has the authority to issue shares of stock to certain directors, officers of the Company and employees of the Company and ACM.  On April 3, 2012, the Company issued an aggregate of 90,000 shares of fully vested common stock to the non-management members of the Board of Directors, as well as 6,255 shares of fully vested common stock to a director who was also the corporate secretary, under the 2003 Stock Incentive Plan, as amended and restated in 2009 (the “Plan”), and recorded approximately $0.5 million to selling and administrative expense in its Consolidated Statement of Operations in the second quarter of 2012.  On March 19, 2012, the Company issued 10,000 shares of fully vested common stock under the Plan to a director who is also an officer of the managing member of ACM, and accrued approximately $0.1 million to selling and administrative expense in the Company’s Consolidated Statement of Operations in the first quarter of 2012.  On January 22, 2012, the Company issued 15,000 shares of fully vested common stock under the Plan to a director who was re-appointed to the Board of Directors on December 19, 2011, and accrued approximately $0.1 million to selling and administrative expense in the Company’s Consolidated Statement of Operations in the fourth quarter of 2011.
 
Warrants
 
In connection with a debt restructuring with Wachovia Bank in the third quarter of 2009, the Company issued Wachovia 1.0 million warrants at an average strike price of $4.00.  500,000 warrants were exercisable immediately at a price of $3.50, 250,000 warrants are exercisable after July 23, 2010 at a price of $4.00 and 250,000 warrants are exercisable after July 23, 2011 at a price of $5.00.  All of the warrants expire on July 23, 2015 and no warrants have been exercised to date.  The warrants were valued at approximately $0.6 million upon issuance using the Black-Scholes method, which was fully amortized into interest expense in the Company’s Consolidated Statement of Operations in 2010 upon closing a discounted payoff agreement with Wachovia Bank.
 
Noncontrolling Interest
 
Noncontrolling interest in a consolidated entity on the Company’s Consolidated Balance Sheet as ofJune 30, 2012 and December 31, 2011 was $1.9 million, representing a third party’s interest in the equity of a consolidated subsidiary that owns an investment and carries a note payable related to the exchange of POM profits interest transaction discussed in Note 7 — “Debt Obligations”.  For the three months ended June 30, 2012 and 2011, the Company recorded income of $0.1 million as well as distributions of $0.1 million attributable to noncontrolling interest.  For the six months ended June 30, 2012 and 2011, the Company recorded income of $0.1 million as well as distributions of $0.1 million and $0.2 million, respectively, attributable to noncontrolling interest.
 
Note 13 — Earnings Per Share
 
Basic earnings per share (“EPS”) is calculated by dividing net income (loss) attributable to Arbor Realty Trust, Inc. by the weighted average number of shares of common stock outstanding during each period inclusive of unvested restricted stock with full dividend participation.  Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of common stock equivalents during each period using the treasury stock method.  The Company’s common stock equivalents include the dilutive effect of warrants outstanding and the potential settlement of incentive management fees in common stock.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations for the three months ended June 30, 2012 and 2011.
 
 	 	For the Three Months Ended	 	For the Three Months Ended	 	
 	 	June 30, 2012	 	June 30, 2011	 	
 	 	Basic	 	Diluted	 	Basic	 	Diluted (1)	 	
Income (loss) from continuing operations, net of noncontrolling interest	 	$	14,370,898	 	$	14,370,898	 	$	(9,223,515	)	$	(9,223,515	)	
Income (loss) from discontinued operations	 	1,175,120	 	1,175,120	 	(1,131,220	)	(1,131,220	)	
Net income (loss) attributable to Arbor Realty Trust, Inc.	 	$	15,546,018	 	$	15,546,018	 	$	(10,354,735	)	$	(10,354,735	)	
 	 	 	 	 	 	 	 	 	 	
Weighted average number of common shares outstanding	 	24,977,879	 	24,977,879	 	25,440,380	 	25,440,380	 	
Dilutive effect of warrants	 	—	 	289,580	 	—	 	—	 	
Weighted average number of common shares outstanding	 	24,977,879	 	25,267,459	 	25,440,380	 	25,440,380	 	
 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations, net of noncontrolling interest, per common share	 	$	0.57	 	$	0.57	 	$	(0.37	)	$	(0.37	)	
Loss from discontinued operations per common share	 	0.05	 	0.05	 	(0.04	)	(0.04	)	
Net income (loss) attributable to Arbor Realty Trust, Inc. per common share	 	$	0. 62	 	$	0.62	 	$	(0.41	)	$	(0.41	)	

(1) For the three months ended June 30, 2011, the Company had a net loss and thus did not have a dilutive effect from one million warrants.
 
The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations for the six months ended June 30, 2012 and 2011.
 
 	 	For the Six Months Ended	 	For the Six Months Ended	 	
 	 	June 30, 2012	 	June 30, 2011	 	
 	 	Basic	 	Diluted	 	Basic	 	Diluted (1)	 	
Income (loss) from continuing operations, net of noncontrolling interest	 	$	14,777,909	 	$	14,777,909	 	$	(8,564,867	)	$	(8,564,867	)	
Income (loss) from discontinued operations	 	4,929,889	 	4,929,889	 	(1,522,719	)	(1,522,719	)	
Net income (loss) attributable to Arbor Realty Trust, Inc.	 	$	19,707,798	 	$	19,707,798	 	$	(10,087,586	)	$	(10,087,586	)	
 	 	 	 	 	 	 	 	 	 	
Weighted average number of common shares outstanding	 	24,579,022	 	24,579,022	 	25,202,248	 	25,202,248	 	
Dilutive effect of warrants	 	—	 	226,785	 	—	 	—	 	
Weighted average number of common shares outstanding	 	24,579,022	 	24,805,807	 	25,202,248	 	25,202,248	 	
 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations, net of noncontrolling interest, per common share	 	$	0.60	 	$	0.59	 	$	(0.34	)	$	(0.34	)	
Loss from discontinued operations per common share	 	0.20	 	0.20	 	(0.06	)	(0.06	)	
Net income (loss) attributable to Arbor Realty Trust, Inc. per common share	 	$	0.80	 	$	0.79	 	$	(0.40	)	$	(0.40	)	

(1) For the six months ended June 30, 2011, the Company had a net loss and thus did not have a dilutive effect from one million warrants.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 14 — Related Party Transactions
 
Due from related party was approximately $0.2 million and $0.7 million at June 30, 2012 and December 31, 2011, respectively, and consisted primarily of escrows held by ACM and its affiliates related to real estate transactions.
 
At June 30, 2012, due to related party was $1.9 millionand consisted primarily of base management fees due to ACM, of which $0.7 million will be remitted by the Company in the third quarter of 2012.  At December 31, 2011, due to related party was $2.7 million and consisted primarily of base management fees due to ACM which were remitted by the Company in the first quarter of 2012.
 
In December 2011, the Company completed a restructuring of a $67.6 million preferred equity loan on the Lexford Portfolio (“Lexford”), which is a portfolio of multi-family assets.  The Company, along with a consortium of independent outside investors, made an additional preferred equity investment of $25.0 million in Lexford, of which the Company holds a $10.5 million interest, and Mr. Fred Weber, the Company’s Executive Vice President of Structured Finance, holds a $0.5 million interest, as of June 30, 2012.  The original preferred equity investment now bears a fixed rate of interest of 2.36%, revised from an original rate of LIBOR plus 5.00% (the loan was paying a modified rate of LIBOR plus 1.65% at the time of the new investment).  The original preferred equity investment matures in June 2020.  The new preferred equity investment has a fixed interest rate of 12% and also matures in June 2020.  The Company, along with the same outside investors, also made a $0.1 million equity investment into Lexford, of which the Company holds a $44,000 noncontrolling interest, and does not have the power to control the significant activities of the entity.  During the fourth quarter of 2011, the Company recorded losses from the entity against the equity investment, reducing the balance to zero.  The Company records this investment under the equity method of accounting.  In addition, under the terms of the restructuring, Lexford’s first mortgage lender required a change of property manager for the underlying assets.  The new management company is an affiliate of Mr. Ivan Kaufman, the Company’s chairman and chief executive officer, and has a contract with the new entity for 7.5 years and will be entitled to 4.75% of gross revenues of the underlying properties, along with the potential to share in the proceeds of a sale or refinancing of the debt should the management company remain engaged by the new entity at the time of such capital event.  In the first quarter of 2012, Mr. Fred Weber invested $250,000 in the new management company for a 25% ownership interest.
 
During the second quarter of 2011, the Company originated a loan to a third party borrower for a portfolio of properties with an unpaid principal balance of $24.4 million as of June 30, 2012, of which one property in the portfolio was previously financed with a $11.7 million loan that was purchased by ACM.  The $11.7 million loan was repaid as part of the $24.4 million loan on the portfolio.  The new loan has a maturity date of May 2016 and a variable interest rate of LIBOR plus 4.75%.
 
During the first quarter of 2011, the Company originated four mortgage loans totaling $28.4 million to borrowers which were secured by property purchased from ACM or its affiliate.  Two of the loans totaling $22.4 million have maturity dates of March 2014 and a combined weighted average variable interest rate of 6.23% as of June 30, 2012 and were secured by the same property.  The third was a $2.0 million bridge loan with a maturity date of February 2013 and an interest rate of one-month LIBOR plus 6.00%.  The fourth was a $4.0 million bridge loan with a maturity date in April 2013 and an interest rate of one-month LIBOR plus 6.00%.
 
In October 2010, the Company purchased, at par, a $4.7 million bridge loan from ACM.  The loan was originated by ACM in June 2010 to a joint venture that acquired a condo development property in Brooklyn, New York.  The loan bore interest at a rate of one-month LIBOR plus 8% with a LIBOR floor of 0.5% and a LIBOR cap of 1.5% and had a maturity date of June 2012.  In the second quarter of 2012, the loan matured and was paid off.  In addition, ACM contributed $0.9 million for a 50% non-controlling interest in an entity, which owns 28% of this joint venture.  In the third quarter of 2011, ACM sold its investment in this joint venture to an affiliated entity of Mr. Ivan Kaufman for $0.9 million.
 
The Company is dependent upon its manager, ACM, with whom it has a conflict of interest, to provide services to the Company that are vital to its operations.  The Company’s chairman, chief executive officer and
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
president, Mr. Ivan Kaufman, is also the chief executive officer and president of ACM, and, the Company’s chief financial officer and treasurer, Mr. Paul Elenio, is the chief financial officer of ACM.  In addition, Mr. Kaufman and his affiliated entities (“the Kaufman Entities”) together beneficially own approximately 92% of the outstanding membership interests of ACM and certain of the Company’s employees and directors also hold an ownership interest in ACM.  Furthermore, one of the Company’s former directors is general counsel to ACM and another of the Company’s directors also serves as the trustee of one of the Kaufman Entities that holds a majority of the outstanding membership interests in ACM and co-trustee of another Kaufman Entity that owns an equity interest in ACM.  ACM currently holds approximately 5.3 million of the Company’s common shares, representing approximately 19% of the voting power of the Company’s outstanding stock as of June 30, 2012.  The Company’s Board of Directors approved a resolution under the Company’s charter allowing Ivan Kaufman and ACM, (which Mr. Kaufman has a controlling equity interest in), to own more than the ownership interest limit of the Company’s common stock stated in the Company’s charter as amended.  In May 2012, the Company’s charter was amended to lower each of the general aggregate stock ownership limit and the general common stock ownership limit from 7% to 5% unless an exemption is granted by the Company’s Board of Directors.
 
Note 15 — Distributions
 
Under the terms of the Company’s amended junior subordinated note agreements, annual dividends were limited to 100% of taxable income to common shareholders and were required to be paid in the form of the Company’s stock to the maximum extent permissible, with the balance payable in cash.  Upon expiration of these terms in April 2012, the Company is permitted to pay 100% of its taxable income in cash.  See Note 7 — “Debt Obligations” for further details.  On May 4, 2012, the Board of Directors declared a cash dividend of $0.075 per share of common stock with respect to the three months ended March 31, 2012.  The dividend was paid on May 29, 2012 to common shareholders of record at the close of business on May 22, 2012 and the ex-dividend date was May 18, 2012.  On August 3, 2012, the Board of Directors declared a cash dividend of $0.10 per share of common stock with respect to the three months ended June 30, 2012.  The dividend is payable on August 28, 2012 to common shareholders of record at the close of business on August 21, 2012 and the ex-dividend date is August 17, 2012.
 
The following table presents dividends declared by the Company on its common stock from January 1, 2012 through June 30, 2012:
 
Declaration	 	For Quarter	 	Record	 	Payment	 	Dividend	 	
Date	 	Ended	 	Date	 	Date	 	Per Share	 	
 	 	 	 	 	 	 	 	 	 	
May 4, 2012	 	March 31, 2012	 	May 22, 2012	 	May 29, 2012	 	$	0.075	 	

The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes.  As a REIT, the Company is generally not subject to federal income tax on its REIT—taxable income that it distributes to its stockholders, provided that it distributes at least 90% of its REIT—taxable income and meets certain other requirements.  Also, under current federal tax law, the income and the tax on such income attributable to certain debt extinguishment transactions realized in 2009 or 2010 have been deferred to future periods at the Company’s election.  As of June 30, 2012 and 2011, the Company was in compliance with all REIT requirements and, therefore, has not provided for income tax expense for the three and six months ended June 30, 2012 and 2011, except for $0.6 million of federal alternative minimum tax recorded in the second quarter of 2012.  Certain of the Company’s assets that produce non-qualifying income are owned by its taxable REIT subsidiaries, the income of which is subject to federal and state income taxes.  During the three and six months ended June 30, 2012 and 2011, the Company did not record any provision for income taxes from these taxable REIT subsidiaries.  However, during the first quarter of 2012 the Company recorded a $1.4 million receivable for the expected refund of income taxes paid by a taxable REIT subsidiary in a prior year.
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
Note 16 — Management Agreement
 
The Company, ARLP and Arbor Realty SR, Inc. have a management agreement with ACM, pursuant to which ACM provides certain services and the Company pays ACM a base management fee and under certain circumstances, an annual incentive fee.
 
The base management fee is an arrangement whereby the Company reimburses ACM for its actual costs incurred in managing the Company’s business based on the parties’ agreement in advance on an annual budget with subsequent quarterly true-ups to actual costs.  The 2011 base management fee was $8.3 million and the 2012 base management fee is estimated to be approximately $10.0 million.  All origination fees on investments are retained by the Company.
 
The incentive fee is calculated as (1) 25% of the amount by which (a) the Company’s funds from operations per share, adjusted for certain gains and losses including gains from the retirement and restructuring of debt and 60% of any loan loss reserve recoveries (spread over a three year period), exceeds (b) the product of (x) 9.5% per annum or the Ten Year U.S. Treasury Rate plus 3.5%, whichever is greater, and (y) the greater of $10.00 or the weighted average of book value of the net assets contributed by ACM to ARLP per ARLP partnership unit, the offering price per share of the Company’s common equity in the private offering on July 1, 2003 and subsequent offerings and the issue price per ARLP partnership unit for subsequent contributions to ARLP, multiplied by (2) the weighted average of the Company’s outstanding shares.
 
The minimum return, or incentive fee hurdle to be reached before an incentive fee is earned, is a percentage applied on a per share basis to the greater of $10.00 or the average gross proceeds per share.  In addition, 60% of any loan loss and other reserve recoveries are eligible to be included in the incentive fee calculation, which recoveries are spread over a three year period.
 
The management agreement also allows the Company to consider, from time to time, the payment of additional “success-based” fees to ACM for accomplishing certain specified corporate objectives; has a termination fee of $10.0 million; and is renewable automatically for successive one-year terms, unless terminated with six months prior written notice.  If the Company terminates or elects not to renew the management agreement without cause, it is required to pay the termination fee of $10.0 million.
 
The incentive fee is measured on an annual basis.  However, when applicable, the Company will pay the annual incentive fee in quarterly installments, each within 60 days of each fiscal quarter.  The quarterly installments are calculated based on the results for the period of twelve months ending on the last day of each quarter with respect to which such installment is payable.  Each quarterly installment payment is deemed to be an advance of a portion of the incentive fee payable for the year, with an adjustment at year end to reflect the full year’s results.  At least 25% of any incentive fee is paid to ACM in shares of the Company’s common stock, subject to ownership limitations in the Company’s charter.  For purposes of determining the number of shares that are paid to ACM to satisfy the common stock portion of the incentive fee from and after the date the Company’s common shares are publicly traded, each common share shall have a value equal to the average closing price per common share based on the last twenty days of the fiscal quarter with respect to which the incentive fee is being paid.
 
The incentive fee is accrued as it is earned.  The expense incurred for incentive fee paid in common stock is determined using the amount of stock calculated as noted above and the quoted market price of the stock on the last day of each quarter. At December 31 of each year, the Company remeasures the incentive fee expense paid to ACM in shares of the Company’s common stock in accordance with current accounting guidance, which discusses how to determine the expense when certain terms are not known prior to the measurement date.  Accordingly, any expense recorded related to common stock issued as a portion of incentive fee is adjusted to reflect the fair value of the stock on the measurement date when the final calculation of the total incentive fee is determined.  In the event the calculated incentive fee for the full year is an amount less than the total of the installment payments made to ACM for the year, ACM will refund to the Company the amount of such overpayment in cash regardless of whether such
 
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
 
installments were paid in cash or common stock.  In such a case, the Company would record a negative incentive fee expense in the quarter when such overpayment is determined.
 
The following table sets forth the Company’s base management fees and incentive fees for the periods indicated:
 
 	 	For the Three Months Ended
June 30,	 	For the Six Months Ended
June 30,	 	
Management Fees:	 	2012	 	2011	 	2012	 	2011	 	
 	 	 	 	 	 	 	 	 	 	
Base	 	$	2,500,000	 	$	2,050,000	 	$	5,000,000	 	$	4,000,000	 	
 	 	 	 	 	 	 	 	 	 	
Incentive	 	—	 	—	 	—	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total management fee	 	$	2,500,000	 	$	2,050,000	 	$	5,000,000	 	$	4,000,000	 	
 
For the three months ended June 30, 2012 and 2011, the Company recorded $2.5 million and $2.1 million, respectively, of base management fee expenses, of which $1.3 million and $1.0 million was included in due to related party as of June 30, 2012 and 2011, respectively.  For the six months ended June 30, 2012 and 2011, the Company recorded $5.0 million and $4.0 million, respectively, of base management fee expenses, of which $1.9 million and $1.6 million was included in due to related party as of June 30, 2012 and 2011, respectively.  For the three and six months ended June 30, 2012 and 2011, ACM did not earn an incentive fee installment and no success-based payments were made.
 
Additionally, in 2007, ACM received an incentive fee installment totaling $19.0 million which was recorded as a prepaid management fee related to the incentive fee on $77.1 million of deferred revenue recognized on the transfer of control of the 450 West 33 rd  Street property, which is one of the Company’s equity affiliates.
 
Note 17 — Due to Borrowers
 
Due to borrowers represents borrowers’ funds held by the Company to fund certain expenditures or to be released at the Company’s discretion upon the occurrence of certain pre-specified events, and to serve as additional collateral for borrowers’ loans.  While retained, these balances earn interest in accordance with the specific loan terms they are associated with.
 
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Item 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the unaudited consolidated interim financial statements, and related notes included herein.
 
Overview
 
We are a Maryland corporation formed in June 2003 to invest in multi-family and commercial real estate-related bridge loans, junior participating interests in first mortgages, mezzanine loans, preferred and direct equity and, in limited cases, discounted mortgage notes and other real estate-related assets, which we refer to collectively as structured finance investments.  We have also invested in mortgage-related securities.  We conduct substantially all of our operations through our operating partnership and its wholly-owned subsidiaries.
 
Our operating performance is primarily driven by the following factors:
 
·                 Net interest income earned on our investments — Net interest income represents the amount by which the interest income earned on our assets exceeds the interest expense incurred on our borrowings.  If the yield earned on our assets decreases or the cost of borrowings increases, this will have a negative impact on earnings.  However, if the yield earned on our assets increases or the cost of borrowings decreases, this will have a positive impact on earnings.  Net interest income is also directly impacted by the size and performance of our asset portfolio.  See “Current Market Conditions, Risks and Recent Trends” below for risks and trends of our net interest income.
 
