ARBOR REALTY TRUST INC - Quarter Report: 2010 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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		(I.R.S. Employer
incorporation)		Identification No.)
333 Earle Ovington Boulevard, Suite 900
Uniondale, NY		11553
(Address of principal executive offices)		(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 þ     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 o     No o

     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.

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ

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: 25,477,410 outstanding (excluding 279,400 shares held in the treasury) as of November 5, 2010.

 

 

ARBOR REALTY TRUST, INC.

FORM 10-Q
INDEX

PART I. FINANCIAL INFORMATION			2
Item 1. Financial Statements			2
Consolidated Balance Sheets at September 30, 2010 (Unaudited) and December 31, 2009			2
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2010 and 2009			3
Consolidated Statement of Changes in Equity (Unaudited) for the Nine Months Ended September 30, 2010			4
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2010 and 2009			5
Notes to the Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			48
Item 3. Quantitative and Qualitative Disclosures about Market Risk			78
Item 4. Controls and Procedures			81
PART II. OTHER INFORMATION			81
Item 1. Legal Proceedings			81
Item 1A. Risk Factors			81
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds			81
Item 3. Defaults Upon Senior Securities			81
Item 4. Reserved			81
Item 5. Other Information			81
Item 6. Exhibits			82
Signatures			87
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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, 2009. 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, 2009.

     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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2010				2009
		(Unaudited)
Assets:
Cash and cash equivalents		$	26,269,001			$	64,624,275
Restricted cash (includes $52,955,412 and $27,935,470 from consolidated VIEs, respectively)			52,955,412				27,935,470
Loans and investments, net (includes $1,272,489,555 and $1,305,593,730 from consolidated VIEs, respectively)			1,501,726,514				1,700,774,288
Available-for-sale securities, at fair value (includes $1,000,000 and $0 from consolidated VIEs, respectively)			1,088,184				488,184
Securities held-to-maturity, net (includes $0 and $60,562,808 from consolidated VIEs, respectively)			—				60,562,808
Investment in equity affiliates			66,913,344				64,910,949
Real estate owned, net (includes $2,716,415 and $2,658,128 from consolidated VIEs, respectively)			23,099,647				8,205,510
Real estate held-for-sale, net			46,977,501				41,440,000
Due from related party (includes $574,099 and $4,165,695 from consolidated VIEs, respectively)			7,866,547				15,240,255
Prepaid management fee — related party			19,047,949				19,047,949
Other assets (includes $15,082,531 and $21,011,295 from consolidated VIEs, respectively)			52,061,017				57,545,084
Total assets		$	1,798,005,116			$	2,060,774,772
Liabilities and Equity:
Repurchase agreements		$	1,478,997			$	2,657,332
Collateralized debt obligations (includes $1,075,753,103 and $1,100,515,185 from consolidated VIEs, respectively)			1,075,753,103				1,100,515,185
Junior subordinated notes to subsidiary trust issuing preferred securities			157,699,816				259,487,421
Notes payable			82,457,708				375,219,206
Mortgage note payable — real estate owned			20,750,000				—
Mortgage note payable — held-for-sale			41,440,000				41,440,000
Due to related party			1,905,097				1,997,629
Due to borrowers (includes $1,298,816 and $2,734,526 from consolidated VIEs, respectively)			3,168,888				6,676,544
Deferred revenue			77,123,133				77,123,133
Other liabilities (includes $42,681,852 and $34,351,469 from consolidated VIEs, respectively)			99,707,733				97,024,352
Total liabilities			1,561,484,475				1,962,140,802
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; 25,756,810 shares issued, 25,477,410 shares outstanding at September 30, 2010 and 25,666,810 shares issued, 25,387,410 shares outstanding at December 31, 2009			257,568				256,668
Additional paid-in capital			450,686,382				450,376,782
Treasury stock, at cost — 279,400 shares			(7,023,361	)			(7,023,361	)
Accumulated deficit			(139,542,492	)			(293,585,378	)
Accumulated other comprehensive loss			(69,803,257	)			(53,331,105	)
Total Arbor Realty Trust, Inc. stockholders’ equity			234,574,840				96,693,606
Noncontrolling interest in consolidated entity			1,945,801				1,940,364
Total equity			236,520,641				98,633,970
Total liabilities and equity		$	1,798,005,116			$	2,060,774,772

See notes to consolidated financial statements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Interest income		$	24,878,523			$	30,416,621			$	74,963,895			$	92,604,628
Interest expense			15,209,936				20,797,420				49,474,664				61,039,357
Net interest income			9,668,587				9,619,201				25,489,231				31,565,271
Other revenue:
Property operating income			806,751				291,753				1,835,344				482,965
Other income			21,876				1,857				1,044,500				800,517
Total other revenue			828,627				293,610				2,879,844				1,283,482
Other expenses:
Employee compensation and benefits			1,853,626				2,136,499				5,754,048				8,038,394
Selling and administrative			1,985,471				4,092,293				5,513,868				8,856,214
Property operating expenses			1,103,712				508,782				2,547,285				834,105
Depreciation and amortization			221,246				26,037				367,956				26,037
Other-than-temporary impairment			—				29,395				7,004,800				411,525
Provision for loan losses (net of recoveries)			11,347,964				51,000,000				61,177,964				141,500,000
Loss on restructured loans			5,363,332				300,000				6,188,571				33,127,749
Management fee — related party			1,900,000				6,136,170				5,800,000				13,136,170
Total other expenses			23,775,351				64,229,176				94,354,492				205,930,194
Loss from continuing operations before gain on exchange of profits interest, gain on extinguishment of debt, loss on sale of securities, net, loss on termination of swaps and income (loss) from equity affiliates			(13,278,137	)			(54,316,365	)			(65,985,417	)			(173,081,441	)
Gain on exchange of profits interest			—				—				—				55,988,411
Gain on extinguishment of debt			11,790,000				6,348,128				229,321,130				54,080,118
Loss on sale of securities, net			—				—				(6,989,583	)			—
Loss on termination of swaps			—				—				—				(8,729,408	)
Income (loss) from equity affiliates			25,588				8,856,060				(47,335	)			(1,300,958	)
(Loss) income before provision for income taxes			(1,462,549	)			(39,112,177	)			156,298,795				(73,043,278	)
Provision for income taxes			—				—				(1,800,000	)			—
(Loss) income from continuing operations			(1,462,549	)			(39,112,177	)			154,498,795				(73,043,278	)
Loss on impairment of real estate held-for-sale			—				(4,898,295	)			—				(4,898,295	)
Income (loss) on operations of real estate held-for-sale			108,555				(65,796	)			(283,382	)			(383,351	)
Income (loss) from discontinued operations			108,555				(4,964,091	)			(283,382	)			(5,281,646	)
Net (loss) income			(1,353,994	)			(44,076,268	)			154,215,413				(78,324,924	)
Net income attributable to noncontrolling interest			54,067				58,694				161,682				18,620,771
Net (loss) income attributable to Arbor Realty Trust, Inc.		$	(1,408,061	)		$	(44,134,962	)		$	154,053,731			$	(96,945,695	)
Basic (loss) earnings per common share:
(Loss) income from continuing operations, net of noncontrolling interest		$	(0.06	)		$	(1.54	)		$	6.06			$	(3.62	)
Income (loss) from discontinued operations			—				(0.20	)			(0.01	)			(0.21	)
Net (loss) income attributable to Arbor Realty Trust, Inc.		$	(0.06	)		$	(1.74	)		$	6.05			$	(3.83	)
Diluted (loss) earnings per common share:
(Loss) income from continuing operations, net of noncontrolling interest		$	(0.06	)		$	(1.54	)		$	6.04			$	(3.62	)
Income (loss) from discontinued operations			—				(0.20	)			(0.01	)			(0.21	)
Net (loss) income attributable to Arbor Realty Trust, Inc.		$	(0.06	)		$	(1.74	)		$	6.03			$	(3.83	)
Dividends declared per common share		$	—			$	—			$	—			$	—
Weighted average number of shares of common stock outstanding:
Basic			25,477,410				25,387,410				25,447,740				25,288,692
Diluted			25,477,410				25,387,410				25,558,270				25,288,692

See notes to consolidated financial statements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Nine Months Ended September 30, 2010
(Unaudited)