·                 Credit quality of our assets — Effective asset and portfolio management is essential to maximize the performance and value of a real estate/mortgage investment.  Maintaining the credit quality of our loans and investments is of critical importance.  Loans that do not perform in accordance with their terms may have a negative impact on earnings and liquidity.
 
·                 Cost control — We seek to minimize our operating costs, which consist primarily of employee compensation and related costs, management fees and other general and administrative expenses. If there are increases in foreclosures and non-performing loans and investments, certain of these expenses, particularly employee compensation expenses and asset management related expenses, may increase.
 
We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) and to comply with the provisions of the Internal Revenue Code with respect thereto.  A REIT is generally not subject to federal income tax on its REIT—taxable income which is distributed to its stockholders, provided that at least 90% of its REIT—taxable income is distributed and provided that certain other requirements are met.  Additionally, under the terms of our junior subordinated note agreements, annual dividends were limited to 100% of taxable income to common shareholders and were required to be paid in the form of our stock to the maximum extent permissible, with the balance payable in cash.  Upon expiration of these terms in April 2012, we are permitted to pay 100% of our taxable income in cash.  As of June 30, 2012 and 2011, we were in compliance with all REIT requirements and, therefore, have not provided for income tax expense for the three and six months ended June 30, 2012 and 2011, except for $0.6 million of federal alternative minimum tax recorded in the second quarter of 2012.   Certain REIT income may be subject to state and local income taxes.  Our assets or operations that would not otherwise comply with the REIT requirements, are owned or conducted by our taxable REIT subsidiaries, the income of which is subject to federal and state income tax.  Under current federal tax law, the gain and the tax on the gain of certain debt extinguishment transactions realized in 2009 and 2010 have been deferred to future periods at our election.  We did not record a current provision for income taxes related to the assets that are held in taxable REIT subsidiaries for the three and six months ended June 30, 2012 and 2011.  However, during the first quarter of 2012 we recorded a $1.4 million receivable for the expected refund of income taxes paid by a taxable REIT subsidiary in a prior year.
 
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Current Market Conditions, Risks and Recent Trends
 
Global stock and credit markets have experienced prolonged price volatility, dislocations and liquidity disruptions over the past several years, which have caused market prices of many stocks to fluctuate substantially.  Commercial real estate has been particularly adversely affected by the prolonged economic downturn.  Although we have seen some improvements, the overall market recovery remains uncertain.  Should the market regress, the commercial real estate sector may experience additional losses, challenges in complying with the terms of financing agreements, difficulty in raising capital, and challenges in obtaining investment financing with attractive terms or at all.  If market conditions continue to stabilize, we will rely on the credit and equity markets to generate capital for financing the growth of our business.
 
These circumstances have materially impacted liquidity in the financial markets and have resulted in the scarcity of certain types of financing, and, in certain cases, making terms for certain financings less attractive.  If these conditions persist, lending institutions may be forced to exit markets such as repurchase lending, become insolvent, further tighten their lending standards or increase the amount of equity capital required to obtain financing, and in such event, could make it more difficult for us to obtain financing on favorable terms or at all.  Our profitability will be adversely affected if we are unable to obtain cost-effective financing for our investments.  A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly.  In addition, these factors may make it more difficult for our borrowers to repay our loans as they may experience difficulties in selling assets, increased costs of financing or obtaining financing at all.  These events in the stock and credit markets may also make it more difficult or unlikely for us to raise capital through the issuance of our common stock or preferred stock.  These disruptions in the financial markets also may have a material adverse effect on the market value of our common stock and other adverse effects on us or the economy in general.
 
This environment has had a significant impact on our business, our borrowers and real estate values throughout all asset classes and geographic locations.  If real estate values decline, it may limit our new mortgage loan originations since borrowers often use increases in the value of their existing properties to support the purchase or investment in additional properties.  Borrowers may also be less able to pay principal and interest on our loans.  Declining real estate values may also significantly increase the likelihood that we will continue to incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan.  Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate, sell and securitize loans, which would significantly impact our revenues, results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.  In addition, our investments are also subject to the risks described above with respect to commercial real estate loans and mortgage-backed securities and similar risks, including risks of delinquency and foreclosure, the dependence upon the successful operation of, and net income from, real property, risks generally related to interests in real property, and risks that may be presented by the type and use of a particular commercial property.
 
During the first and second quarters of fiscal year 2012 we recorded $7.8 million and $8.6 million, respectively, of new provisions for loan losses due to declining collateral values and net recoveries of reserves of less than $0.1 million and $0.6 million, respectively.  During the first, second, third and fourth quarters of fiscal year 2011 we recorded $1.6 million, $11.4 million, $11.5 million and $20.4 million, respectively, of new provisions for loan losses due to declining collateral values; net recoveries of reserves of $1.0 million, $3.8 million, $1.3 million and $0.2 million, respectively; recorded a $1.0 million loss on a restructured loan in the first quarter of 2011; recorded a $4.7 million loss on the sale of portion of a loan in the fourth quarter of 2011; and recorded an impairment loss of $0.8 million and $0.7 million on a real estate held-for-sale investment in the second and fourth quarters of 2011, respectively.  In addition, we acquired two new real estate owned properties through a transfer from a creditor trust and a purchase out of bankruptcy, respectively, in the first quarter of 2011.  We have made, and continue to make modifications and extensions to loans when it is economically feasible to do so.  In some cases, a modification is a more viable alternative to foreclosure proceedings when a borrower cannot comply with loan terms.  In doing so, lower borrower interest rates, combined with non-performing loans, will lower our net interest margins when comparing interest income to our costs of financing.  These trends may persist with a prolonged economic downturn and we feel if they do, there will be continued modifications and delinquencies in the foreseeable future, which may result in reduced net interest margins and additional losses throughout our sector.
 
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Commercial real estate financing companies were severely impacted by the economic downturn and until relatively recently have had very little access to the capital markets or the debt markets in order to meet their existing obligations or to refinance maturing debt.  We responded to these troubled times by decreasing investment activity for capital preservation, aggressively managing our assets through restructuring and extending our debt facilities and repurchasing our previously issued debt at discounts when economically feasible.  In order to accomplish these goals, we have worked closely with our borrowers in restructuring our loans, receiving payoffs and paydowns and monetizing our investments as appropriate.  Additionally, based on available liquidity and market opportunities, we have from time to time repurchased our debt at discounts as well as shares of our common stock.  We also completed a public offering in the second quarter of 2012 in which we sold 3,500,000 shares of our common stock and intend to use the net proceeds from the offering to make investments, to repurchase or pay liabilities and for general corporate purposes, which may include the repayment of indebtedness under our credit facilities.  We will continue to remain focused on executing these strategies when appropriate and where available if this significant economic downturn persists.
 
Refer to our Annual Report on Form 10-K for the year ending December 31, 2011 as well as Item 3. “Quantitative and Qualitative Disclosures About Market Risk” herein for additional risk factors.
 
Sources of Operating Revenues
 
We derive our operating revenues primarily through interest received from making real estate-related bridge, mezzanine and junior participation loans and preferred equity investments.  For the three and six months ended June 30, 2012, interest income earned on these loans and investments represented approximately 67% and 66% of our total revenues, respectively.  For the three and six months ended June 30, 2011, interest income earned on these loans and investments represented approximately 71% and 75% of our total revenues, respectively.
 
Interest income may also be derived from profits of equity participation interests.  No such interest income was recognized for the three and six months ended June 30, 2012 and 2011.
 
We also derive interest income from our investments in commercial real estate collateralized debt obligation (“CDO”) bond securities, commercial mortgage-backed securities (“CMBS”) and residential mortgage-backed securities (“RMBS”).  For the three and six months ended June 30, 2012, interest on these investments represented approximately 3% and 2% of our total revenues, respectively.  For the three and six months ended June 30, 2011, interest on these investments represented approximately less than 1% of our total revenues.
 
Property operating income is derived from our hotel and multifamily real estate owned assets.  For the three and six months ended June 30, 2012, property operating income represented approximately 30% and 31% of our total revenues, respectively.  For the three and six months ended June 30, 2011, property operating income represented approximately 29% and 25% of our total revenues, respectively.  The operation of a portfolio of hotel properties that we own is seasonal with the majority of revenues earned in the first two quarters of the calendar year.
 
Additionally, we derive operating revenues from other income that represents net interest income and gains and losses recorded on our linked transactions, as well as loan structuring and defeasance fees, and miscellaneous asset management fees associated with our loans and investments portfolio.  For the three and six months ended June 30, 2012, revenue from other income represented approximately 1% of our total revenues. For the three and six months ended June 30, 2011, revenue from other income represented less than 1% of our total revenues.
 
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Income or Loss from Equity Affiliates and Gain or Loss on Sale of Loans and Real Estate
 
We derive income or loss from equity affiliates relating to joint ventures that were formed with equity partners to acquire, develop and/or sell real estate assets.  These joint ventures are not majority owned or controlled by us, and are not consolidated in our financial statements.  These investments are recorded under either the equity or cost method of accounting as appropriate.  We record our share of net income and losses from the underlying properties of our equity method investments and any other-than-temporary impairment of these investments on a single line item in the Consolidated Statements of Operations as income or loss from equity affiliates.  For the three months ended June 30, 2012 and 2011, loss from equity affiliates was $0.2 million and income from equity affiliates was less than $0.1 million, respectively.  For the six months ended June 30, 2012 and 2011, loss from equity affiliates was $0.5 million and income from equity affiliates was $0.1 million, respectively.
 
We also may derive income or loss from the sale of loans and real estate.  We may acquire real estate by foreclosure or through partial or full settlement of mortgage debt or for investment in order to stabilize the property and dispose of it for a future anticipated return.  We may also acquire real estate notes generally at a discount from lenders in situations where the borrower wishes to restructure and reposition its short-term debt and the lender wishes to divest certain assets from its portfolio.  In the first quarter of 2012, we sold two real estate held-for-sale properties acquired by deed-in-lieu of foreclosure to third parties for a total gain of $3.5 million.  No such gain or loss was recorded during the three and six months ended June 30, 2011.
 
Critical Accounting Policies
 
Please refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2011 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Significant Accounting Estimates and Critical Accounting Policies” for a discussion of our critical accounting policies.  During the six months ended June 30, 2012, there were no material changes to these policies.
 
Impaired Loans, Allowance for Loan Losses, Loss on Sale and Restructuring of Loans and Charge-offs
 
Loans are considered impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement.  We evaluate each loan in our portfolio on a quarterly basis.  Our loans are individually specific and unique as it relates to product type, geographic location, and collateral type, as well as to the rights and remedies and the position in the capital structure our loans and investments have in relation to the underlying collateral.  We evaluate all of this information as well as general market trends related to specific classes of assets, collateral type and geographic locations, when determining the appropriate assumptions such as capitalization and market discount rates, as well as the borrower’s operating income and cash flows, in estimating the value of the underlying collateral when determining if a loan is impaired.  We utilize internally developed valuation models and techniques primarily consisting of discounted cash flow and direct capitalization models in determining the fair value of the underlying collateral on an individual loan.  We may also obtain a third party appraisal, which may value the collateral through an “as-is” or “stabilized value” methodology.  Such appraisals may be used as an additional source of valuation information only and no adjustments are made to appraisals.  Included in the evaluation of the capitalization and market discount rates, we consider not only assumptions specific to the collateral but also geographical and industry trends that could impact the collateral’s value.
 
If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses.  The allowance for each loan is maintained at a level that is believed to be adequate by management to absorb probable losses.  We had an allowance for loan losses of $188.3 million relating to 20 loans with an aggregate carrying value, before loan loss reserves, of approximately $271.7 million at June 30, 2012 and $185.4 million in allowance for loan losses relating to 24 loans with an aggregate carrying value, before loan loss reserves, of approximately $282.9 million at December 31, 2011.
 
Loan terms may be modified if we determine that based on the individual circumstances of a loan and the underlying collateral, a modification would more likely increase the total recovery of the combined principal and interest from the loan.  Any loan modification is predicated upon a goal of maximizing the collection of the loan.
 
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Typical triggers for a modification would include situations where the projected cash flow is insufficient to cover required debt service, when asset performance is lagging the initial projections, where there is a requirement for rebalancing, where there is an impending maturity of the loan, and where there is an actual loan default.  Loan terms that have been modified have included, but are not limited to interest rate, maturity date and in certain cases, principal amount.  Length and amounts of each modification have varied based on individual circumstances and are determined on a case by case basis.  If the loan modification constitutes a concession whereas we do not receive ample consideration in return for the modification, and the borrower is experiencing financial difficulties and cannot repay the loan under the current terms, then the modification is considered by us to be a troubled debt restructuring.  If we receive a benefit, either monetary or strategic, and the above criteria are not met, the modification is not considered to be a troubled debt restructuring.
 
We record interest on modified loans on an accrual basis to the extent that the modified loan is contractually current.  To date, we have not recorded interest income on a modified loan where we have not subsequently received the cash.
 
Loss on restructured loans is recorded when we grant a concession to a borrower in the form of principal forgiveness related to a payoff or the substitution or addition of a new debtor for the original borrower or when we incur costs on behalf of the borrower related to the modification, payoff or the substitution or addition of a new debtor for the original borrower.  When a loan is restructured, we record the investment at net realizable value, taking into account the cost of all concessions at the date of restructuring.  The reduction in the recorded investment is recorded as a charge to the Consolidated Statement of Operations in the period in which the loan is restructured.  In addition, a gain or loss may be recorded upon the sale of a loan to a third party as a charge to the Consolidated Statement of Operations in the period in which the loan was sold.  No loss on sale and restructuring of loans was recorded for the three and six months ended June 30, 2012.  We recorded a loss on sale and restructuring of loans of $1.0 million for the six months ended June 30, 2011 as a result of the execution of a forbearance agreement in the first quarter of 2011 on a loan modified in the second quarter of 2011.
 
Charge-offs to the allowance for loan losses occur when losses are confirmed through the receipt of cash or other consideration from the completion of a sale; when a modification or restructuring takes place in which we grant a concession to a borrower or agree to a discount in full or partial satisfaction of the loan; when we take ownership and control of the underlying collateral in full satisfaction of the loan;  when loans are reclassified as other investments; or when significant collection efforts have ceased and it is highly likely that a loss has been realized.  For the six months ended June 30, 2012 and 2011, we recorded charge-offs to the allowance for loan losses of $12.8 million and $42.4 million, respectively.
 
Revenue Recognition
 
Interest income.  Interest income is recognized on the accrual basis as it is earned from loans, investments and securities.  In certain instances, the borrower pays an additional amount of interest at the time the loan is closed, an origination fee, a prepayment fee and/or deferred interest upon maturity.  In some cases, interest income may also include the amortization or accretion of premiums and discounts arising from the purchase or origination of the loan or security.  This additional income, net of any direct loan origination costs incurred, is deferred and accreted into interest income on an effective yield or “interest” method adjusted for actual prepayment activity over the life of the related loan or security as a yield adjustment.  Income recognition is suspended for loans when, in the opinion of management, a full recovery of all contractual principal is not probable.  Income recognition is resumed when the loan becomes contractually current and performance is resumed.  We record interest income on certain impaired loans to the extent cash is received, in which a loan loss reserve has been recorded, as the borrower continues to make interest payments.  We recorded loan loss reserves related to these loans as it was deemed that full recovery of principal and interest was not probable.
 
Several of our loans provide for accrual of interest at specified rates, which differ from current payment terms.  Interest is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible, based on the underlying collateral and operations of the borrower.  If management cannot make this determination, interest income above the current pay rate is recognized only upon actual receipt.  We currently have no loans in our portfolio accruing such interest.  Therefore, interest income is recorded on all of our loans and investments only to the extent that the current pay rate is received.
 
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Given the transitional nature of some of our real estate loans, we may require funds to be placed into an interest reserve, based on contractual requirements, to cover debt service costs.  We will analyze these interest reserves on a periodic basis and determine if any additional interest reserves are needed.  Recognition of income on loans with funded interest reserves are accounted for in the same manner as loans without funded interest reserves.  We will not recognize any interest income on loans in which the borrower has failed to make the contractual interest payment due or has not replenished the interest reserve account.  As of June 30, 2012, we had total interest reserves of $7.2 million on 38 loans with an aggregate unpaid principal balance of $487.7 million and had three non-performing loans with an aggregate unpaid principal balance of $38.4 million with a funded interest reserve of $0.1 million.  Income from non-performing loans is generally recognized on a cash basis only to the extent it is received.  Full income recognition will resume when the loan becomes contractually current and performance has recommenced.
 
Additionally, interest income is recorded when earned from equity participation interests, referred to as equity kickers.  These equity kickers have the potential to generate additional revenues to us as a result of excess cash flow distributions and/or as appreciated properties are sold or refinanced.  We did not record interest income on such investments for the three and six months ended June 30, 2012 and 2011.
 
Property operating income. Property operating income represents income associated with the operation of commercial real estate properties classified as real estate owned.  We recognize revenue for these activities when the fees are fixed or determinable, or are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided.  For the three and six months ended June 30, 2012, we recorded approximately $8.3 million and $17.3 million, respectively, of property operating income relating to real estate owned properties, as compared to approximately $7.5 million and $12.2 million, respectively, for the three and six months ended June 30, 2011.  As of June 30, 2012 and 2011, we had two real estate owned properties, a portfolio of multifamily assets that was purchased by us out of bankruptcy and a portfolio of hotel assets that was transferred to us by the owner, a creditor trust.  Both of these portfolios were acquired in the first quarter of 2011.  Additionally, real estate investments were reclassified from real estate owned to real estate held-for-sale in 2011, which resulted in the reclassification of all of the operating activity from these properties from property operating income and expenses into discontinued operations for all prior periods.  For more details see Note 6 of the “Notes to Consolidated Financial Statements” set forth in Item 1 hereof.
 
Hedging Activities and Derivatives
 
Hedging Activities
 
The carrying values of interest rate swaps and the underlying hedged liabilities are reflected at their fair value.  Changes in the fair value of these derivatives are either offset against the change in the fair value of the hedged liability through earnings or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings.  The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.  Derivatives that do not qualify for cash flow hedge accounting treatment are adjusted to fair value through earnings.
 
Derivatives
 
We record all derivatives in the Consolidated Balance Sheet at fair value.  Additionally, the accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether a company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.  Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.  Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.  Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  We may enter into derivative contracts that are intended to economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.
 
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During the six months ended June 30, 2012, one basis swap matured with a notional value of approximately $110.1 million and eight interest rate swaps matured with a combined notional value of approximately $171.2 million.  In addition, the notional value on two basis swaps decreased by approximately $109.4 million pursuant to the contractual terms of the respective swap agreements and the notional value on an interest rate swap decreased by approximately $6.4 million pursuant to the contractual terms of the respective swap agreement.  In certain circumstances, we may finance the purchase of RMBS investments through a repurchase agreement with the same counterparty which may qualify as a linked transaction.  If both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed to be linked transactions and we account for the purchase of such securities and the repurchase agreement on a combined basis as a forward contract derivative at fair value which is reported in other assets on the Consolidated Balance Sheet with changes in the fair value of the assets and liabilities underlying linked transactions and associated interest income and expense reported in other income on the Consolidated Statement of Operations.  The analysis of transactions under these rules requires management’s judgment and experience. During the six months ended June 30, 2012, we purchased five RMBS investments which qualified as linked transactions.  The RMBS investments, net of their respective financing, had a total fair value at June 30, 2012 of $2.9 million which is recorded in other assets on the Consolidated Balance Sheet.  During the six months ended June 30, 2011 we entered into a LIBOR Cap with a notional value of approximately $73.3 million that was designated as cash flow hedge and a LIBOR Cap with a notional value of approximately $6.0 million that was not designated as cash flow hedge.  In addition, the notional value on two basis swaps decreased by approximately $119.0 million pursuant to the contractual terms of the respective swap agreements, the notional value on three interest rate swaps decreased by approximately $53.5 million pursuant to the contractual terms of the respective swap agreements, and two interest rate swaps matured with a combined notional value of approximately $24.8 million.  Gains and losses on terminated swaps are deferred and recognized in interest expense over the original life of the hedged item.  The fair value of our qualifying hedge portfolio has increased by approximately $4.4 million from December 31, 2011 as a result of the maturities and the amortized notional value of swaps, combined with a change in the projected LIBOR rates and credit spreads of both parties.
 
Because the valuations of our derivatives are based on estimates, the fair value may change if our estimates are inaccurate.  For the effect of hypothetical changes in market interest rates on our interest rate swaps, see “Interest Rate Risk” in “Quantitative and Qualitative Disclosures About Market Risk”, set forth in Item 3 hereof.
 
Recently Issued Accounting Pronouncements
 
In December 2011, the FASB issued updated guidance on disclosure about offsetting assets and liabilities which amends U.S. GAAP to conform more to the disclosure requirements of International Financial Reporting Standards (“IFRS”).  This guidance is effective as of the first quarter of 2013 and we are currently evaluating the impact it may have on our financial disclosure.
 
In June 2011, the FASB issued updated guidance on comprehensive income which amends U.S. GAAP to conform to IFRS disclosure requirements.  The amendment eliminates the option to present components of other comprehensive income as part of the Statement of Changes in Stockholders’ Equity and requires a separate Statement of Comprehensive Income or two consecutive statements in the Statement of Operations and in a separate Statement of Comprehensive Income.  The guidance also requires the presentation of reclassification adjustments for each component of other comprehensive income on the face of the financial statements rather than in the notes to the financial statements.  This guidance was effective as of the first quarter of 2012, except for the disclosure of reclassification adjustments which was postponed for re-deliberation by the FASB, and early adoption was permitted.  We early adopted the guidance in the fourth quarter of 2011, with the exception of the disclosure of reclassification adjustments postponed for re-deliberation by the FASB.  As the guidance only amends existing disclosure requirements, its adoption did not have a material effect on our Consolidated Financial Statements.
 
In May 2011, the FASB issued updated guidance on fair value measurement which amends U.S. GAAP to conform to IFRS measurement and disclosure requirements.  The guidance amends certain fair value measurement principles and enhances disclosure requirements by requiring a description of the process for valuing items categorized as Level 3 in the fair value hierarchy, quantitative disclosure of unobservable inputs used to make these measurements and, in certain cases, the sensitivity of the measurements to changes in these inputs.  This guidance was effective as of the first quarter of 2012, applied prospectively, and its adoption did not have a material effect on our Consolidated Financial Statements.
 
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In April 2011, the FASB issued updated guidance on the transfer of financial assets which primarily removes certain criteria from the consideration of effective control over assets subject to repurchase agreements when determining the recognition of a sale.  The removal of these criteria will generally result in the assets transferred pursuant to the repurchase agreement being accounted for as a secured borrowing, with both the transferred asset and repurchase liability recorded on the transferor’s balance sheet.  This guidance was effective as of the first quarter of 2012, applied prospectively to transactions which occur subsequent to the effective date, and its adoption did not have a material effect on our Consolidated Financial Statements.
 
Changes in Financial Condition
 
Our loan and investment portfolio balance, including our available-for-sale and held-to-maturity securities, at June 30, 2012 was $1.5 billion, with a weighted average current interest pay rate of 4.72%.  Including certain fees and costs associated with the loan and investment portfolio, the weighted average current interest rate was 4.95%.  This is compared to $1.5 billion at December 31, 2011, with a weighted average current interest pay rate of 4.59%.  Including certain fees and costs associated with the loan and investment portfolio, the weighted average current interest rate was 4.82%.  At June 30, 2012, advances on our financing facilities totaled $1.2 billion with a weighted average funding cost of 2.71%, which excludes changes in the market value of certain interest rate swaps and financing costs.  Including the financing costs, the weighted average funding rate was 3.05%.  This is compared to $1.3 billion at December 31, 2011 with a weighted average funding cost of 3.20%, which excludes changes in the market value of certain interest rate swaps and financing costs.  Including the financing costs, the weighted average funding rate was 3.53%.
 
Cash and cash equivalents increased $9.0 million, or 16%, to $64.3 million at June 30, 2012 compared to $55.2 million at December 31, 2011.  All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  The increase was primarily due to proceeds received from our equity offering in June, proceeds from new financing facilities, loan payoffs, paydowns and interest from our investments, net of the funding new loan originations and purchasing our own CDO bonds.
 
Restricted cash increased $10.4 million, or 15%, to $77.7 million at June 30, 2012 compared to $67.3 million at December 31, 2011.  Restricted cash is kept on deposit with the trustees for our CDOs, all three of which have reached their respective replenishment dates as of January 2012, and primarily represents proceeds from loan payoffs and paydowns net of principal repayments to the CDO bondholders, as well as unfunded loan commitments and interest payments received from loans.  The increase was primarily due to loan payoffs and partial paydowns net of principal repayments.  Our real estate owned assets acquired in 2011 also have restricted cash balances totaling $1.9 million and $2.0 million as of June 30, 2012 and December 31, 2011, respectively, due to escrow requirements.
 
Loans and investments decreased $77.7 million, or 6%, to $1.2 billion at June 30, 2012 compared to $1.3 billion at December 31, 2011.  During the quarter ended June 30, 2012, we originated five loans totaling $58.0 million that had an aggregate weighted average rate of interest of 7.95%, as well as received full satisfaction of seven loans totaling $132.9 million that had an aggregate weighted average rate of interest of 4.77%.  We also received partial repayment on one loan for $1.5 million.  We also refinanced and/or modified one loan for $8.4 million which increased the rate of interest on the modified loan from 7.5% to 8.25%, and eight loans totaling approximately $80.3 million were extended during the quarter, $5.6 million of which was in accordance with an extension option of the corresponding loan agreement.  During the quarter ended March 31, 2012, we originated seven loans totaling $39.4 million that had an aggregate weighted average rate of interest of 7.67%, as well as received full satisfaction of four loans totaling $39.1 million that had an aggregate weighted average rate of interest of 8.01%.  We also received partial repayment on two loans totaling $2.6 million.  We also refinanced and/or modified one loan for $35.7 million which increased the rate of interest on the modified loan from 6.00% to 7.75%, and 11 loans totaling approximately $128.8 million were extended during the quarter, $12.6 million of which were in accordance with an extension option of the corresponding loan agreement.
 
Securities held-to-maturity increased $34.1 million to $64.0 million at June 30, 2012 compared to $29.9 million at December 31, 2011 as a result of purchasing 15 RMBS investments, net of total paydowns received,
 
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during the six months ended June 30, 2012.  See Note 4 of the “Notes to the Consolidated Financial Statements” set forth in Item 1 hereof for a further description of these transactions.
 
Real estate held-for-sale decreased $62.1 million to $0 at June 30, 2012 compared to $62.1 million at December 31, 2011.  In the third and fourth quarters of 2011, we entered into negotiations to sell two real estate investments with carrying values of $19.4 million and $1.2 million, respectively, to third parties.  In the first quarter of 2012, the two investments were sold and a total gain on sale of real estate held-for-sale of $3.5 million was recorded in our Consolidated Statement of Operations.  In the second quarter of 2012 we surrendered a property held-for-sale with a carrying value of $41.4 million to the first mortgage lender in full satisfaction of a $41.4 million mortgage note payable.  See Note 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for a further description of these transactions.
 
Other assets increased $3.1 million, or 7%, to $49.9 million at June 30, 2012 compared to $46.9 million at December 31, 2011.  The increase was primarily due to five RMBS investments recorded on a combined basis with the related repurchase financing as linked transactions at a total fair value of $2.9 million, a $1.4 million expected refund of taxes paid in a prior year net of $0.6 million of current year federal alternative minimum tax, and a $1.3 million net increase in various other receivables and prepaid expenses, net of a $1.1 million decrease in cash collateral posted against our interest rate swaps and a $0.8 million decrease in deferred financing fees, which includes amortization.  See Item 3 “Quantitative and Qualitative Disclosures About Market Risk” for further information relating to our derivatives.
 
Repurchase agreement and credit facilities increased $51.2 million, or 67%, to $127.3 million at June 30, 2012 compared to $76.1 million at December 31, 2011 due to financing the purchase of 15 RMBS investments classified as securities held-to-maturity, net of paydowns, with two repurchase agreements during the six months ended 2012, which had a combined total net increase of $29.3 million during the six months ended June 30, 2012.  Also, in the second quarter of 2012, we entered into a $15.0 million committed revolving line of credit with a one year term which had an outstanding balance of $10.0 million at June 30, 2012 as well as a $12.6 million warehousing facility which had an outstanding balance of $12.6 million at June 30, 2012.  See “Sources of Liquidity — Repurchase Agreements and Credit Facilities” below.
 
Collateralized debt obligations decreased $92.4 million, or 9%, to $910.2 million at June 30, 2012 compared to approximately $1.0 billion at December 31, 2011 primarily due to $34.8 million of payments to investors due to runoff and amortization, as well as repurchases of Class B, C, D, E, F, G and H notes originally issued by our CDO II and CDO III issuing entities with an aggregate face value of $57.2 million.  See “Sources of Liquidity — CDOs” below.
 
Notes payable decreased $32.0 million, or 37%, to $53.5 million at June 30, 2012 compared to $85.5 million at December 31, 2011 due to the sale of a $50.0 million mezzanine loan which relieved a $32.0 million junior loan participation liability.
 
Mortgage notes payable — held-for-sale decreased $62.2 million to $0 at June 30, 2012 compared to $62.2 million at December 31, 2011 primarily due to the satisfaction of a $20.8 million first lien mortgage upon the sale to a third party of a property held-for-sale in the first quarter of 2012 as well as the surrender of a property held-for-sale to the first mortgage lender in full satisfaction of a $41.4 million mortgage note payable in the second quarter of 2012.
 
Due to related party decreased $0.9 million, or 32%, to $1.9 million at June 30, 2012 compared to $2.7 million at December 31, 2011.  The decrease was due to our payment of $2.7 million of base management fees due to ACM at December 31, 2011, net of $1.9 million of base management fees due to ACM at June 30, 2012.  See “Contractual Commitments — Management Agreement” below for further details.
 
Due to borrowers increased $13.6 million to $16.4 million at June 30, 2012 compared to $2.8 million at December 31, 2011 due to an increase in unfunded commitments on the loans originated in the second quarter of 2012.
 
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Other liabilities decreased $2.6 million, or 3%, to $80.0 million at June 30, 2012 compared to $82.6 million at December 31, 2011.  The decrease was primarily due to a $3.6 million decrease in accrued interest payable as a result of an increase in the fair value of our interest rate swaps and a $3.0 million decrease in accrued expenses, net of a $2.4 million increase in various other deposits and deferred fees and $1.6 million of effective yield amortization on our junior subordinated notes.
 
In June 2012, we completed a public offering in which we sold 3,500,000 shares of our common stock for $5.40 per share, and received net proceeds of approximately $17.5 million after deducting the underwriting discount and other offering expenses.  We intend to use the net proceeds from the offering to make investments, to repurchase or pay liabilities and for general corporate purposes, which may include the repayment of indebtedness under our credit facilities.  The underwriter did not exercise its over-allotment option for additional shares which expired in July 2012 and $481.1 million currently remains available under the shelf registration.
 
On May 4, 2012, the Board of Directors declared a cash dividend of $0.075 per share of common stock with respect to the three months ended March 31, 2012.  The dividend was paid on May 29, 2012 to common shareholders of record at the close of business on May 22, 2012 and the ex-dividend date was May 18, 2012.
 
On August 3, 2012, the Board of Directors declared a cash dividend of $0.10 per share of common stock with respect to the three months ended June 30, 2012.  The dividend is payable on August 28, 2012 to common shareholders of record at the close of business on August 21, 2012 and the ex-dividend date is August 17, 2012.
 
On April 3, 2012, we issued an aggregate of 90,000 shares of fully vested common stock to the non-management members of the Board of Directors, as well as 6,255 shares of fully vested common stock to a director who was also the corporate secretary, under the 2003 Stock Incentive Plan, as amended and restated in 2009 (the “Plan”), and recorded approximately $0.5 million to selling and administrative expense in our Consolidated Statement of Operations in the second quarter of 2012.  On March 19, 2012, we issued 10,000 shares of fully vested common stock under the Plan to a director who is also an officer of the managing member of ACM, and accrued approximately $0.1 million to selling and administrative expense in our Consolidated Statement of Operations in the first quarter of 2012.  On January 22, 2012, we issued 15,000 shares of fully vested common stock under the Plan to a director who was re-appointed to the Board of Directors on December 19, 2011, and accrued approximately $0.1 million to selling and administrative expense in our Consolidated Statement of Operations in the fourth quarter of 2011.
 
In December 2011, the Board of Directors authorized a stock repurchase plan that enables us to buy up to 0.5 million shares of our common stock beginning January 3, 2012.  At management’s discretion, shares may be acquired from time to time on the open market, through privately negotiated transactions or pursuant to a Rule 10b5-1 plan.  A Rule 10b5-1 plan permits us to repurchase shares at times when we might otherwise be prevented from doing so.  The program expired on July 3, 2012.  As of June 30, 2012, we had repurchased a total 170,170 shares of our common stock under this stock repurchase plan at a total cost of $0.7 million and an average cost of $4.02 per share and no additional shares were repurchased up to the expiration date.
 
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Comparison of Results of Operations for the Three Months Ended June 30, 2012 and 2011
 
The following table sets forth our results of operations for the three months ended June 30, 2012 and 2011:
 
 	 	Three Months Ended
June 30,	 	Increase/(Decrease)	 	
 	 	2012	 	2011	 	Amount	 	Percent	 	
 	 	(Unaudited)	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	19,502,713	 	$	18,572,772	 	$	929,941	 	5%	 	
Interest expense	 	9,770,807	 	15,792,751	 	(6,021,944	)	(38)%	 	
Net interest income	 	9,731,906	 	2,780,021	 	6,951,885	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Other revenue:	 	 	 	 	 	 	 	 	 	
Property operating income	 	8,312,794	 	7,534,536	 	778,258	 	10%	 	
Other income	 	369,609	 	41,556	 	328,053	 	nm	 	
Total other revenue	 	8,682,403	 	7,576,092	 	1,106,311	 	15%	 	
 	 	 	 	 	 	 	 	 	 	
Other expenses:	 	 	 	 	 	 	 	 	 	
Employee compensation and benefits	 	2,381,817	 	2,285,433	 	96,384	 	4%	 	
Selling and administrative	 	2,191,769	 	1,583,793	 	607,976	 	38%	 	
Property operating expenses	 	7,574,422	 	6,292,041	 	1,282,381	 	20%	 	
Depreciation and amortization	 	1,540,217	 	1,705,366	 	(165,149	)	(10)%	 	
Provision for loan losses (net of recoveries)	 	7,945,453	 	7,560,263	 	385,190	 	5%	 	
Management fee — related party	 	2,500,000	 	2,050,000	 	450,000	 	22%	 	
Total other expenses	 	24,133,678	 	21,476,896	 	2,656,782	 	12%	 	
 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations before gain on extinguishment of debt, (loss) income from equity affiliates and provision for income taxes	 	(5,719,369	)	(11,120,783	)	5,401,414	 	(49)%	 	
 	 	 	 	 	 	 	 	 	 	
Gain on extinguishment of debt	 	20,968,214	 	1,926,700	 	19,041,514	 	nm	 	
(Loss) income from equity affiliates	 	(224,136	)	24,446	 	(248,582	)	nm	 	
 	 	 	 	 	 	 	 	 	 	
Income (loss) before provision for income taxes	 	15,024,709	 	(9,169,637	)	24,194,346	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Provision for income taxes	 	(600,000	)	—	 	(600,000	)	nm	 	
 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	14,424,709	 	(9,169,637	)	23,594,346	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Impairment loss on real estate held-for-sale	 	—	 	(750,000	)	750,000	 	(100)%	 	
Income (loss) from operations of real estate held-for-sale	 	1,175,120	 	(381,220	)	1,556,340	 	nm	 	
Loss from discontinued operations	 	1,175,120	 	(1,131,220	)	2,306,340	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	15,599,829	 	(10,300,857	)	25,900,686	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Net income attributable to noncontrollinginterest	 	53,811	 	53,878	 	(67	)	nm	 	
 	 	 	 	 	 	 	 	 	 	
Net income (loss) attributable to Arbor Realty Trust, Inc.	 	$	15,546,018	 	$	(10,354,735	)	$	25,900,753	 	nm	 	
 
nm — not meaningful
 
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Net Interest Income
 
Interest income increased $0.9 million, or 5%, to $19.5 million for the three months ended June 30, 2012 from $18.6 million for the three months ended June 30, 2011.  This increase was primarily due to a 6% increase in the average yield on assets from 4.64% for the three months ended June 30, 2011 to 4.91% for the three months ended June 30, 2012, due to higher interest rates on our net originations.  Interest income from cash equivalents was $0.1 million and $0.2 million for the three months ended June 30, 2012 and 2011, respectively.
 
Interest expense decreased $6.0 million, or 38%, to $9.8 million for the three months ended June 30, 2012 from $15.8 million for the three months ended June 30, 2011.  The decrease was primarily due to a 36% decrease in the average cost of these borrowings from 4.86% for the three months ended June 30, 2011 to 3.10% for the three months ended June 30, 2012 primarily due to the maturity of certain of our interest rate swaps, resulting in a reduction of interest expense.  The decrease in interest expense was also due to a 3% decrease in the average balance of our debt facilities for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011.  The decrease in the average balance was primarily due to a reduction in our CDO debt due to runoff and amortization and the repurchase of CDO notes, net of the addition of new financing facilities.
 
Other Revenue
 
Property operating income increased $0.8 million, or 10%, to $8.3 million for the three months ended June 30, 2012 compared to $7.5 million for the three months ended June 30, 2011.  This was due to an increase in revenue from the operations of two real estate investments.
 
Other income increased $0.3 million to $0.4 million for the three months ended June 30, 2012 compared to less than $0.1 million for the three months ended June 30, 2011 primarily due to net interest income and the increase in fair value on our linked transactions as well as miscellaneous asset management fees on our loan and investment portfolio.
 
Other Expenses
 
Employee compensation and benefits expense increased $0.1 million, or 4%, to $2.4 million for the three months ended June 30, 2012 from $2.3 million for the three months ended June 30, 2011.  These expenses represent salaries and benefits for those employed by us during these periods.
 
Selling and administrative expense increased $0.6 million, or 38%, to $2.2 million for the three months ended June 30, 2012 from $1.6 million for the three months ended June 30, 2011.  These costs include, but are not limited to, professional and consulting fees, marketing costs, insurance expense, travel and placement fees, director’s fees, licensing fees and stock-based compensation relating to our directors and certain employees of our manager.  This increase was primarily due to $0.5 million of stock-based compensation recorded for the issuance of fully vested common stock to members of the Board of Directors.
 
Property operating expenses increased $1.3 million, or 20%, to $7.6 million for the three months ended June 30, 2012 compared to $6.3 million for the three months ended June 30, 2011.  This was due to an increase in expenses from the operations of two real estate investments.
 
Depreciation and amortization expense decreased $0.2 million, or 10%, to $1.5 million for the three months ended June 30, 2012 compared to $1.7 million for the three months ended June 30, 2011.  This is due to depreciation expense associated with two real estate investments.
 
Provision for loan losses (net of recoveries) totaled $7.9 million for the three months ended June 30, 2012, and $7.6 million for the three months ended June 30, 2011.  At June 30, 2012, we performed an evaluation of our loan portfolio and determined that the fair value of the underlying collateral securing an impaired loan with an aggregate carrying value of $20.6 million was less than the net carrying value of the loan, resulting in us recording an additional $8.6 million provision for loan losses.  We also recorded $0.7 million of net recoveries of previously recorded loan loss reserves in the second quarter of 2012, which were recorded in provision for loan losses on the Consolidated Statement of Operations, netting the provision to $7.9 million.  At June 30, 2012 we had a total of 20
 
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loans with an aggregate carrying value of $271.7 million, before loan loss reserves, for which impairment reserves have been recorded.  At June 30, 2011, we performed an evaluation of our loan portfolio and determined that the fair value of the underlying collateral securing three impaired loans with an aggregate carrying value of $50.5 million was less than the net carrying value of the loans, resulting in us recording an additional $11.4 million provision for loan losses.  We also recorded net recoveries of $3.8 million related to five loans in our portfolio in the second quarter of 2011, netting the provision to $7.6 million for the three months ended June 30, 2011.  At June 30, 2011, we had a total of 26 loans with an aggregate carrying value of $316.8 million, before loan loss reserves, for which impairment reserves were recorded.
 