																																		Total Arbor
																														Accumulated				Realty Trust,
						Common				Common				Additional				Treasury												Other				Inc.				Non-
		Comprehensive				Stock				Stock				Paid-in				Stock				Treasury				Accumulated				Comprehensive				Stockholders’				controlling
		Income (1)				Shares				Par Value				Capital				Shares				Stock				Deficit				Loss (2)				Equity				Interest				Total
Balance – January 1, 2010							25,666,810			$	256,668			$	450,376,782				(279,400	)		$	(7,023,361	)		$	(293,585,378	)		$	(53,331,105	)		$	96,693,606			$	1,940,364			$	98,633,970
Stock-based compensation							90,000				900				309,600																				310,500								310,500
Distributions – preferred stock of private REIT																											(10,845	)							(10,845	)							(10,845	)
Net income		$	154,215,413																								154,053,731								154,053,731				161,682				154,215,413
Distribution to non-controlling interest																																							(156,245	)			(156,245	)
Unrealized gain on securities available-for-sale			29,395																												29,395				29,395								29,395
Unrealized loss on derivative financial instruments			(39,953,407	)																											(39,953,407	)			(39,953,407	)							(39,953,407	)
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings			23,451,860																												23,451,860				23,451,860								23,451,860
Balance – September 30, 2010		$	137,743,261				25,756,810			$	257,568			$	450,686,382				(279,400	)		$	(7,023,361	)		$	(139,542,492	)		$	(69,803,257	)		$	234,574,840			$	1,945,801			$	236,520,641

See notes to consolidated financial statements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2010 and 2009
(Unaudited)

		Nine Months Ended September 30,
		2010				2009
Operating activities:
Net income (loss)		$	154,215,413			$	(78,324,924	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization			377,837				686,921
Stock-based compensation			310,500				2,414,796
Other-than-temporary impairment			7,004,800				411,525
Gain on exchange of profits interest			—				(55,988,411	)
Gain on extinguishment of debt			(229,321,130	)			(54,080,118	)
Loss on sale of securities			6,989,583				—
Provision for loan losses (net of recoveries)			61,177,964				141,500,000
Loss on restructured loans			6,188,571				33,127,749
Loss on termination of swaps			—				8,729,408
Loss on impairment of real estate held-for-sale			—				4,898,295
Amortization and accretion of interest and fees			6,162,557				4,601,698
Change in fair value of non-qualifying swaps			242,449				5,091,754
Loss from equity affiliates			47,335				1,300,958
Changes in operating assets and liabilities:
Other assets			(106,063	)			19,530,985
Distributions of operations from equity affiliates			67,628				9,879,000
Other liabilities			1,045,407				(10,212,153	)
Deferred fees			512,322				2,699,409
Due from/to related party			290,478				3,967,028
Net cash provided by operating activities		$	15,205,651			$	40,233,920
Investing activities:
Loans and investments funded, originated and purchased, net			(16,804,362	)			(6,928,736	)
Payoffs and paydowns of loans and investments			125,174,049				115,543,729
Deposits received relating to loan held-for-sale			3,000,000				—
Proceeds from sale of loans			14,500,000				23,250,000
Due to borrowers and reserves			568,828				(7,153,352	)
Purchase of securities			(4,481,719	)			(10,670,000	)
Principal collection on securities			271,766				2,516,810
Proceeds from sale of available-for-sale securities			50,678,631				—
Investment in real estate owned, net			(59,475	)			(59,986	)
Contributions to equity affiliates			(2,557,540	)			—
Distributions from equity affiliates			435,939				1,616,316
Net cash provided by investing activities		$	170,726,117			$	118,114,781
Financing activities:
Proceeds from notes payable and repurchase agreements			26,000,000				13,080,633
Payoffs and paydowns of notes payable and repurchase agreements			(160,522,077	)			(177,066,633	)
Payoff of junior subordinated notes to subsidiary trust issuing preferred securities			(10,500,122	)			(1,265,625	)
Payoff of notes payable — related party			—				(4,200,000	)
Proceeds from collateralized debt obligations			5,500,000				500,000
Payoffs and paydowns of collateralized debt obligations			(50,328,430	)			(19,246,596	)
Change in restricted cash			(25,019,942	)			53,513,452
Payments on swaps to hedge counterparties			(19,310,000	)			(61,580,588	)
Receipts on swaps from hedge counterparties			10,490,000				69,085,000
Distributions paid to noncontrolling interest			(156,245	)			(111,630	)
Distributions paid on preferred stock of private REIT			(10,845	)			(7,197	)
Payment of deferred financing costs			(429,381	)			(4,617,514	)
Net cash used in financing activities		$	(224,287,042	)		$	(131,916,698	)
Net (decrease) increase in cash and cash equivalents		$	(38,355,274	)		$	26,432,003
Cash and cash equivalents at beginning of period			64,624,275				832,041
Cash and cash equivalents at end of period		$	26,269,001			$	27,264,044

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Nine Months Ended September 30, 2010 and 2009
(Unaudited)

		Nine Months Ended September 30,
		2010				2009
Supplemental cash flow information:
Cash used to pay interest		$	41,290,321			$	48,967,437
Cash used (refunded) for taxes		$	731,316			$	(78,145	)
Supplemental schedule of non-cash investing and financing activities:
Extinguishment of notes payable		$	159,417,756			$	—
Extinguishment of trust preferred securities		$	102,110,610			$	—
Re-issuance of CDO debt		$	42,304,391			$	—
Accrual of interest on reissued collateralized debt obligations		$	22,941,851			$	—
Available-for-sale securities exchanged		$	400,000			$	—
Investments transferred to available-for-sale securities, at fair value		$	35,814,344			$	—
Unearned discounts recorded on restructured loans		$	7,658,597			$	—
Investment transferred to real estate held-for-sale, net		$	5,537,501			$	41,440,000
Investment in real estate, net		$	20,750,000			$	8,411,013
Assumption of mortgage note payable — real estate owned		$	20,750,000			$	—
Margin calls applied to repurchase agreements		$	—			$	4,845,810
Termination of swap		$	—			$	17,034,929
Retirement of common equity in trust preferred securities		$	—			$	7,727,000

See notes to consolidated financial statements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(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, par value $0.01 per share, and 100 million shares of preferred stock, par value $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 estimated offering expenses. The Company used the proceeds to pay down 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, the (“Warrant Agreement”) 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 the other estimated 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

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(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.

     The Company had 25,477,410 shares of common stock outstanding at September 30, 2010 and 25,387,410 shares of common stock outstanding at December 31, 2009.

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 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 impact the VIE’s economic performance and (ii) has the right to receive the majority of expected returns or the obligation to absorb the majority of expected losses. Updated 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. Interest income and interest expense were netted on the Company’s Consolidated Statements of Operations in accordance with Article 9 of Regulation S-X due to the relevance in understanding its operations. In addition, one of the Company’s real estate investments was reclassified from real estate owned to real estate held-for-sale at September 30, 2010 which resulted in a reclassification from property operating income and expenses to discontinued operations for all prior period presentations. Also, recent accounting guidance, effective at the beginning of 2010, requires expanded disclosure of VIEs to include assets and liabilities of the Company’s CDOs on its Consolidated Balance Sheets as described above.

     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

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

estimates. Further, in connection with preparation of the consolidated interim financial statements, the Company evaluated subsequent events after the balance sheet date of September 30, 2010 through the issuance of the Consolidated Financial Statements.

     The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2010. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated annual financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

     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 September 30, 2010 and December 31, 2009, the Company had restricted cash of $53.0 million and $27.9 million, respectively, on deposit with the trustees for the Company’s collateralized debt obligations (“CDOs”), see Note 8 — “Debt Obligations.” Restricted cash primarily represents proceeds from loan repayments which will be used to purchase replacement loans as collateral for the CDOs, unfunded loan commitments, principal repayments for the CDOs and interest payments received from loans in the CDOs, which are remitted quarterly to the bond holders and the Company in the month following the quarter.

     Loans and Investments

     At the time of purchase, the Company designates a security as held-to-maturity, available-for-sale, or trading depending on the Company’s ability and intent to hold. The Company does not have any securities designated as trading or held-to-maturity as of September 30, 2010. 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 and investments that are 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. 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 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

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

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 and Loss on Restructured Loans

     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. Included in the evaluation of the capitalization and market discount rates, the Company considers not only assumptions specific to 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 believed adequate by management to absorb probable losses. The Company had an allowance for loan losses of $287.8 million relating to 32 loans with an aggregate carrying value, before reserves, of approximately $622.7 million at September 30, 2010 and $326.3 million in allowance for loan losses relating to 31 loans with an aggregate carrying value, before reserves, of approximately $693.7 million at December 31, 2009. In addition, the Company recorded $3.8 million in recoveries of previously recorded loan loss reserves related to two of the Company’s assets during the third quarter of 2010. These recoveries were recorded in provision for loan losses on the Statement of Operations. Of the $3.8 million in recoveries, $3.5 million was related to one asset in which the property was sold and the Company provided financing to the new operator, and as a result of this restructuring, the Company recorded a net recovery of $3.5 million. The Company also recorded a cash recovery of $0.8 million in the second quarter of 2010 for a fully reserved loan.