Management fees increased $0.5 million, or 22%, to $2.5 million for the three months ended June 30, 2012 from $2.1 million for the three months ended June 30, 2011.  These amounts represent compensation in the form of base management fees, on a cost reimbursement basis.  The management agreement also provides for incentive management fees and success-based payments to be paid to our manager upon the completion of specified corporate objectives in addition to the standard base management fee.  No incentive or success-based management fees were earned for the three months ended June 30, 2012 and 2011.  Refer to “Management Agreement” below for further details including information related to our amended management agreement with ACM.
 
Gain on extinguishment of debt increased $19.0 million to $21.0 million for the three months ended June 30, 2012 from $1.9 million for the three months ended June 30, 2011.  During the three months ended June 30, 2012, we purchased, at a discount, $42.7 million of investment grade rated Class C, D, E, F, G and H notes originally issued by our CDO II and CDO III issuing entities from third party investors and recorded a net gain on early extinguishment of debt of $21.0 million.  During the three months ended June 30, 2011, we purchased, at a discount, $3.5 million of investment grade rated Class C and F notes originally issued by our CDO III issuing entity and recorded a gain on early extinguishment of debt of $1.9 million.
 
Loss from equity affiliates was $0.2 million and income from equity affiliates was less than $0.1 million for the three months ended June 30, 2012 and 2011, respectively, which reflects our portion of the loss and income from our equity affiliates.
 
Income Taxes
 
We are organized and conduct our operations to qualify as a REIT for federal income tax purposes.  As a REIT, we are generally not subject to federal income tax on our REIT—taxable income that we distribute to our stockholders, provided that we distribute at least 90% of our REIT—taxable income and meet certain other requirements.  As of June 30, 2012 and 2011, we were in compliance with all REIT requirements and, therefore, have not recorded a provision for income taxes on our REIT— taxable income for the three months ended June 30, 2012 and 2011, except for $0.6 million of federal alternative minimum tax recorded in the second quarter of 2012.
 
Certain of our assets that produce non-qualifying income are owned by our taxable REIT subsidiaries, the income of which is subject to federal and state income taxes.  During the three months ended June 30, 2012 and 2011, we did not record any provision for income taxes from these taxable REIT subsidiaries.
 
Income (loss) from Discontinued Operations
 
During the fourth quarter of 2011, we entered into negotiations to sell one of our real estate owned investments to a third party at which time it was determined that the property met the held-for-sale requirements pursuant to the accounting guidance.  As a result, this investment was reclassified from real estate owned to real estate held-for-sale at a value of $19.4 million and property operating income and expenses, which netted to a loss of $0.2 million for the three months ended June 30, 2011 was classified as discontinued operations.  The property was sold in the first quarter of 2012.
 
During the third quarter of 2011, we entered into negotiations to sell another of our real estate owned investments to a third party at which time it was determined that the property met the held-for-sale requirements pursuant to the accounting guidance.  As a result, this investment was reclassified from real estate owned to real estate held-for-sale at a value of $1.9 million, which was reduced to $1.2 million in the fourth quarter of 2011, and property operating income and expenses, which netted to a loss of $0.2 million for the three months ended June 30,
 
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2011 was reclassified to discontinued operations.  We also recorded an impairment loss on real estate held-for-sale of $0.8 million in the second quarter of 2011 due to our determination of an impairment based on an analysis of indicators of value from the market participants.  The property was sold in the first quarter of 2012.
 
During the third quarter of 2009, we mutually agreed with a first mortgage lender to appoint a receiver to operate another of our real estate owned investments and we were working to assist in the transfer of title to the first mortgage lender.  As a result we reclassified this investment from real estate owned to real estate held-for-sale at a fair value of $41.4 million.  In May 2012, we surrendered the property to the first mortgage lender in full satisfaction of a$41.4 million mortgage note payable and recorded income from discontinued operations of $1.2 million related to the reversal of accrued liabilities which were not incurred.
 
Net Income Attributable to Noncontrolling Interest
 
Net income attributable to noncontrolling interest totaled $0.1 million for the three months ended June 30, 2012 and 2011, representing the portion of income allocated to a third party’s interest in a consolidated subsidiary, which holds an investment in operating partnership units that are accruing interest and dividend income as well as a note payable that is accruing interest expense.  See Note 12 of the “Notes to the Consolidated Financial Statements” set forth in Item 1 hereof.
 
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Comparison of Results of Operations for the Six Months Ended June 30, 2012 and 2011
 
The following table sets forth our results of operations for the six months ended June 30, 2012 and 2011:
 
 	 	Six Months Ended	 	 	 	 	 	
 	 	June 30,	 	Increase/(Decrease)	 	
 	 	2012	 	2011	 	Amount	 	Percent	 	
 	 	(Unaudited)	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	39,109,120	 	$	36,580,339	 	$	2,528,781	 	7%	 	
Interest expense	 	21,532,207	 	28,833,700	 	(7,301,493	)	(25)%	 	
Net interest income	 	17,576,913	 	7,746,639	 	9,830,274	 	127%	 	
 	 	 	 	 	 	 	 	 	 	
Other revenue:	 	 	 	 	 	 	 	 	 	
Property operating income	 	17,335,955	 	12,207,955	 	5,128,000	 	42%	 	
Other income	 	401,639	 	63,432	 	338,207	 	nm	 	
Total other revenue	 	17,737,594	 	12,271,387	 	5,466,207	 	45%	 	
 	 	 	 	 	 	 	 	 	 	
Other expenses:	 	 	 	 	 	 	 	 	 	
Employee compensation and benefits	 	4,866,595	 	4,373,487	 	493,108	 	11%	 	
Selling and administrative	 	3,852,002	 	2,781,618	 	1,070,384	 	38%	 	
Property operating expenses	 	14,899,729	 	9,148,012	 	5,751,717	 	63%	 	
Depreciation and amortization	 	2,716,972	 	1,944,815	 	772,157	 	40%	 	
Provision for loan losses (net of recoveries)	 	15,734,861	 	8,095,398	 	7,639,463	 	94%	 	
Loss on sale and restructuring of loans	 	—	 	1,000,000	 	(1,000,000	)	(100)%	 	
Management fee — related party	 	5,000,000	 	4,000,000	 	1,000,000	 	25%	 	
Total other expenses	 	47,070,159	 	31,343,330	 	15,726,829	 	50%	 	
 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations before gain on extinguishment of debt, (loss) income from equity affiliates and benefit from income taxes	 	(11,755,652	)	(11,325,304	)	(430,348	)	4%	 	
 	 	 	 	 	 	 	 	 	 	
Gain on extinguishment of debt	 	26,314,335	 	2,819,200	 	23,495,135	 	nm	 	
(Loss) income from equity affiliates	 	(474,710	)	48,811	 	(523,521	)	nm	 	
 	 	 	 	 	 	 	 	 	 	
Income (loss) before benefit from income taxes	 	14,083,973	 	(8,457,293	)	22,541,266	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Benefit from income taxes	 	801,558	 	—	 	801,558	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	14,885,531	 	(8,457,293	)	23,342,824	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Loss on impairment of real estate held-for-sale	 	—	 	(750,000	)	750,000	 	(100)%	 	
Gain on sale of real estate held-for-sale	 	3,487,145	 	—	 	3,487,145	 	nm	 	
Income (loss) from operations of real estate held-for-sale	 	1,442,744	 	(772,719	)	2,215,463	 	nm	 	
Income (loss) from discontinued operations	 	4,929,889	 	(1,522,719	)	6,452,608	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	19,815,420	 	(9,980,012	)	29,795,432	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Net income attributable to noncontrollinginterest	 	107,622	 	107,574	 	48	 	nm	 	
 	 	 	 	 	 	 	 	 	 	
Net income (loss) attributable to Arbor Realty Trust, Inc.	 	$	19,707,798	 	$	(10,087,586	)	$	29,795,384	 	nm	 	
 
nm — not meaningful
 
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Net Interest Income
 
Interest income increased $2.5 million, or 7%, to $39.1 million for the six months ended June 30, 2012 from $36.6 million for the six months ended June 30, 2011.  This increase was primarily due to a 7% increase in the average yield on assets from 4.56% for the six months ended June 30, 2011 to 4.88% for the six months ended June 30, 2012, due to higher interest rates on our net originations.  Interest income from cash equivalents was $0.2 million and $0.4 million for the six months ended June 30, 2012 and 2011, respectively.
 
Interest expense decreased $7.3 million, or 25%, to $21.5 million for the six months ended June 30, 2012 from $28.8 million for the six months ended June 30, 2011.  The decrease was primarily due to a 26% decrease in the average cost of these borrowings from 4.47% for the six months ended June 30, 2011 to 3.32% for the six months ended June 30, 2012 primarily due to the maturity of certain of our interest rate swaps, resulting in a reduction of interest expense.
 
Other Revenue
 
Property operating income increased $5.2 million, or 42%, to $17.3 million for the six months ended June 30, 2012 compared to $12.2 million for the six months ended June 30, 2011.  This was due to the operations of two real estate investments recorded as real estate owned during the first quarter of 2011, resulting in a partial first quarter of activity recorded in 2011 as compared to a full first quarter of activity recorded in 2012.
 
Other income increased $0.3 million to $0.4 million for the six months ended June 30, 2012 compared to $0.1 million for the six months ended June 30, 2011 primarily due to net interest income and the increase in fair value on our linked transactions as well as miscellaneous asset management fees on our loan and investment portfolio.
 
Other Expenses
 
Employee compensation and benefits expense increased $0.5 million, or 11%, to $4.9 million for the six months ended June 30, 2012 from $4.4 million for the six months ended June 30, 2011.  These expenses represent salaries and benefits for those employed by us during these periods.
 
Selling and administrative expense increased $1.1 million, or 38%, to $3.9 million for the six months ended June 30, 2012 from $2.8 million for the six months ended June 30, 2011.  These costs include, but are not limited to, professional and consulting fees, marketing costs, insurance expense, travel and placement fees, director’s fees, licensing fees and stock-based compensation relating to our directors and certain employees of our manager.  This increase was primarily due to a $0.5 increase in professional fees and insurance as well as $0.6 million of stock-based compensation recorded for the issuance of fully vested common stock to members of the Board of Directors during the six months ended June 30, 2012.
 
Property operating expenses increased $5.8 million, or 63%, to $14.9 million for the six months ended June 30, 2012 compared to $9.1 million for the six months ended June 30, 2011.  This was due to the operations of two real estate investments recorded as real estate owned during the first quarter of 2011, resulting in a partial first quarter of activity recorded in 2011 as compared to a full first quarter of activity recorded in 2012.
 
Depreciation and amortization expense increased $0.8 million, or 40%, to $2.7 million for the six months ended June 30, 2012 compared to $1.9 million for the six months ended June 30, 2011.  This is due to depreciation expense associated with two real estate investments recorded as real estate owned during the first quarter of 2011, resulting in a partial first quarter of activity recorded in 2011 as compared to a full first quarter of activity recorded in 2012.
 
Provision for loan losses (net of recoveries) totaled $15.7 million for the six months ended June 30, 2012, and $8.1 million for the six months ended June 30, 2011.  During the six months ended June 30, 2012, we performed an evaluation of our loan portfolio and determined that the fair value of the underlying collateral securing three impaired loans with an aggregate carrying value of $55.4 million was less than the net carrying value of the loans, resulting in us recording an additional $16.4 million provision for loan losses.  We also recorded less than $0.1
 
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million of net recoveries of previously recorded loan loss reserves in the first quarter of 2012 and $0.7 million of net recoveries of previously recorded loan loss reserves in the second quarter of 2012, which were recorded in provision for loan losses on the Consolidated Statement of Operations, netting the provision to $15.7 million.  At June 30, 2012 we had a total of 20 loans with an aggregate carrying value of $271.7 million, before loan loss reserves, for which impairment reserves have been recorded.  During the six months ended June 30, 2011, we performed an evaluation of our loan portfolio and determined that the fair value of the underlying collateral securing six impaired loans with an aggregate carrying value of $72.3 million was less than the net carrying value of the loans, resulting in us recording an additional $12.9 million provision for loan losses.  We also recorded net recoveries of $3.8 million related to five loans in our portfolio in the second quarter of 2011and recoveries of $1.0 million related to two loans in our portfolio in the first quarter of 2011, netting the provision to $8.1 million for the six months ended June 30, 2011.  At June 30, 2011, we had a total of 26 loans with an aggregate carrying value of $316.8 million, before loan loss reserves, for which impairment reserves were recorded.
 
Loss on sale and restructuring of loans was $1.0 million for the six months ended June 30, 2011 as a result of the execution of a forbearance agreement in the first quarter of 2011 on a loan modified in the second quarter of 2011.  There was no loss on sale and restructuring of loans for the six months ended June 30, 2012.
 
Management fees increased $1.0 million, or 25%, to $5.0 million for the six months ended June 30, 2012 from $4.0 million for the six months ended June 30, 2011.  These amounts represent compensation in the form of base management fees, on a cost reimbursement basis.  The management agreement also provides for incentive management fees and success-based payments to be paid to our manager upon the completion of specified corporate objectives in addition to the standard base management fee.  No incentive or success-based management fees were earned for the six months ended June 30, 2012 and 2011.  Refer to “Management Agreement” below for further details including information related to our amended management agreement with ACM.
 
Gain on extinguishment of debt increased $23.5 million to $26.3 million for the six months ended June 30, 2012 from $2.8 million for the six months ended June 30, 2011.  During the six months ended June 30, 2012, we purchased, at a discount, $57.2 million of investment grade rated Class B, C, D, E, F, G and H notes originally issued by our CDO II and CDO III issuing entities from third party investors and recorded a net gain on early extinguishment of debt of $26.3 million.  During the six months ended June 30, 2011, we purchased, at a discount, $5.0 million of investment grade rated Class C and F notes originally issued by our CDO III issuing entity and recorded a gain on early extinguishment of debt of $2.8 million.
 
Loss from equity affiliates was $0.5 million and income from equity affiliates was $0.1 million for the six months ended June 30, 2012 and 2011, respectively, which reflects our portion of the loss and income from our equity affiliates.
 
Income Taxes
 
We are organized and conduct our operations to qualify as a REIT for federal income tax purposes.  As a REIT, we are generally not subject to federal income tax on our REIT—taxable income that we distribute to our stockholders, provided that we distribute at least 90% of our REIT—taxable income and meet certain other requirements.  As of June 30, 2012 and 2011, we were in compliance with all REIT requirements and, therefore, have not recorded a provision for income taxes on our REIT— taxable income for the six months ended June 30, 2012 and 2011, except for $0.6 million of federal alternative minimum tax recorded in the second quarter of 2012.
 
Certain of our assets that produce non-qualifying income are owned by our taxable REIT subsidiaries, the income of which is subject to federal and state income taxes.  During the six months ended June 30, 2012 and 2011, we did not record any provision for income taxes from these taxable REIT subsidiaries.  However, during the first quarter of 2012 we recorded a $1.4 million receivable for the expected refund of income taxes paid by a taxable REIT subsidiary in a prior year.
 
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Income (loss) from Discontinued Operations
 
During the fourth quarter of 2011, we entered into negotiations to sell one of our real estate owned investments to a third party at which time it was determined that the property met the held-for-sale requirements pursuant to the accounting guidance.  As a result, this investment was reclassified from real estate owned to real estate held-for-sale at a value of $19.4 million and property operating income and expenses, which netted to income of $0.1 million and a loss of $0.3 million for the six months ended June 30, 2012 and 2011, respectively, were classified as discontinued operations.  In the first quarter of 2012, we sold the property and recorded a gain of $3.5 million.
 
During the third quarter of 2011, we entered into negotiations to sell another of our real estate owned investments to a third party at which time it was determined that the property met the held-for-sale requirements pursuant to the accounting guidance.  As a result, this investment was reclassified from real estate owned to real estate held-for-sale at a value of $1.9 million, which was reduced to $1.2 million in the fourth quarter of 2011, and property operating income and expenses, which netted to income of $0.2 million and a loss of $0.5 million for the six months ended June 30, 2012 and 2011, respectively, were reclassified to discontinued operations.  We also recorded an impairment loss on real estate held-for-sale of $0.8 million in the second quarter of 2011 due to our determination of an impairment based on an analysis of indicators of value from the market participants.  In the first quarter of 2012, we sold the property and recorded a gain of less than $0.1 million.
 
During the third quarter of 2009, we mutually agreed with a first mortgage lender to appoint a receiver to operate another of our real estate owned investments and we were working to assist in the transfer of title to the first mortgage lender.  As a result we reclassified this investment from real estate owned to real estate held-for-sale at a fair value of $41.4 million.  In May 2012, we surrendered the property to the first mortgage lender in full satisfaction of a $41.4 million mortgage note payable and recorded income from discontinued operations of $1.2 million related to the reversal of accrued liabilities which were not incurred.
 
Net Income Attributable to Noncontrolling Interest
 
Net income attributable to noncontrolling interest totaled $0.1 million for the six months ended June 30, 2012 and 2011, representing the portion of income allocated to a third party’s interest in a consolidated subsidiary, which holds an investment in operating partnership units that are accruing interest and dividend income as well as a note payable that is accruing interest expense.  See Note 12 of the “Notes to the Consolidated Financial Statements” set forth in Item 1 hereof.
 
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Liquidity and Capital Resources
 
Sources of Liquidity
 
Liquidity is a measurement of the ability to meet potential cash requirements.  Our short-term and long-term liquidity needs include ongoing commitments to repay borrowings, fund future loans and investments, fund additional cash collateral from potential declines in the value of a portion of our interest rate swaps, fund operating costs and distributions to our stockholders as well as other general business needs.  Our primary sources of funds for liquidity consist of proceeds from equity offerings, debt facilities and cash flows from our operations.  Our equity sources, depending on market conditions, consist of proceeds from capital market transactions including the issuance of common, convertible and/or preferred equity securities.  Our debt facilities include the issuance of floating rate notes resulting from our CDOs, the issuance of junior subordinated notes and borrowings under credit agreements.  Net cash flows from operations include interest income from our loan and investment portfolio reduced by interest expense on our debt facilities, cash from other investments reduced by expenses, repayments of outstanding loans and investments and funds from junior loan participation arrangements.
 
We believe our existing sources of funds will be adequate for purposes of meeting our short-term and long-term liquidity needs.  A majority of our loans and investments are financed under existing debt obligations and their credit status is continuously monitored; therefore, these loans and investments are expected to generate a generally stable return.  Our ability to meet our long-term liquidity and capital resource requirements is subject to obtaining additional debt and equity financing.  Any decision by our lenders and investors to enter into such transactions with us will depend upon a number of factors, such as our financial performance, compliance with the terms of our existing credit arrangements, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders’ and investors’ resources and policies concerning the terms under which they make such capital commitments and the relative attractiveness of alternative investment or lending opportunities.
 
While we have been successful in obtaining proceeds from an equity offering and from certain financing facilities in 2012 to date, current conditions in the capital and credit markets have and may continue to make certain forms of financing less attractive and, in certain cases, less available.  Therefore we will continue to rely, in part, on cash flows provided by operating and investing activities for working capital.
 
To maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT—taxable income.  These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations.  However, we believe that our capital resources and access to financing will provide us with financial flexibility and market responsiveness at levels sufficient to meet current and anticipated capital requirements.
 
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Cash Flows
 
As of June 30, 2012 and 2011, we had cash and cash equivalents of $64.3 million and $42.4 million, respectively.  The following table shows our cash flow components (in thousands):
 
 	 	Six Months Ended
June 30,	 	
 	 	2012	 	2011	 	
 	 	 	 	 	 	
Net cash provided by / (used in) operating activities	 	$	7,160	 	$	(10,683	)	
Net cash provided by / (used in) investing activities	 	33,773	 	(3,790	)	
Net cash used in financing activities	 	(31,887	)	(44,256	)	
Net increase / (decrease) in cash and cash equivalents	 	9,046	 	(58,729	)	
Cash and cash equivalents at beginning of period	 	55,236	 	101,125	 	
Cash and cash equivalents at end of period	 	$	64,282	 	$	42,396	 	
 
Our cash flows from operating activities increased by $17.8 million for the six months ended June 30, 2012 compared to the comparable period in 2011 primarily due to an $11.1 million cash payment of a related party payable in the first quarter of 2011 as well as a $4.2 million increase in net income adjusted for noncash expenses, gains and losses.
 
Cash flows from investing activities increased by $37.6 million for the six months ended June 30, 2012 compared to the comparable period in 2011 primarily due to a $47.6 million increase in payoffs and paydowns and $22.7 million from the sale of real estate held-for-sale, $17.9 million from the sale of a loan, net of a $34.1 million increase in the purchase of investments, net of principal collections, and a $15.2 million increase in the origination of loans, as compared to 2011.
 
Cash flows from financing activities increased by $12.4 million for the six months ended June 30, 2012 compared to the comparable period in 2011 mainly due to $55.5 million in proceeds from repurchase agreements and credit facilities, a $32.4 million increase in restricted cash and $17.7 million from the issuance of common stock and is net of $20.8 million from the repayment of a mortgage note payable — held-for-sale, a $34.0 million increase in the amortization of our CDO vehicles as well as the purchase of our own CDO bonds, a $34.1 million increase in the repayment of repurchase agreements and credit facilities, net payments of $2.8 million on financial instruments underlying linked transactions and the payment of a common stock dividend of $1.8 million in 2012.
 
Equity Offerings
 
Our authorized capital provides for the issuance of up to 500 million shares of common stock, par value $0.01 per share, and 100 million shares of preferred stock, par value $0.01 per share.
 
In June 2010, we filed a shelf registration statement on Form S-3 with the SEC under the 1933 Act with respect to an aggregate of $500.0 million of debt securities, common stock, preferred stock, depositary shares and warrants, that may be sold by us from time to time pursuant to Rule 415 of the 1933 Act.  On June 23, 2010, the SEC declared this shelf registration statement effective.
 
In June 2012, we completed a public offering in which we sold 3,500,000 shares of our common stock for $5.40 per share, and received net proceeds of approximately $17.5 million after deducting the underwriting discount and other offering expenses.  We intend to use the net proceeds from the offering to make investments, to repurchase or pay liabilities and for general corporate purposes, which may include the repayment of indebtedness under our credit facilities.  The underwriter did not exercise its over-allotment option for additional shares which expired in July 2012 and $481.1 million currently remains available under the shelf registration.
 
At June 30, 2012 and December 31, 2011, we had27,749,225 and 24,298,140 common shares outstanding, respectively.
 
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Debt Facilities
 
We also maintain liquidity through two repurchase agreements, two warehousing credit facilities, a revolving credit facility, a note payable and three junior loan participations with eight different financial institutions or companies.  In addition, we have issued three collateralized debt obligations or CDOs and nine separate junior subordinated notes.  London inter-bank offered rate, or LIBOR, refers to one-month LIBOR unless specifically stated.  As of June 30, 2012, these facilities had aggregate borrowings of approximately $1.3 billion.
 
The following is a summary of our debt facilities as of June 30, 2012:
 
 	 	At June 30, 2012	 	
 	 	 	 	Debt Carrying	 	 	 	Maturity	 	
Debt Facilities	 	Commitment	 	Value	 	Available	 	Dates	 	
 	 	 	 	 	 	 	 	 	 	
Repurchase agreements and credit facilities. Interest is variable based on pricing over LIBOR and fixed	 	$	132,963,000	 	$	127,297,594	 	$	5,665,406	 	2012 - 2013	 	
 	 	 	 	 	 	 	 	 	 	
Collateralized debt obligations. Interest is variable based on pricing over three-month LIBOR  (1)	 	910,206,205	 	910,206,205	 	—	 	2014 – 2015	 	
 	 	 	 	 	 	 	 	 	 	
Junior subordinated notes. Interest is variable based on pricing over three-month LIBOR (2)	 	158,509,407	 	158,509,407	 	—	 	2034 – 2037	 	
 	 	 	 	 	 	 	 	 	 	
Notes payable. Interest is at a fixed rate and variable based on pricing over LIBOR	 	53,457,708	 	53,457,708	 	—	 	2012 – 2016	 	
 	 	 	 	 	 	 	 	 	 	
 	 	$	1,255,136,320	 	$	1,249,470,914	 	$	5,665,406	 	 	 	

(1) Maturity dates represent the weighted average remaining maturity based on the underlying collateral as of June 30, 2012.
 
(2) Represents a total face amount of $175.9 million less a total deferred amount of $17.4 million.
 
These debt facilities are described in further detail in Note 7 of the “Notes to the Consolidated Financial Statements” set forth in Item 1 hereof.
 
Repurchase Agreements and Credit Facilities
 
During the six months ended June 30, 2012, we financed the purchase of 14 RMBS investments with a repurchase agreement with a financial institution for a total of $49.1 million and paid down the total debt by $20.7 million due to principal paydowns received on the RMBS investments.  During the year ended December 31, 2011, we financed the purchase of seven RMBS investments with this repurchase agreement for a total of $30.0 million and paid down the total debt by $3.9 million due to principal paydowns received on the RMBS investments.  The total debt balance was $54.6 million and $26.1 million at June 30, 2012 and December 31, 2011, respectively.  We also financed the purchase of four RMBS investments with this repurchase agreement for $8.7 million, which qualified as linked transactions, and paid down the debt by $1.2 million due to the principal paydowns received on the RMBS investments.  The linked transactions are presented on a combined basis and reported in other assets on the Consolidated Balance Sheet.  The facility finances between 80% and 90% of the value of each individual investment, has a rolling monthly term, and bears interest at a rate of 125 to 150 basis points over LIBOR.  The facility also includes a minimum net worth covenant of $100.0 million.
 
In June 2012, we financed the purchase of an RMBS investment with another repurchase agreement with a financial institution for a total of $0.8 million and the total outstanding debt balance was $0.8 million at June 30, 2012.  We also financed the purchase of an RMBS investment with this repurchase agreement for $13.7 million, which qualified as a linked transaction.  The facility finances between 80% and 90% of the value of each investment, has a rolling monthly term, and bears interest at a rate of 175 to 185 basis points over LIBOR.
 
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In July 2011, we entered into a two year, $50.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties.  The facility bears interest at a rate of 275 basis points over LIBOR, required a 1% commitment fee upon closing, matures in July 2013 with a one year extension option that requires two 5% paydowns and has warehousing and non-use fees.  The facility also has a maximum advance rate of 75% and contains several restrictions including full repayment of an advance if a loan becomes 60 days past due, is in default or is written down by us.  The facility also includes various financial covenants including a minimum liquidity requirement of $20.0 million, minimum tangible net worth which includes junior subordinated notes as equity of $150.0 million, maximum total liabilities less subordinate debt of $2.0 billion, as well as certain other debt service coverage ratios and debt to equity ratios.  The facility also has a compensating balance requirement of $50.0 million to be maintained by us and our affiliates.  At June 30, 2012, the outstanding balance of this facility was $49.3 million.
 
In June 2012, we entered into a $12.6 million warehouse facility with a financial institution to finance the first mortgage loan on a multifamily property.  The facility bears interest at a rate of 275 basis points over LIBOR or Prime at our election, required a 1% commitment fee upon closing, matures in December 2013 and has a non-use fee.  The facility also has a maximum advance rate of 70%, which can be increased to 75% under certain specified conditions, and contains several restrictions including full repayment of an advance if the loan becomes 60 days past due, is in default or is written down by us.  The facility also includes various financial covenants including a minimum liquidity requirement of $20.0 million, minimum tangible net worth which includes junior subordinated notes as equity of $150.0 million, maximum total liabilities less subordinate debt of $2.0 billion, as well as certain other debt service coverage ratios and debt to equity ratios.  At June 30, 2012, the outstanding balance of this facility was $12.6 million.
 
In May 2012, we entered into a $15.0 million committed revolving line of credit with a one year term maturing in May 2013, which is secured by a portion of the bonds originally issued by our CDO entities that have been repurchased by us.  This facility has a 1% commitment fee, a 1% non-use fee and pays interest at a fixed rate of 8% on any drawn portion of the line.  The facility also includes a debt service coverage ratio requirement for the posting of collateral.  At June 30, 2012, the outstanding balance of this facility was $10.0 million.
 
CDOs
 
We completed the formation of three separate CDO entities since 2005 by issuing to third party investors, tranches of investment grade collateralized debt obligations through newly-formed wholly-owned subsidiaries (the “Issuers”).  The Issuers hold assets, consisting primarily of real-estate related assets and cash which serve as collateral for the CDOs.  The assets pledged as collateral for the CDOs were contributed from our portfolio of assets.  By contributing these real estate assets to the various CDOs, these transactions resulted in a decreased cost of funds relating to the corresponding CDO assets and created capacity in our debt facilities.
 
The Issuers issued tranches of investment grade floating-rate notes of approximately $305.0 million, $356.0 million and $447.5 million for CDO I, CDO II and CDO III, respectively.  CDO III also has a $100.0 million revolving note which was not drawn upon at the time of issuance.  The revolving note facility has a commitment fee of 0.22% per annum on the undrawn portion of the facility.  The tranches were issued with floating rate coupons based on three-month LIBOR plus pricing of 0.44% - 0.77%.  Proceeds from the sale of the investment grade tranches issued in CDO I, CDO II and CDO III of $267.0 million, $301.0 million and $317.1 million, respectively, were used to repay higher costing outstanding debt under our repurchase agreements and notes payable.  The CDOs could be replenished with substitute collateral for loans that are repaid during the first four years for CDO I and the first five years for CDO II and CDO III, subject to certain customary provisions.  Thereafter, the outstanding debt balance is reduced as loans are repaid.  Proceeds from the repayment of assets which serve as collateral for the CDOs must be retained in its structure as restricted cash until such collateral can be replaced and therefore are not available to fund current cash needs.  If such cash is not used to replenish collateral, it could have a negative impact on our anticipated returns.  As of January 15, 2012, CDO III has reached the end of its replenishment date.  Investor capital will be repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CDO.  As of April 15, 2011, CDO II reached the end of its replenishment date and will no longer make quarterly amortization payments of $1.2 million to investors as a reduction of the CDO liability.  As of April 15, 2009, CDO I reached the end of its replenishment date and will no longer make quarterly amortization payments
 
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of $2.0 million to investors.  Investor capital will be repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CDO.  Proceeds distributed will be recorded as a reduction of the CDO liability.  Our CDO vehicles are VIEs for which we are the primary beneficiary and are consolidated in our Financial Statements.
 
In the second quarter of 2012, we purchased, at a discount, $42.7 million of investment grade rated Class C, D, E, F, G and H notes originally issued by our CDO II and CDO III issuing entities for a price of $21.7 million from third party investors and recorded a net gain on extinguishment of debt of $21.0 million in our Consolidated Statement of Operations.
 
In the first quarter of 2012, we purchased, at a discount, $14.5 million of investment grade rated Class B and E notes originally issued by our CDO II and CDO III issuing entities for a price of $9.2 million from third party investors.  We recorded a net gain on extinguishment of debt of $5.3 million from this transaction in our first quarter 2012 Consolidated Statement of Operations.
 
In the third quarter of 2012, we purchased, at a discount, $9.0 million of investment grade rated Class D and E notes originally issued by our CDO III issuing entity for a price of $4.9 million from third party investors and will record a net gain on extinguishment of debt of $4.1 million in our Consolidated Statement of Operations for the three months ended September 30, 2012.
 
During the three and six months ended June 30, 2011, we purchased, at a discount, $3.5 million and $5.0 million, respectively, of investment grade rated Class C and F notes originally issued by our CDO III issuing entity for a price of $1.6 million and $2.2 million, respectively, from third party investors and recorded a gain on extinguishment of debt of $1.9 million and $2.8 million, respectively, in our 2011 Consolidated Statements of Operations.
 
The following table sets forth the face amount and gain on extinguishment of our CDO bonds repurchased in the following periods by bond class:
 
 	 	For the Three Months Ended June 30,	 	For the Six Months Ended June 30,	 	
 	 	2012	 	2011	 	2012	 	2011	 	
Class:	 	Face
Amount	 	Gain	 	Face
Amount	 	Gain	 	Face
Amount	 	Gain	 	Face
Amount	 	Gain	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
B	 	$	—	 	$	—	 	$	—	 	$	—	 	$	13,000,000	 	$	4,615,000	 	$	—	 	$	—	 	
C	 	3,329,509	 	1,200,182	 	1,630,000	 	757,950	 	3,329,509	 	1,200,182	 	1,630,000	 	757,950	 	
D	 	10,350,000	 	4,537,503	 	—	 	—	 	10,350,000	 	4,537,503	 	—	 	—	 	
E	 	6,250,000	 	2,850,787	 	—	 	—	 	7,765,276	 	3,581,908	 	—	 	—	 	
F	 	9,708,556	 	5,048,417	 	1,870,000	 	1,168,750	 	9,708,556	 	5,048,417	 	3,370,000	 	2,061,250	 	
G	 	8,672,039	 	4,777,138	 	—	 	—	 	8,672,039	 	4,777,138	 	—	 	—	 	
H	 	4,403,771	 	2,554,187	 	—	 	—	 	4,403,771	 	2,554,187	 	—	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	42,713,875	 	$	20,968,214	 	$	3.500,000	 	$	1,926,700	 	$	57,229,151	 	$	26,314,335	 	$	5,000,000	 	$	2,819,200	 	
 
In 2010, we re-issued our own CDO bonds we had acquired throughout 2009 with an aggregate face amount of $42.8 million, as well as CDO bonds from other issuers acquired in the second quarter of 2008 with an aggregate face amount of $25.0 million and a carrying value of $0.4 million, and $10.5 million in cash, as part of an exchange for the retirement of $114.1 million of our junior subordinated notes.  This transaction resulted in the recording of $65.2 million of additional CDO debt, of which $42.3 million represents the portion of our CDO bonds that were exchanged and $22.9 million represents the estimated interest due on the reissued bonds through their maturity, of which $21.2 million remains at June 30, 2012.  See “Junior Subordinated Notes” below.
 
At June 30, 2012, the outstanding note balance under CDO I, CDO II and CDO III was $164.1 million, $251.1 million and $495.0 million, respectively.
 
The economic difficulties over the last several years in the structured finance markets has negatively impacted the credit markets generally, and, as a result, investor demand for commercial real estate collateralized debt obligations has been substantially curtailed.  In recent years, we have relied to a substantial extent on CDO financings to obtain match funded financing for our investments.  Until the market for commercial real estate CDOs
 
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recovers, we may be unable to utilize CDOs to finance our future investments and we may need to utilize less favorable sources of financing to finance our investments on a long-term basis.  There can be no assurance as to when demand for commercial real estate CDOs will return or the terms of such securities investors will demand or whether we will be able to issue CDOs to finance our investments on terms beneficial to us.
 
The following table outlines borrowings and the corresponding collateral under the Company’s collateralized debt obligations as of June 30, 2012:

 	 	Debt	 	Collateral	 	 	 	
 	 	 	 	Loans	 	Securities	 	Cash	 	 	 	
 	 	Face	 	Carrying	 	Unpaid	 	Carrying	 	Face	 	Carrying	 	Fair	 	Restricted	 	Collateral	 	
 	 	Value	 	Value	 	Principal (1)	 	Value (1)	 	Value	 	Value	 	Value (2)	 	Cash (3)	 	At-Risk (4)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO I — Issued four investment grade tranches January 19, 2005. Reinvestment period through April 2009. Stated maturity date of February 2040. Interest is variable based on three-month LIBOR; the weighted average note rate was 3.56%	 	$	158,122,932	 	$	164,094,082	 	$	303,088,410	 	$	244,272,906	 	$	727,838	 	$	734,515	 	$	736,608	 	$	21,026,090	 	$	207,548,894	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO II — Issued nine investment grade tranches January 11, 2006. Reinvestment period through April 2011. Stated maturity date of April 2038. Interest is variable based on three-month LIBOR; the weighted average note rate was 3.07%	 	244,948,957	 	251,084,147	 	413,011,403	 	348,382,202	 	10,000,000	 	1,500,000	 	1,500,000	 	11,453,407	 	141,010,635	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO III — Issued ten investment grade tranches December 14, 2006. Reinvestment period through January 2012. Stated maturity date of January 2042. Interest is variable based on three-month LIBOR; the weighted average note rate was 0.77%	 	485,944,553	 	495,027,976	 	578,078,693	 	531,485,118	 	—	 	—	 	—	 	25,285,706	 	187,071,847	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total CDOs	 	$	889,016,442	 	$	910,206,205	 	$	1,294,178,506	 	$	1,124,140,226	 	$	10,727,838	 	$	2,234,515	 	$	2,236,608	 	$	57,765,203	 	$	535,631,376	 	

The following table outlines borrowings and the corresponding collateral under our collateralized debt obligations as of December 31, 2011:

 	 	Debt	 	Collateral	 	 	 	
 	 	 	 	Loans	 	Securities	 	Cash	 	 	 	
 	 	Face	 	Carrying	 	Unpaid	 	Carrying	 	Face	 	Carrying	 	Fair	 	Restricted	 	Collateral	 	
 	 	Value	 	Value	 	Principal (1)	 	Value (1)	 	Value	 	Value	 	Value (2)	 	Cash (3)	 	At-Risk (4)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO I — Issued four investment grade tranches January 19, 2005. Reinvestment period through April 2009. Stated maturity date of February 2040. Interest is variable based on three-month LIBOR; the weighted average note rate was 4.49%	 	$	160,435,201	 	$	166,513,982	 	$	329,771,834	 	$	267,636,713	 	$	734,969	 	$	742,602	 	$	737,423	 	$	22,136	 	$	152,303,041	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO II — Issued nine investment grade tranches January 11, 2006. Reinvestment period through April 2011. Stated maturity date of April 2038. Interest is variable based on three-month LIBOR; the weighted average note rate was 2.83%	 	285,827,267	 	292,073,302	 	443,418,527	 	380,782,546	 	10,000,000	 	2,000,000	 	2,000,000	 	17,136,397	 	131,932,659	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO III — Issued ten investment grade tranches December 14, 2006. Reinvestment period through January 2012. Stated maturity date of January 2042. Interest is variable based on three-month LIBOR; the weighted average note rate was 1.24%	 	534,791,657	 	544,028,109	 	579,343,579	 	531,123,295	 	—	 	—	 	—	 	24,795,495	 	171,427,137	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total CDOs	 	$	981,054,125	 	$	1,002,615,393	 	$	1,352,533,940	 	$	1,179,542,554	 	$	10,734,969	 	$	2,742,602	 	$	2,737,423	 	$	41,954,028	 	$	455,662,837	 	

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(1) Amounts include loans to real estate assets consolidated by us that were reclassified to real estate owned and held-for-sale, net on the Consolidated Financial Statements.
(2) The security with a fair value of $736,608 was rated AAA at June 30, 2012 and December 31, 2011 by Standard & Poor’s.  The security with a fair value of $1,500,000 was rated a CCC- at June 30, 2012 and December 31, 2011 by Standard & Poor’s.
(3) Represents restricted cash held for reinvestment and/or principal repayments in the CDOs.  Does not include restricted cash related to interest payments, delayed fundings and expenses.
(4) Amounts represent the face value of collateral in default, as defined by the CDO indenture, as well as assets deemed to be “credit risk”.  Credit risk assets are reported by each of the CDOs and are generally defined as one that, in the CDO collateral manager’s reasonable business judgment, has a significant risk of declining in credit quality or, with a passage of time, becoming a defaulted asset.
 
Our CDO vehicles contain interest coverage and asset over collateralization covenants that must be met as of the waterfall distribution date in order for us to receive such payments.  If we fail these covenants in any of our CDOs, all cash flows from the applicable CDO would be diverted to repay principal and interest on the outstanding CDO bonds and we would not receive any residual payments until that CDO regained compliance with such tests.  Our CDOs were in compliance with all such covenants as of June 30, 2012 as well as on the most recent determination date in July 2012.  In the event of a breach of the CDO covenants that could not be cured in the near-term, we would be required to fund our non-CDO expenses, including management fees and employee costs, distributions required to maintain REIT status, debt costs, and other expenses with (i) cash on hand, (ii) income from any CDO not in breach of a covenant test, (iii) income from real property and loan assets, (iv) sale of assets, (v) or accessing the equity or debt capital markets, if available.  We have the right to cure covenant breaches which would resume normal residual payments to us by purchasing non-performing loans out of the CDOs.  However, we may not have sufficient liquidity available to do so at such time.
 
The chart below is a summary of our CDO compliance tests as of the most recent determination date in July 2012:
 
Cash Flow Triggers	 	CDO I	 	CDO II	 	CDO III	 	
 	 	 	 	 	 	 	 	
Overcollateralization (1)	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Current	 	212.94	%	191.93	%	106.96	%	
 	 	 	 	 	 	 	 	
Limit	 	184.00	%	169.50	%	105.60	%	
 	 	 	 	 	 	 	 	
Pass / Fail	 	Pass	 	Pass	 	Pass	 	
 	 	 	 	 	 	 	 	
Interest Coverage (2)	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Current	 	394.01	%	449.45	%	510.13	%	
 	 	 	 	 	 	 	 	
Limit	 	160.00	%	147.30	%	105.60	%	
 	 	 	 	 	 	 	 	
Pass / Fail	 	Pass	 	Pass	 	Pass	 	

(1) The overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total principal balance of the bonds associated with the applicable ratio.  To the extent an asset is considered a defaulted security, the asset’s principal balance for purposes of the overcollateralization test, is the lesser of the asset’s market value or the principal balance of the defaulted asset multiplied by the asset’s recovery rate which is determined by the rating agencies.  Rating downgrades of CDO collateral will generally not have a direct impact on the principal balance of a CDO asset for purposes of calculating the CDO’s overcollateralization test unless the rating downgrade is below a significantly low threshold (e.g. CCC-) as defined in each CDO vehicle.
 
(2) The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by us.
 
As of the determination dates in July 2012, April 2012, January 2012, October 2011 and July 2011, our overcollateralization ratios were 212.94%, 211.21%, 211.18%, 207.53% and 196.92%, respectively, for CDO I; 191.93%, 185.89%, 179.31%, 181.78% and 181.74%, respectively, for CDO II; and 106.96%, 107.59%, 107.59%, 108.47% and 109.50%, respectively, for CDO III.  The ratio will fluctuate based on the performance of the underlying assets, transfers of assets into the CDOs prior to the expiration of their respective replenishment dates, purchase or disposal of other investments, and loan payoffs.
 
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Junior Subordinated Notes
 
In 2010, we retired $114.1 million of our junior subordinated notes, with a carrying value of $102.1 million in exchange for the re-issuance of our own CDO bonds we had acquired throughout 2009 with an aggregate face amount of $42.8 million, CDO bonds from other issuers acquired in the second quarter of 2008 with an aggregate face amount of $25.0 million and a carrying value of $0.4 million, and $10.5 million in cash.
 
In 2009, we retired $265.8 million of our then outstanding trust preferred securities, primarily consisting of $258.4 million of junior subordinated notes issued to third party investors and $7.4 million of common equity issued to us in exchange for $289.4 million of newly issued unsecured junior subordinated notes, representing 112% of the original face amount.  The notes bore a fixed interest rate of 0.50% per annum until March 31, 2012 or April 30, 2012 (the “Modification Period”).  Thereafter, interest is to be paid at the rates set forth in the existing trust agreements until maturity, equal to a weighted average three month LIBOR plus 2.90%, which was reduced to 2.77% after the exchange in 2010 mentioned above.  The 12% increase to the face amount due upon maturity, which had a balance of $17.4 million at June 30, 2012, is being amortized into interest expense over the life of the notes.  We also paid transaction fees of approximately $1.3 million to the issuers of the junior subordinated notes related to this restructuring which is being amortized over the life of the notes.
 
During the Modification Period, we were permitted to make distributions of up to 100% of taxable income to common shareholders.  We had agreed that such distributions would be paid in the form of our stock to the maximum extent permissible under the Internal Revenue Service rules and regulations in effect at the time of such distribution, with the balance payable in cash.  This requirement regarding distributions in stock could have been terminated by us at any time, provided that we paid the note holders the original rate of interest from the time of such termination.  The terms of the Modification Period expired in April 2012.
 
The junior subordinated notes are unsecured, have maturities of 25 to 28 years, pay interest quarterly at a fixed rate or floating rate of interest based on three-month LIBOR and, absent the occurrence of special events, were not redeemable during the first two years.
 
At June 30, 2012, the aggregate carrying value under these facilities was $158.5 million with a current weighted average pay rate of 3.24%, however, based upon the accounting treatment for the restructuring mentioned above, the effective rate was 3.85%.  At December 31, 2011 the weighted average pay rate was 0.5%, however, based upon the accounting treatment for the restructuring mentioned above, the effective rate was 3.85%.
 
Notes Payable
 
We have a $50.2 million non-recourse note payable at June 30, 2012 related to a prior year exchange of profits interest transaction.  During 2008, we recorded a $49.5 million note payable related to the exchange of our Prime Outlets Member, LLC (“POM”) profits interest for operating partnership units in Lightstone Value Plus REIT, L.P.  The note was initially secured by our interest in POM, matures in July 2016 and bears interest at a fixed rate of 4.06% with payment deferred until the closing of the transaction.  Upon the closing of the POM transaction in March 2009, the note balance was increased to $50.2 million and is secured by our investment in common and preferred operating partnership units in Lightstone Value Plus REIT, L.P.
 
In April 2011, we entered into a non-recourse junior loan participation in the amount of $32.0 million on a $50.0 million mezzanine loan.  The loan was participated out to a subordinate lender at a discount and we received $28.8 million of proceeds.  The subordinate lender will receive its proportionate share of the interest received from the loan which has a variable rate of LIBOR plus 4.35% and a maturity of July 2012.  We also had the right to sell our $18.0 million senior participation to the subordinate lender, at face value, in the event of default or if the loan was not repaid by July 9, 2012.  In May 2012, we sold the $50.0 million mezzanine loan to the same third party which relieved our $32.0 million junior loan participation liability.  In June 2011, we entered into a non-recourse junior loan participation in the amount of $2.0 million on an $11.8 million mezzanine loan.  The participation has a 0% rate of interest and a maturity of August 2012.  The outstanding balance of this junior loan participation was $2.0 million at June 30, 2012.  We also have a third junior loan participation with an outstanding balance at June 30, 2012 of $1.3 million on a $1.3 million bridge loan.  Participations have a maturity date equal to the corresponding mortgage loan and are secured by the participant’s interest in the mortgage loan.  Interest expense is based on the
 
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portion of the interest received from the loan that is paid to the junior participant.  Our obligation to pay interest on participations is based on the performance of the related loan.
 
Mortgage Note Payable — Real Estate Owned
 
During 2011, we assumed a $55.4 million interest-only first lien mortgage in connection with the acquisition of real property pursuant to bankruptcy proceedings for an entity in which we had a $29.8 million loan secured by a portfolio of multifamily assets (the “Multifamily Portfolio”).  The real estate investment was classified as real estate owned in our Consolidated Balance Sheet in March 2011.  The mortgage bears interest at a variable rate of one-month LIBOR plus 1.23% and has a maturity date of March 2014 with a one year and three month extension option.  In June 2011, one of the properties in the Multifamily Portfolio was sold to a third party for $1.6 million and the proceeds were used to pay down the first lien mortgage.  The outstanding balance of this mortgage was $53.8 million at June 30, 2012.
 
Mortgage Notes Payable - Held-For-Sale
 
During 2010, we assumed a $20.8 million interest-only first lien mortgage related to a deed in lieu of foreclosure agreement for an entity in which we had a $5.6 million junior participation loan secured by an apartment building.  The real estate investment was originally classified as real estate owned and was reclassified as real estate held-for-sale in December 2011.  The mortgage bore interest at a fixed rate of 6.23% and had a maturity date of December 2013 with a five year extension option.  In March 2012, we sold the property to a third party and the first lien mortgage was paid off.
 
During 2008, we assumed a $41.4 million first lien mortgage related to the foreclosure of an entity in which we had a $5.0 million mezzanine loan.  The real estate investment was originally classified as real estate owned and was reclassified as real estate held-for-sale in September 2009.  The mortgage bore interest at a fixed rate of 6.13% and had a maturity date of June 2012.  In May 2012, we surrendered the property to the first mortgage lender in full satisfaction of the first lien mortgage.
 
Restrictive Covenants
 
Our debt facilities contain various financial covenants and restrictions, including minimum net worth, minimum liquidity and maximum debt balance requirements, as well as certain other debt service coverage ratios and debt to equity ratios.  We were in compliance with all financial covenants and restrictions at June 30, 2012.
 
No payment due under the Junior Subordinated Indentures may be paid if there is a default under any senior debt and the senior lender has sent notice to the trustee.  The Junior Subordinated Indentures are also cross-defaulted with each other.
 
Cash Flow From Operations
 
We continually monitor our cash position to determine the best use of funds to both maximize our return on funds and maintain an appropriate level of liquidity.  Historically, in order to maximize the return on our funds, cash generated from operations has generally been used to temporarily pay down borrowings under credit facilities whose primary purpose is to fund our new loans and investments.  Consequently, when making distributions in the past, we have borrowed the required funds by drawing on credit capacity available under our credit facilities.  Since we have substantially reduced our short-term debt, we may have to maintain adequate liquidity from operations to make any future distributions.
 
Share Repurchase Plan
 
In December 2011, the Board of Directors authorized a stock repurchase plan that enables us to buy up to 0.5 million shares of our common stock beginning January 3, 2012.  At management’s discretion, shares may be acquired from time to time on the open market, through privately negotiated transactions or pursuant to a Rule 10b5-1 plan.  A Rule 10b5-1 plan permits us to repurchase shares at times when it might otherwise be prevented from doing so.  The program expired on July 3, 2012.  As of June 30, 2012, we repurchased a total of 170,170 shares of
 
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our common stock under this stock repurchase plan at a total cost of $0.7 million and an average cost of $4.02 per share and no additional shares were repurchased up to the expiration date.
 
Contractual Commitments
 
As of June 30, 2012, we had the following material contractual obligations (dollars in thousands):
 
 	 	Payments Due by Period (1)	 	
Contractual Obligations	 	2012	 	2013	 	2014	 	2015	 	2016	 	Thereafter	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repurchase agreements and credit facilities	 	$	55,363	 	$	71,935	 	$	—	 	$	—	 	$	—	 	$	—	 	$	127,298	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Collateralized debt obligations (2)	 	45,870	 	153,265	 	263,096	 	108,758	 	232,356	 	106,861	 	910,206	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Junior subordinated notes (3)	 	—	 	—	 	—	 	—	 	—	 	175,858	 	175,858	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Notes payable	 	3,300	 	—	 	—	 	—	 	50,158	 	—	 	53,458	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mortgage note payable — real estate owned (4)	 	—	 	—	 	53,751	 	—	 	—	 	—	 	53,751	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Outstanding unfunded commitments (5)	 	7,887	 	1,922	 	1,897	 	1,632	 	584	 	22	 	13,944	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Totals	 	$	112,420	 	$	227,122	 	$	318,744	 	$	110,390	 	$	283,098	 	$	282,741	 	$	1,334,515	 	

(1)	 	Represents principal amounts due based on contractual maturities. Does not include total projected interest payments on our debt obligations of $13.5 million in 2012, $24.9 million in 2013, $21.0 million in 2014, $14.9 million in 2015, $11.4 million in 2016 and $99.3 million thereafter based on current LIBOR rates.	
 	 	 	
(2)	 	Comprised of $164.1 million of CDO I debt, $251.1 million of CDO II debt and $495.0 million of CDO III debt with a weighted average remaining maturity of 2.12, 2.53 and 2.49 years, respectively, as of June 30, 2012. The balance of estimated interest due through maturity on CDO bonds reissued in 2010, which is included in the carrying values of the CDOs, totaled $21.2 million at June 30, 2012. During the six months ended June 30, 2012, we repurchased, at a discount, $57.2 million of investment grade notes originally issued by our CDO II and CDO III issuers and recorded a reduction of the outstanding debt balance of $57.2 million.	
 	 	 	
(3)	 	Represents the face amount due upon maturity. The carrying value is $158.5 million, which is net of a deferred amount of $17.4 million at June 30, 2012.	
 	 	 	
(4)	 	Represents a $55.4 million mortgage note payable with a contractual maturity in 2014, related to a real estate investment purchased out of bankruptcy in March 2011, which was paid down in the second quarter of 2011 and had a balance of $53.8 million at June 30, 2012.	
 	 	 	
(5)	 	In accordance with certain loans and investments, we have outstanding unfunded commitments of $13.9 million as of June 30, 2012, that we are obligated to fund as the borrowers meet certain requirements. Specific requirements include, but are not limited to, property renovations, building construction, and building conversions based on criteria met by the borrower in accordance with the loan agreements. In relation to the $13.9 million outstanding balance at June 30, 2012, our restricted cash balance and CDO III revolver capacity contained approximately $9.1 million available to fund the portion of the unfunded commitments for loans financed by our CDO vehicles.	
 
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Management Agreement
 
We, ARLP and Arbor Realty SR, Inc. have a management agreement with ACM, pursuant to which ACM provides certain services and we pay ACM a base management fee and under certain circumstances, an annual incentive fee.
 
The base management fee is an arrangement whereby we reimburse ACM for its actual costs incurred in managing our business based on the parties’ agreement in advance on an annual budget with subsequent quarterly true-ups to actual costs.  The 2011 base management fees was $8.3 million and the 2012 base management fee is estimated to be approximately $10.0 million.  All origination fees on investments are retained by us.
 
The incentive fee is calculated as (1) 25% of the amount by which (a) our funds from operations per share, adjusted for certain gains and losses including gains from the retirement and restructuring of debt and 60% of any loan loss reserve recoveries (spread over a three year period), exceeds (b) the product of (x) 9.5% per annum or the Ten Year U.S. Treasury Rate plus 3.5%, whichever is greater, and (y) the greater of $10.00 or the weighted average of book value of the net assets contributed by ACM to ARLP per ARLP partnership unit, the offering price per share of our common equity in the private offering on July 1, 2003 and subsequent offerings and the issue price per ARLP partnership unit for subsequent contributions to ARLP, multiplied by (2) the weighted average of our outstanding shares.
 
The minimum return, or incentive fee hurdle, to be reached before an incentive fee is earned, is a percentage applied on a per share basis to the greater of $10.00 or the average gross proceeds per share.  In addition, 60% of any loan loss and other reserve recoveries are eligible to be included in the incentive fee calculation, which recoveries are spread over a three year period.
 
The management agreement also allows us to consider, from time to time, the payment of additional “success-based” fees to ACM for accomplishing certain specified corporate objectives; has a termination fee of $10.0 million; and is renewable automatically for successive one-year terms, unless terminated with six months prior written notice.
 
We incurred $2.5 million and $5.0 million of base management fees for services rendered in the three and six months ended June 30, 2012, respectively, and $2.1 million and $4.0 million of base management fees for services rendered in the three and six months ended June 30, 2011, respectively.  For the three and six months ended June 30, 2012 and 2011, ACM did not earn an incentive fee installment and no success-based payments were made.
 
The incentive fee is measured on an annual basis.  However, when applicable, we will pay the annual incentive fee in quarterly installments, each within 60 days of the end of each fiscal quarter.  The calculation of each installment is based on results for the twelve months ending on the last day of the fiscal quarter for which the installment is payable.  These installments of the annual incentive fee are deemed to be an advance subject to potential reconciliation at the end of such fiscal year, and any overpayments are required to be repaid in accordance with the amended management agreement.  Subject to the ownership limitations in our charter, at least 25% of this incentive fee is payable to our manager in shares of our common stock having a value equal to the average closing price per share for the last twenty days of the fiscal quarter for which the incentive fee is being paid.
 
The incentive fee is accrued as it is earned.  The expense incurred for the incentive fee paid in common stock is determined using the valuation method described above and the quoted market price of our common stock on the last day of each quarter.  At December 31 of each year, we remeasure the incentive fee paid to ACM in the form of common stock in accordance with current accounting guidance, which discusses how to determine the expense when certain terms are not known prior to the measurement date.  Accordingly, any expense recorded for such common stock is adjusted to reflect the fair value of the common stock on the measurement date when the final calculation of the total incentive fee is determined.  In the event that the incentive fee for the full year is an amount less than the total of the installment payments made to ACM for the year, ACM will refund the amount of such overpayment to us in cash regardless of whether such installments were paid in cash or common stock.  In such a case, we would record a negative incentive fee expense in the quarter when such overpayment is determined.
 
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Additionally, in 2007, ACM received an incentive fee installment totaling $19.0 million which was recorded as a prepaid management fee related to the incentive fee on $77.1 million of deferred revenue recognized on the transfer of control of the 450 West 33 rd  Street property, one of our equity affiliates.
 
Related Party Transactions
 
Due from related party was $0.2 million and $0.7 million at June 30, 2012 and December 31, 2011, respectively, and consisted primarily of escrows held by ACM and its affiliates related to real estate transactions.
 
Due to related party was $1.9 million at June 30, 2012 and consisted primarily of base management fees due to ACM, of which $0.7 million will be remitted by us in the third quarter of 2012.  At December 31, 2011, due to related party was $2.7 million and consisted primarily of base management fees due to ACM, which were remitted by us in the first quarter of 2012.
 
In December 2011, we completed a restructuring of a $67.6 million preferred equity loan on the Lexford Portfolio (“Lexford”), which is a portfolio of multi-family assets.  We, along with a consortium of independent outside investors, made an additional preferred equity investment of $25.0 million in Lexford, of which we hold a $10.5 million interest, and Mr. Fred Weber, our Executive Vice President of Structured Finance, holds a $0.5 million interest, at June 30, 2012.  The original preferred equity investment now bears a fixed rate of interest of 2.36%, revised from an original rate of LIBOR plus 5.00% (the loan was paying a modified rate of LIBOR plus 1.65% at the time of the new investment).  The original preferred equity investment matures in June 2020.  The new preferred equity investment has a fixed interest rate of 12% and also matures in June 2020.  We, along with the same outside investors, also made a $0.1 million equity investment into Lexford, of which we hold a $44,000 noncontrolling interest, and do not have the power to control the significant activities of the entity.  During the fourth quarter of 2011, we recorded losses from the entity against the equity investment, reducing the balance to zero.  We record this investment under the equity method of accounting.  In addition, under the terms of the restructuring, Lexford’s first mortgage lender required a change of property manager for the underlying assets.  The new management company is an affiliate of Mr. Ivan Kaufman, our chairman and chief executive officer, and has a contract with the new entity for 7.5 years and will be entitled to 4.75% of gross revenues of the underlying properties, along with the potential to share in the proceeds of a sale or refinancing of the debt should the management company remain engaged by the new entity at the time of such capital event.  In the first quarter of 2012, Mr. Fred Weber invested $250,000 in the new management company for a 25% ownership interest.
 
During the second quarter of 2011, we originated a loan to a third party borrower for a portfolio of properties with an unpaid principal balance of $24.4 million as of June 30, 2012, of which, one property in the portfolio was previously financed with an $11.7 million loan that was purchased by ACM, our manager.  The $11.7 million loan was repaid as part of the $24.4 million loan on the portfolio.  The new loan has a maturity date of May 2016 and a variable interest rate of LIBOR plus 4.75%.
 
During the first quarter of 2011, we originated four mortgage loans totaling $28.4 million to borrowers which were secured by property purchased from ACM, our manager, or its affiliate.  Two of the loans totaling $22.4 million have maturity dates of March 2014 and a combined weighted average variable interest rate of 6.23% as of June 30, 2012 and were secured by the same property.  The third was a $2.0 million bridge loan with a maturity date of February 2013 and an interest rate of one-month LIBOR plus 6.00%.  The fourth was a $4.0 million bridge loan with a maturity date in April 2013 and an interest rate of one-month LIBOR plus 6.00%.
 
In October 2010, we purchased, at par, a $4.7 million bridge loan from ACM.  The loan was originated by ACM in June 2010 to a joint venture that acquired a condo development property in Brooklyn, New York.  The loan bore interest at a rate of one-month LIBOR plus 8% with a LIBOR floor of 0.5% and a LIBOR cap of 1.5% and had a maturity date of June 2012.  In the second quarter of 2012, the loan matured and was paid off.  In addition, ACM contributed $0.9 million for a 50% non-controlling interest in an entity, which owns 28% of this joint venture.  In the third quarter of 2011, ACM sold its investment in this joint venture to an affiliated entity of Mr. Ivan Kaufman for $0.9 million.
 
We are dependent upon our manager, ACM, with whom we have a conflict of interest, to provide services to us that are vital to our operations.  Our chairman, chief executive officer and president, Mr. Ivan Kaufman, is also
 
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the chief executive officer and president of our manager, and, our chief financial officer and treasurer, Mr. Paul Elenio, is the chief financial officer of our manager.  In addition, Mr. Kaufman and his affiliated entities (the “Kaufman Entities”) together beneficially own approximately 92% of the outstanding membership interests of ACM and certain of our employees and directors also hold an ownership interest in ACM.  Furthermore, one of our former directors is general counsel to ACM and another of our directors also serves as the trustee of one of the Kaufman Entities that holds a majority of the outstanding membership interests in ACM and co-trustee of another Kaufman Entity that owns an equity interest in our manager.  ACM currently holds approximately 5.3 million of our common shares, representing approximately 19% of the voting power of our outstanding stock as of June 30, 2012.  Our Board of Directors approved a resolution under our charter allowing Ivan Kaufman and ACM, (which Mr. Kaufman has a controlling equity interest in), to own more than the ownership interest limit of our common stock as stated in our charter as amended.  In May 2012, our charter was amended to lower each of the general aggregate stock ownership limit and the general common stock ownership limit from 7% to 5% unless an exemption is granted by our Board of Directors.
 
Non-GAAP Financial Measures
 
Funds from Operations
 
We are presenting funds from operations (“FFO”) because we believe it to be an important supplemental measure of our operating performance in that it is frequently used by analysts, investors and other parties in the evaluation of real estate investment trusts (REITs).  The revised White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, in April 2002 defines FFO as net income (loss) attributable to Arbor Realty Trust, Inc. (computed in accordance with generally accepted accounting principles in the United States (“GAAP”)), excluding gains (losses) from sales of depreciated real properties, plus impairments of depreciated properties and real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.  We consider gains and losses on the sales of undepreciated real estate investments to be a normal part of our recurring operating activities in accordance with GAAP and should not be excluded when calculating FFO.  In accordance with the revised white paper, losses from discontinued operations are not excluded when calculating FFO.
 
FFO is not intended to be an indication of our cash flow from operating activities (determined in accordance with GAAP) or a measure of our liquidity, nor is it entirely indicative of funding our cash needs, including our ability to make cash distributions.  Our calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited.
 
FFO for the three and six months ended June 30, 2012 and 2011 are as follows:
 
 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	 	
(Unaudited)	 	2012	 	2011	 	2012	 	2011	 	
Net income (loss) attributable to Arbor Realty Trust, Inc.	 	$	15,546,018	 	$	(10,354,735	)	$	19,707,798	 	$	(10,087,586	)	
Subtract:	 	 	 	 	 	 	 	 	 	
Gain on sale of real estate held-for-sale	 	—	 	—	 	(3,487,145	)	—	 	
Add:	 	 	 	 	 	 	 	 	 	
Loss on impairment of real estate held-for-sale	 	—	 	750,000	 	—	 	750,000	 	
Depreciation — real estate owned and held-for-sale (1)	 	1,540,217	 	1,898,034	 	2,716,972	 	2,330,499	 	
Depreciation — investment in equity affiliates	 	26,936	 	—	 	53,871	 	—	 	
Funds from operations (“FFO”)	 	$	17,113,171	 	$	(7,706,701	)	$	18,991,496	 	$	(7,007,087	)	
 	 	 	 	 	 	 	 	 	 	
Diluted FFO per common share	 	$	0.68	 	$	(0.30	)	$	0.77	 	$	(0.28	)	
Diluted weighted average shares outstanding	 	25,267,459	 	25,440,380	 	24,805,807	 	25,202,248	 	

(1)        Includes discontinued operations.
 
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Adjusted Book Value
 
We believe that adjusted book value per share is an additional appropriate measure given the magnitude and the deferral structure of the 450 West 33rd Street transaction from 2007, as well as the changes in the fair value of certain derivative instruments.  Adjusted book value per share currently reflects the future impact of the 450 West 33rd Street transaction on our financial condition as well as the evaluation of our operating results without the effects of unrealized losses from certain of our derivative instruments.  We consider this non-GAAP financial measure to be an effective indicator of our financial performance for both us and our investors.  We do not advocate that investors consider this non-GAAP financial measure in isolation from, or as a substitute for, financial measures prepared in accordance with GAAP.  In addition, GAAP book value per share and adjusted book value per share calculations do not take into account any dilution from the potential exercise of the warrants issued to Wachovia as part of the 2009 debt restructuring.
 
GAAP book value per share and adjusted book value per share as of June 30, 2012 and December 31, 2011 is as follows:
 
 	 	June 30, 2012	 	December 31, 2011	 	
 	 	 	 	 	 	
GAAP Arbor Realty Trust, Inc. Stockholders’ Equity	 	$	210,459,835	 	$	171,126,405	 	
 	 	 	 	 	 	
Add: 450 West 33rd Street transaction — deferred revenue	 	77,123,133	 	77,123,133	 	
 	 	 	 	 	 	
Unrealized loss on derivative instruments	 	41,880,177	 	45,888,654	 	
 	 	 	 	 	 	
Subtract: 450 West 33rd Street transaction — prepaid management fee	 	(19,047,949	)	(19,047,949	)	
 	 	 	 	 	 	
Adjusted Arbor Realty Trust, Inc. Stockholders’ Equity	 	$	310,415,196	 	$	275,090,243	 	
 	 	 	 	 	 	
Adjusted book value per share	 	$	11.19	 	$	11.32	 	
 	 	 	 	 	 	
GAAP book value per share	 	$	7.58	 	$	7.04	 	
 	 	 	 	 	 	
Common shares outstanding	 	27,749,225	 	24,298,140	 	
 
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Item 3.             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and real estate values.  The primary market risks that we are exposed to are real estate risk and interest rate risk.
 
Market Conditions
 
We are subject to market changes in the debt and secondary mortgage markets.  These markets have experienced disruptions, which have and may in the future have an adverse impact on our earnings and financial condition.
 
Current conditions in the debt markets include reduced liquidity and increased risk adjusted premiums.  These conditions may increase the cost and reduce the availability of debt.  We attempt to mitigate the impact of debt market disruptions by obtaining adequate debt facilities from a variety of financing sources.  There can be no assurance, however, that we will be successful in these efforts, that such debt facilities will be adequate or that the cost of such debt facilities will be at similar terms.
 
The secondary mortgage markets are still experiencing disruptions resulting from reduced investor demand for collateralized debt obligations and increased investor yield requirements for these obligations.  In light of these conditions, we currently expect to finance a majority of our loan and investment portfolio with our current capital and debt facilities.
 
Real Estate Risk
 
Commercial mortgage assets may be viewed as exposing an investor to greater risk of loss than residential mortgage assets since such assets are typically secured by larger loans to fewer obligors than residential mortgage assets.  Multi-family and commercial property values and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, events such as natural disasters including hurricanes and earthquakes, acts of war and/or terrorism (such as the events of September 11, 2001) and others that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investment; national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; construction quality, construction delays, construction cost, age and design; demographic factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs).  In the event net operating income decreases, a borrower may have difficulty repaying our loans, which could result in losses to us.  In addition, decreases in property values reducing the value of collateral, and a lack of liquidity in the market, could reduce the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.  Even when the net operating income is sufficient to cover the related property’s debt service, there can be no assurance that this will continue to be the case in the future.
 
Interest Rate Risk
 
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
 
Our operating results will depend in large part on differences between the income from our loans and our borrowing costs.  Most of our loans and borrowings are variable-rate instruments, based on LIBOR.  The objective of this strategy is to minimize the impact of interest rate changes on our net interest income.  In addition, we have various fixed rate loans in our portfolio, which are financed with variable rate LIBOR borrowings.  We have entered into various interest swaps (as discussed below) to hedge our exposure to interest rate risk on our variable rate LIBOR borrowings as it relates to our fixed rate loans.  Certain of these swaps are scheduled to mature on the original maturity dates of their corresponding loans.  However, loans are sometimes extended and, consequently, do not pay off on their original maturity dates.  If a loan is extended, whether it is through an existing extension option or a modification, our exposure to interest rate risk may be increased.  In these instances, we could have a fixed rate loan in our portfolio financed with variable debt and, since the corresponding interest swap already matured, a
 
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portion of our debt is no longer protected against interest rate risk.  Some of our loans and borrowings are subject to various interest rate floors.  As a result, the impact of a change in interest rates may be different on our interest income than it is on our interest expense.
 
We utilize interest rate swaps to limit interest rate risk.  Derivatives are used for hedging purposes rather than speculation.  Also, in certain circumstances, we may finance the purchase of RMBS investments through a repurchase agreement with the same counterparty which may qualify as a linked transaction.  If both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed to be linked transactions unless certain criteria are met, and the Company accounts for the purchase of such securities and the repurchase agreement on a combined basis as a forward contract derivative.  We do not enter into financial instruments for trading purposes.
 
One month LIBOR approximated 0.25% at June 30, 2012 and 0.30% at December 31, 2011.
 
Based on our loans, securities available-for-sale, securities held-to-maturity and liabilities as of June 30, 2012, and assuming the balances of these loans, securities and liabilities remain unchanged for the subsequent twelve months, a 0.25% increase in LIBOR would decrease our annual net income and cash flows by approximately $0.1 million.  This is primarily due to a substantial portion of our portfolio having variable interest rates, partially offset by various interest rate floors that are in effect at a rate that is above a 0.25% increase in LIBOR which would limit the effect of a 0.25% increase, and increased expense on variable rate debt, partially offset by our interest rate swaps that effectively convert a portion of the variable rate LIBOR based debt, as it relates to certain fixed rate assets, to a fixed basis that is not subject to a 0.25% increase.  Based on the loans, securities available-for-sale, securities held-to-maturity and liabilities as of June 30, 2012, and assuming the balances of these loans, securities and liabilities remain unchanged for the subsequent twelve months, a 0.25% decrease in LIBOR would increase our annual net income and cash flows by approximately $0.5 million.  This is primarily due to various interest rate floors which limit the effect of a decrease on interest income and decreased expense on variable rate debt, partially offset by our interest rate swaps that effectively converted a portion of the variable rate LIBOR based debt, as it relates to certain fixed rate assets, to a fixed basis that is not subject to a 0.25% decrease.
 
Based on our loans, securities available-for-sale, securities held-to-maturity and liabilities as of December 31, 2011, and assuming the balances of these loans, securities and liabilities remain unchanged for the subsequent twelve months, a 0.25% increase in LIBOR would increase our annual net income and cash flows by approximately $0.3 million.  This is primarily due to a substantial portion of our portfolio having variable interest rates, partially offset by various interest rate floors that are in effect at a rate that is above a 0.25% increase in LIBOR which would limit the effect of a 0.25% increase, and increased expense on variable rate debt, partially offset by our interest rate swaps that effectively convert a portion of the variable rate LIBOR based debt, as it relates to certain fixed rate assets, to a fixed basis that is not subject to a 0.25% increase.  Based on the loans, securities available-for-sale, securities held-to-maturity and liabilities as of December 31, 2011, and assuming the balances of these loans, securities and liabilities remain unchanged for the subsequent twelve months, a 0.25% decrease in LIBOR would increase our annual net income and cash flows by approximately $0.1 million.  This is primarily due to various interest rate floors which limit the effect of a decrease on interest income and decreased expense on variable rate debt, partially offset by our interest rate swaps that effectively converted a portion of the variable rate LIBOR based debt, as it relates to certain fixed rate assets, to a fixed basis that is not subject to a 0.25% decrease.
 
In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results.  Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.
 
In connection with our CDOs described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we entered into interest rate swap agreements to hedge the exposure to the risk of changes in the difference between three-month LIBOR and one-month LIBOR interest rates.  These interest rate swaps became necessary due to the investor’s return being paid based on a three-month LIBOR index while the assets contributed to the CDOs are yielding interest based on a one-month LIBOR index.
 
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We had eight of these interest rate swap agreements outstanding that had combined notional values of $634.5 million as of June 30, 2012 compared to nine of these interest rate swap agreements outstanding with combined notional values of $854.1 million as of December 31, 2011.  The market value of these interest rate swaps is dependent upon existing market interest rates and swap spreads, which change over time.  If there were a 25 basis point increase in forward interest rates as of June 30, 2012 and December 31, 2011, respectively, the value of these interest rate swaps would have decreased by less than $0.1 million for both periods.  If there were a 25 basis point decrease in forward interest rates as of June 30, 2012 and December 31, 2011, respectively, the value of these interest rate swaps would have increased by less than $0.1 million for both periods.
 
We also have interest rate swap agreements outstanding to hedge current and outstanding LIBOR based debt relating to certain fixed rate loans within our portfolio.  We had 16 of these interest rate swap agreements outstanding that had a combined notional value of $337.6 million as of June 30, 2012 compared to 24 interest rate swap agreements outstanding with combined notional values of $515.3 million as of December 31, 2011.  The fair market value of these interest rate swaps is dependent upon existing market interest rates and swap spreads, which change over time.  If there had been a 25 basis point increase in forward interest rates as of June 30, 2012 and December 31, 2011, respectively, the fair market value of these interest rate swaps would have increased by approximately $2.8 million and $3.3 million, respectively.  If there were a 25 basis point decrease in forward interest rates as of June 30, 2012 and December 31, 2011, respectively, the fair market value of these interest rate swaps would have decreased by approximately $2.8 million and $3.3 million, respectively.
 
We also had three LIBOR Caps with a combined notional value of $86.3 million as of June 30, 2012 and December 31, 2011.  If there were a 25 basis point increase in forward interest rates as of June 30, 2012 and December 31, 2011, respectively, the value of the LIBOR Caps would have increased by less than $0.1 million for both periods.  If there were a 25 basis point decrease in forward interest rates as of June 30, 2012 and December 31, 2011, respectively, the value of the LIBOR Caps would have decreased by less than $0.1 million for both periods.
 
We also had five forward contracts due to recording the purchase of three RMBS investments as linked transactions on a combined basis with the related repurchase financing, with a combined fair value of $2.9 million as of June 30, 2012.  We had no forward contracts as of December 31, 2011.  As of June 30, 2012, assuming the balances of the securities and liabilities remain unchanged for the subsequent twelve months, a 0.25% increase in LIBOR would decrease our annual net income and cash flows by approximately $0.1 million, and a 0.25% decrease in LIBOR would increase our annual net income and cash flows by approximately $0.1 million.
 
Certain of our interest rate swaps, which are designed to hedge interest rate risk associated with a portion of our loans and investments, could require the funding of additional cash collateral for changes in the market value of these swaps.  Due to the prolonged volatility in the financial markets that began in 2007, the value of these interest rate swaps have declined substantially.  As a result, at June 30, 2012 and December 31, 2011, we funded approximately $20.8 million and $21.9 million, respectively, in cash related to these swaps.  If we continue to experience significant changes in the outlook of interest rates, these contracts could continue to decline in value, which would require additional cash to be funded.  However, at maturity the value of these contracts return to par and all cash will be recovered.  If we do not have available cash to meet these requirements, this could result in the early termination of these interest rate swaps, leaving us exposed to interest rate risk associated with these loans and investments, which could adversely impact our financial condition.
 
Our hedging transactions using derivative instruments also involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract.  The counterparties to our derivative arrangements are major financial institutions with high credit ratings with which we and our affiliates may also have other financial relationships.  As a result, we do not anticipate that any of these counterparties will fail to meet their obligations.  There can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.
 
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Item 4.   CONTROLS AND PROCEDURES
 
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.  Based upon such evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act of 1934 is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II.  OTHER INFORMATION
 
Item 1.   LEGAL PROCEEDINGS
 
We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us other than the following:
 
On June 15, 2011, three related lawsuits were filed by the Extended Stay Litigation Trust (the “Trust”), a post-bankruptcy litigation trust alleged to have standing to pursue claims that previously had been held by Extended Stay, Inc. and the Homestead Village L.L.C. family of companies (together “ESI”) (formerly Chapter 11 debtors, together the “Debtors”) that have emerged from bankruptcy.  Two of the lawsuits were filed in the United States Bankruptcy Court for the Southern District of New York, and the third in the Supreme Court of the State of New York, New York County.  (The New York State Court action has been removed to the Bankruptcy Court).  There are 73 defendants in the three lawsuits, including 55 corporate and partnership entities and 18 individuals.  A subsidiary of ours and certain other entities that are affiliates of ours are included as defendants.
 
 The lawsuits all allege, as a factual basis and background, certain facts surrounding the June 2007 leveraged buyout of ESI from affiliates of Blackstone Capital.  Our subsidiary, Arbor ESH II, LLC, had a $115.0 million investment in the Series A1 Preferred Units of a holding company of Extended Stay, Inc.  The New York State Court action and one of the two federal court actions name as defendants, Arbor ESH II, LLC, Arbor Commercial Mortgage, LLC and ABT-ESI LLC, an entity in which we have a membership interest, among the broad group of defendants.  These two actions were commenced by substantially identical complaints.  The defendants are alleged in these complaints, among other things, to have breached fiduciary and contractual duties by causing or allowing the Debtors to pay illegal dividends or other improper distributions of value at a time when the Debtors were insolvent.  These two complaints also allege that the defendants aided and abetted, induced, or participated in breaches of fiduciary duty, waste, and unjust enrichment (“Fiduciary Duty Claims”) and name a director of ours, and a former general counsel of Arbor Commercial Mortgage, LLC, each of whom had served on the Board of Directors of ESI for a period of time.  We are defending these two defendants and paying the costs of such defense.  On the basis of the foregoing allegations, the Trust has asserted claims under a number of common law theories, seeking the return of assets transferred by the Debtors prior to the Debtors’ bankruptcy filing.
 
 In the third action, filed in Bankruptcy Court, the same plaintiff, the Trust, has named Arbor Commercial Mortgage, LLC and ABT-ESI LLC, together with a number of other defendants and asserts claims, including constructive and fraudulent conveyance claims under state and federal statutes, as well as a claim under the Federal Debt Collection Procedure Act.
 
The complaints seek among other things, damages of not less than $2.1 billion, plus punitive damages, on a joint and several basis, from each defendant in connection with the Fiduciary Duty Claims and the return of in
 
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excess of $50.0 million which is alleged to have been wrongfully received by the holders of the Series A1 Preferred Units, including Arbor ESH II, LLC.  We have moved to dismiss the referenced actions and intend to vigorously defend against the claims asserted therein.
 
We have not made a loss accrual for this litigation because we believe that is not probable that a loss has been incurred and an amount cannot be reasonably estimated.
 
Item 1A.  RISK FACTORS
 
There have been no material changes to the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.
 
Item 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Share Repurchases
 
During the three months ended June 30, 2012, we made the following purchases of shares of our common stock that are registered pursuant to Section 12(b) of the Securities Exchange Act of 1934.
 
Period	 	Total Number
of Shares
Purchased	 	Average Price
Paid per Share	 	Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs	 	Maximum
Number of
Shares that May
Yet be
Purchased Under
the Plan (1)	 	
 	 	 	 	 	 	 	 	 	 	
April 1, 2012 through April 30, 2012	 	—	 	—	 	—	 	329,830	 	
 	 	 	 	 	 	 	 	 	 	
May 1, 2012 through May 31, 2012	 	—	 	—	 	—	 	329,830	 	
 	 	 	 	 	 	 	 	 	 	
June 1, 2012 through June 30, 2012	 	—	 	—	 	—	 	329,830	 	

(1)  On December 20, 2011, we announced that the Board of Directors authorized a stock repurchase plan that enables us to buy up to 0.5 million shares of our common stock.  At management’s discretion, shares may be acquired from time to time on the open market, through privately negotiated transactions or pursuant to a Rule 10b5-1 plan.  A Rule 10b5-1 plan permits us to repurchase shares at times when we might otherwise be prevented from doing so.  The program expired on July 3, 2012.  As of June 30, 2012, we had repurchased a total of 170,170 shares of our common stock under this stock repurchase plan at a total cost of $0.7 million and an average cost of $4.02 per share and no additional shares were repurchased up to the expiration date.
 
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Item 3.   DEFAULTS UPON SENIOR SECURITIES
 
None.
 
Item 4.  RESERVED

Item 5.   OTHER INFORMATION
 
None.
 
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Item 6.   EXHIBITS
 
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Arbor or the other parties to the agreements.  The agreements contain representations and warranties by each of the parties to the applicable agreement.  These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
 
· should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
 
· have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
 
· may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
 
· were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
 
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.  Additional information about Arbor may be found elsewhere in this report and Arbor’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
 
Exhibit	 	 	
Number	 	Description	
3.1	 	 	Articles of Incorporation of Arbor Realty Trust, Inc. *	
3.2	 	 	Articles of Amendment to Articles of Incorporation of Arbor Realty Trust, Inc. ▲	
3.3	 	 	Articles Supplementary of Arbor Realty Trust, Inc. *	
3.4	 	 	Amended and Restated Bylaws of Arbor Realty Trust, Inc. ▲▲	
4.1	 	 	Form of Certificate for Common Stock. *	
4.2	 	 	Common Stock Purchase Warrant, Certificate No. W-1, dated July 23, 2009, issued to Wachovia Bank, National Association. ·	
4.3	 	 	Common Stock Purchase Warrant, Certificate No. W-2, dated July 23, 2009, issued to Wachovia Bank, National Association. ·	
4.4	 	 	Common Stock Purchase Warrant, Certificate No. W-3, dated July 23, 2009, issued to Wachovia Bank, National Association. ·	
10.1	 	 	Second Amended and Restated Management Agreement, dated August 6, 2009, by and among Arbor Realty Trust, Inc., Arbor Commercial Mortgage, LLC, Arbor Realty Limited Partnership and Arbor Realty SR, Inc. vvv	
10.2	 	 	Services Agreement, dated July 1, 2003, by and among Arbor Realty Trust, Inc., Arbor Commercial Mortgage, LLC and Arbor Realty Limited Partnership. *	
10.3	 	 	Non-Competition Agreement, dated July 1, 2003, by and among Arbor Realty Trust, Inc., Arbor Realty Limited Partnership and Ivan Kaufman. *	
10.4	 	 	Second Amended and Restated Agreement of Limited Partnership of Arbor Realty Limited Partnership, dated January 18, 2005, by and among Arbor Commercial Mortgage, LLC, Arbor Realty Limited Partnership, Arbor Realty LPOP, Inc. and Arbor Realty GPOP, Inc. †	
10.5	 	 	Registration Rights Agreement, dated July 1, 2003, between Arbor Realty Trust, Inc. and Arbor Commercial Mortgage, LLC. *	
10.6	 	 	Pairing Agreement, dated July 1, 2003, by and among Arbor Realty Trust, Inc., Arbor Commercial Mortgage, LLC, Arbor Realty Limited Partnership, Arbor Realty LPOP, Inc. and Arbor Realty GPOP, Inc. *	
10.7	 	 	2003 Omnibus Stock Incentive Plan, (as amended and restated on June 18, 2009).vvv	
10.8	 	 	Form of Restricted Stock Agreement. *	
10.9	 	 	Benefits Participation Agreement, dated July 1, 2003, between Arbor Realty Trust, Inc. and Arbor	
 
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 	 	 	Management, LLC. *	
10.10	 	 	Form of Indemnification Agreement. *	
10.11	 	 	Structured Facility Warehousing Credit and Security Agreement, dated July 1, 2003, between Arbor Realty Limited Partnership and Residential Funding Corporation. *	
10.12	 	 	Amended and Restated Loan Purchase and Repurchase Agreement, dated July 12, 2004, by and among Arbor Realty Funding LLC, as seller, Wachovia Bank, National Association, as purchaser, and Arbor Realty Trust, Inc., as guarantor. **	
10.13	 	 	Master Repurchase Agreement, dated as of November 18, 2002, by and between Nomura Credit and Capital, Inc. and Arbor Commercial Mortgage, LLC. *	
10.14	 	 	Revolving Credit Facility Agreement, dated as of December 7, 2004, by and between Arbor Realty Trust, Inc., Arbor Realty Limited Partnership and Watershed Administrative LLC and the lenders named therein. †	
10.15	 	 	Indenture, dated January 19, 2005, by and between Arbor Realty Mortgage Securities Series 2004-1, Ltd., Arbor Realty Mortgage Securities Series 2004-1 LLC, Arbor Realty SR, Inc. and LaSalle Bank National Association. †	
10.16	 	 	Indenture, dated January 11, 2006, by and between Arbor Realty Mortgage Securities Series 2005-1, Ltd., Arbor Realty Mortgage Securities Series 2005-1 LLC, Arbor Realty SR, Inc. and LaSalle Bank National Association. ‡	
10.17	 	 	Master Repurchase Agreement, dated as of October 26, 2006, by and between Column Financial, Inc. and Arbor Realty SR, Inc. and Arbor TRS Holding Company Inc., as sellers, Arbor Realty Trust, Inc., Arbor Realty Limited Partnership, as guarantors, and Arbor Realty Mezzanine LLC. ‡‡	
10.18	 	 	Note Purchase Agreement, dated January 19, 2005, by and between Arbor Realty Mortgage Securities Series 2004-1, Ltd., Arbor Realty Mortgage Securities Series 2004-1 LLC and Wachovia Capital Markets, LLC. †	
10.19	 	 	Note Purchase Agreement, dated January 11, 2006, by and between Arbor Realty Mortgage Securities Series 2005-1, Ltd., Arbor Realty Mortgage Securities Series 2005-1 LLC and Wachovia Capital Markets, LLC. ‡	
10.20	 	 	Indenture, dated December 14, 2006, by and between Arbor Realty Mortgage Securities Series 2006-1, Ltd., Arbor Realty Mortgage Securities Series 2006-1 LLC, Arbor Realty SR, Inc. and Wells Fargo Bank, National Association. w	
10.21	 	 	Note Purchase and Placement Agreement, dated December 14, 2006, by and between Arbor Realty Mortgage Securities Series 2006-1, Ltd., Arbor Realty Mortgage Securities Series 2006-1 LLC and Wachovia Capital Markets, LLC and Credit Suisse Securities (USA) LLC. w	
10.22	 	 	Note Purchase Agreement, dated December 14, 2006, by and between Arbor Realty Mortgage Securities Series 2006-1, Ltd., Arbor Realty Mortgage Securities Series 2006-1 LLC and Wells Fargo Bank, National Association. w	
10.23	 	 	Master Repurchase Agreement, dated as of March 30, 2007, by and between Variable Funding Capital Company LLC, as purchaser, Wachovia Bank, National Association, as swingline purchaser, Wachovia Capital Markets, LLC, as deal agent, Arbor Realty Funding LLC, Arbor Realty Limited Partnership and ARSR Tahoe, LLC, as sellers, Arbor Realty Trust, Inc., Arbor Realty Limited Partnership and Arbor Realty SR, Inc., as guarantors. ww	
10.24	 	 	Credit Agreement, dated November 6, 2007, by and between Arbor Realty Funding, LLC, ARSR Tahoe, LLC, Arbor Realty Limited Partnership, and ART 450 LLC, as Borrowers, Arbor Realty Trust, Inc., Arbor Realty Limited Partnership, and Arbor Realty SR, Inc., as Guarantors, and Wachovia Bank, National Association, as Administrative Agent. www	
10.25	 	 	Equity Placement Program Sales Agreement, dated August 15, 2008, between Arbor Realty Trust, Inc. and JMP Securities LLC. v	
10.26	 	 	Junior Subordinated Indenture, dated May 6, 2009, between Arbor Realty SR, Inc. and The Bank of New York Mellon Trust Company, National Association, as Trustee relating to $29,400,000 aggregate principal amount of Junior Subordinated Notes due 2034. vv	
10.27	 	 	Junior Subordinated Indenture, dated May 6, 2009, between Arbor Realty SR, Inc. and The Bank of New York Mellon Trust Company, National Association, as Trustee relating to $168,000,000 aggregate principal amount of Junior Subordinated Notes due 2034. vv	
10.28	 	 	Junior Subordinated Indenture, dated May 6, 2009, among Arbor Realty SR, Inc. Arbor Realty Trust, Inc., as Guarantor, and Wilmington Trust Company, as Trustee, relating to $21,224,000 aggregate principal amount of Junior Subordinated Notes due 2035. vv	
 
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10.29	 	 	Junior Subordinated Indenture, dated May 6, 2009, among Arbor Realty SR, Inc. Arbor Realty Trust, Inc., as Guarantor, and Wilmington Trust Company, as Trustee, relating to $2,632,000 aggregate principal amount of Junior Subordinated Notes due 2036. vv	
10.30	 	 	Junior Subordinated Indenture, dated May 6, 2009, among Arbor Realty SR, Inc. Arbor Realty Trust, Inc., as Guarantor, and Wilmington Trust Company, as Trustee, relating to $47,180,000 aggregate principal amount of Junior Subordinated Notes due 2037. vv	
10.31	 	 	Exchange Agreement, datedMay 6, 2009, among Arbor Realty Trust, Inc., Arbor Realty SR, Inc., Kodiak CDO II, Ltd., Attentus CDO I, Ltd. and Attentus CDO III, Ltd. vv	
10.32	 	 	Exchange Agreement, datedMay 6, 2009, among Arbor Realty SR, Inc., Arbor Realty Trust, Inc., Taberna Preferred Funding I, Ltd., Taberna Preferred Funding II, Ltd., Taberna Preferred Funding III, Ltd., Taberna Preferred Funding IV, Ltd., Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VII, Ltd. and Taberna Preferred Funding VIII, Ltd. vv	
10.33	 	 	First Amended and Restated Credit Agreement, dated as of July 23, 2009, among Arbor Realty Funding, LLC, a Delaware limited liability company, as a Borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a Borrower, Arbor ESH II LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a Borrower and a Guarantor, ART 450 LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Trust, Inc., a Maryland corporation, as a Guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a Borrower and a Guarantor, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder. vvv	
10.34	 	 	First Amended and Restated Revolving Loan Agreement, dated as of July 23, 2009, among Arbor Realty Trust, Inc., a Maryland corporation, Arbor Realty GPOP, Inc., a Delaware corporation, Arbor Realty LPOP, Inc., a Delaware corporation, Arbor Realty Limited Partnership, a Delaware limited partnership, Arbor Realty SR, Inc., a Maryland corporation, Arbor Realty Collateral Management, LLC, as Borrowers, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder and initial lender. vvv	
10.35	 	 	Registration Rights Agreement, dated as of July 23, 2009, by and between Arbor Realty Trust, Inc. and Wachovia Bank, National Association, a national banking association. ·	
10.36	 	 	First Amendment to First Amended and Restated Credit Agreement, dated as of December 16, 2009, among Arbor Realty Funding, LLC, a Delaware limited liability company, as a Borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a Borrower, Arbor ESH II LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a Borrower and a Guarantor, ART 450 LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Trust, Inc., a Maryland corporation, as a Guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a Borrower and a Guarantor, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder. ·	
10.37	 	 	Second Amendment to First Amended and Restated Credit Agreement, dated as of December 24, 2009, among Arbor Realty Funding, LLC, a Delaware limited liability company, as a Borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a Borrower, Arbor ESH II LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a Borrower and a Guarantor, ART 450 LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Trust, Inc., a Maryland corporation, as a Guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a Borrower and a Guarantor, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders and Wells Fargo Bank, National Association, a national banking association, as the custodian. ·	
10.38	 	 	First Amendment to First Amended and Restated Revolving Loan Agreement, dated as of December 24, 2009, among Arbor Realty Trust, Inc., a Maryland corporation, Arbor Realty GPOP, Inc., a Delaware corporation, Arbor Realty LPOP, Inc., a Delaware corporation, Arbor Realty Limited Partnership, a Delaware limited partnership, Arbor Realty SR, Inc., a Maryland corporation, Arbor Realty Collateral Management, LLC, as Borrowers, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder and initial lender. ·	
 
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10.39	 	 	Third Amendment and Waiver to First Amended and Restated Credit Agreement, dated as of January 20, 2010, among Arbor Realty Funding, LLC, a Delaware limited liability company, as a Borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a Borrower, Arbor ESH II LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a Borrower and a Guarantor, ART 450 LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Trust, Inc., a Maryland corporation, as a Guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a Borrower and a Guarantor, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder. ·	
10.40	 	 	Waiver to First Amended and Restated Revolving Loan Agreement, dated as of January 20, 2010, among Arbor Realty Trust, Inc., a Maryland corporation, Arbor Realty GPOP, Inc., a Delaware corporation, Arbor Realty LPOP, Inc., a Delaware corporation, Arbor Realty Limited Partnership, a Delaware limited partnership, Arbor Realty SR, Inc., a Maryland corporation, Arbor Realty Collateral Management, LLC, as Borrowers, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder and initial lender. ·	
10.41	 	 	Second Amendment and Waiver to First Amended and Restated Revolving Loan Agreement, dated as of February 2, 2010, among Arbor Realty Trust, Inc., a Maryland corporation, Arbor Realty GPOP, Inc., a Delaware corporation, Arbor Realty LPOP, Inc., a Delaware corporation, Arbor Realty Limited Partnership, a Delaware limited partnership, Arbor Realty SR, Inc., a Maryland corporation, Arbor Realty Collateral Management, LLC, as Borrowers, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder and initial lender. ·	
10.42	 	 	Fourth Amendment and Waiver to First Amended and Restated Credit Agreement, dated as of February 2, 2010, among Arbor Realty Funding, LLC, a Delaware limited liability company, as a Borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a Borrower, Arbor ESH II LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a Borrower and a Guarantor, ART 450 LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Trust, Inc., a Maryland corporation, as a Guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a Borrower and a Guarantor, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder. ·	
10.43	 	 	Exchange Agreement, dated as of February 26, 2010, among Arbor Realty SR, Inc. and Taberna Preferred Funding I, Ltd., Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VII, Ltd. and Taberna Preferred Funding VIII, Ltd. ·	
10.44	 	 	Revolving Bridge Loan and Security Agreement dated as of July 22, 2011, by and between Capital One, National Association as lender and Arbor Realty SR, Inc. as borrower, and Arbor Realty Trust, Inc. as guarantor. ··	
10.45	 	 	Underwriting Agreement, dated June 7, 2012, by and among Arbor Realty Trust, Inc., Arbor Commercial Mortgage, LLC, Arbor Realty Limited Partnership and Deutsche Bank Securities Inc. ···	
31.1	 	 	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14.	
31.2	 	 	Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14.	
32.1	 	 	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
32.2	 	 	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
101.1	 	 	Financial statements from the Quarterly Report on Form 10-Q of Arbor Realty Trust, Inc. for the quarter ended June 30, 2012, filed on August 3, 2012, formatted in XBRL: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Changes in Equity, (v) the Consolidated Statement of Cash Flows and (vi) the Notes to Consolidated Financial Statements.	
 
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Exhibit Index
 
▲	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.	
 	 	
▲▲	Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K (No. 001-32136) which was filed with the Securities and Exchange Commission on December 11, 2007.	
 	 	
*	Incorporated by reference to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-110472), as amended. Such registration statement was originally filed with the Securities and Exchange Commission on November 13, 2003.	
 	 	
**	Incorporated by reference to the Registrant’s Quarterly Report of Form 10-Q for the quarter ended September 30, 2004.	
 	 	
†	Incorporated by reference to the Registrant’s Annual Report of Form 10-K for the year ended December 31, 2004.	
 	 	
‡	Incorporated by reference to the Registrant’s Annual Report of Form 10-K for the year ended December 31, 2005.	
 	 	
‡‡	Incorporated by reference to the Registrant’s Quarterly Report of Form 10-Q for the quarter ended September 30, 2006.	
 	 	
w	Incorporated by reference to the Registrant’s Annual Report of Form 10-K for the year ended December 31, 2006.	
 	 	
ww	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.	
 	 	
www	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.	
 	 	
v	Incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K (No. 001-32136) which was filed with the Securities and Exchange Commission on August 15, 2008.	
 	 	
vv	Incorporated by reference to the Registrant’s Quarterly Report of Form 10-Q for the quarter ended March 31, 2009.	
 	 	
vvv	Incorporated by reference to the Registrant’s Quarterly Report of Form 10-Q for the quarter ended June 30, 2009.	
 	 	
·	Incorporated by reference to the Registrant’s Annual Report of Form 10-K for the year ended December 31, 2009.	
 	 	
··	Incorporated by reference to the Registrant’s Quarterly Report of Form 10-Q for the quarter ended June 30, 2011.	
 	 	
···	Incorporated by reference to the Registrant’s Current Report on Form 8-K which was filed with the Securities and Exchange Commission on June 12, 2012.	
 
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Arbor or the other parties to the agreements.  The agreements contain representations and warranties by each of the parties to the applicable agreement.  These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
 
· should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
 
· have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
 
· may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
 
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· were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
 
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.  Additional information about Arbor may be found elsewhere in this report and Arbor’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
 
 	ARBOR REALTY TRUST, INC.	
 	(Registrant)	
 	 	
 	By:	/s/ Ivan Kaufman	
 	 	
 	Name:	Ivan Kaufman	
 	Title:	Chief Executive Officer	
 	 	
 	By:	/s/ Paul Elenio	
 	 	
 	Name:	Paul Elenio	
 	Title:	Chief Financial Officer	

Date: August 3, 2012
 
109

EXHIBIT 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
I, Ivan Kaufman, certify that:
 
1.                                     I have reviewed this quarterly report on Form 10-Q of Arbor Realty Trust, Inc.;
 
2.                                     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.                                     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.                                     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)                                    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)                                    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)                                     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)                                    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.                                     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)                                    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)                                    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	August 3, 2012	By:	/s/ Ivan Kaufman	
 	 	 	Name:	Ivan Kaufman	
 	 	 	Title:	Chief Executive Officer	

EXHIBIT 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
 
I, Paul Elenio, certify that:
 
1.                                     I have reviewed this quarterly report on Form 10-Q of Arbor Realty Trust, Inc.;
 
2.                                     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.                                     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.                                     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)                                    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)                                    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)                                     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)                                    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.                                     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)                                    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)                                    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	August 3, 2012	By:	/s/ Paul Elenio	
 	 	Name:	Paul Elenio	
 	 	Title:	Chief Financial Officer	

EXHIBIT 32.1
 
 CERTIFICATION OF CEO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Arbor Realty Trust, Inc. (the “Company”) for the quarterly period ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Ivan Kaufman, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 	By:	/s/ Ivan Kaufman	
 	 	
 	Name:	Ivan Kaufman	
 	Title:	Chief Executive Officer	

Date: August 3, 2012
 
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2
 
CERTIFICATION OF CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Arbor Realty Trust, Inc. (the “Company”) for the quarterly period ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Paul Elenio, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 	By:	/s/ Paul Elenio	
 	 	 	
 	Name:	Paul Elenio	
 	Title:	Chief Financial Officer	

 Date: August 3, 2012
 
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.