     Loss on restructured loans are created when the Company has granted a concession to the borrower in the form of principal forgiveness related to the payoff or the substitution or addition of a new debtor for the original borrower or when the Company incurs cost 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 Statement of Operations in the period in which the loan is restructured. For the three and nine months ended September 30, 2010, the Company recorded loss on restructured loans of $5.4 million and $6.2 million, respectively. For the three and nine months ended September 30, 2009, the Company recorded loss on restructured loans of $0.3 million and $33.1 million, respectively.

     Real Estate Owned and Held-For-Sale

     Real estate owned, shown net of accumulated depreciation, is comprised of real property acquired by foreclosure or deed in lieu of foreclosure. Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the estimated fair value of the real estate at the time of foreclosure or delivery of a deed in lieu of foreclosure.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

     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 deed in lieu of foreclosure 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. Upon evaluating a property, many factors are considered, including estimated current and expected operating cash flow 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 complete 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 the 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 many instances, the borrower pays an additional amount of interest at the time the loan is closed, an origination 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 income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is resumed. Several of the 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,

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

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. 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 nine month periods ended September 30, 2010 and 2009, respectively.

     Property operating income — Property operating income represents income associated with the operations of two commercial real estate properties recorded as real estate owned. The Company recognizes revenue for these activities when the fees are fixed or determinable, or evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. For the three and nine month periods ended September 30, 2010, the Company recorded approximately $0.8 million and $1.8 million, respectively, of property operating income relating to its real estate owned, as compared to approximately $0.3 million and $0.5 million, respectively, for the three and nine month periods ended September 30, 2009. As of September 30, 2010, the Company had two real estate owned properties. This was due to a real estate investment that was reclassified from real estate owned to real estate held-for-sale at September 30, 2010 and another real estate investment that was reclassified from real estate owned to real estate held-for-sale at September 30, 2009, respectively, which resulted in a reclassification from property operating income into discontinued operations for the current and all prior periods. See Note 7 — “Real Estate Owned and Held-For-Sale” for further details.

     Other income — Other income represents fees received for loan structuring and defeasance fees, 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 appropriate. The Company records its share of the net income and losses from the underlying properties on 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, independent directors, and employees of ACM, restricted stock awards consisting of shares of the Company’s common stock that vest 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 vest immediately) or ratably over the respective vesting periods. Dividends are paid on the 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 taxable income and meets certain other requirements. Certain REIT income may be subject to state and local

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(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, if any, attributable to certain debt extinguishment transactions may, at the Company’s election, be deferred to future periods.

     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 September 30, 2010, accumulated other comprehensive loss was $69.8 million and consisted of $69.8 million of net unrealized loss on derivatives designated as cash flow hedges and a less than $0.1 million unrealized gain related to available-for-sale securities. At December 31, 2009, accumulated other comprehensive loss was $53.3 million and consisted of net unrealized losses on derivatives designated as cash flow hedges.

     Derivatives and 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 on 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 utilizes quotations from a third party to assist in the determination of these fair values.

     The Company records all derivatives on 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 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. 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 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

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

income. Derivatives are used for hedging purposes rather than speculation. See Note 9 — “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. 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. 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 impact the VIE’s economic performance and (ii) has the right to receive the majority of expected returns or the obligation to absorb the majority of expected losses. See Note 10 — “Variable Interest Entities” for further details.

     Recently Issued Accounting Pronouncements

     In July 2010, the FASB issued updated guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses which will require a greater level of information disclosed about the credit quality of loans and allowance for loan losses, as well as additional information related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring. This guidance is effective for the fourth quarter of 2010, and as it only amends existing disclosure requirements, the Company does not expect the adoption of this guidance to have a material effect on its Consolidated Financial Statements.

     In March 2010, the FASB issued updated guidance on embedded credit derivatives for contracts containing an embedded credit derivative feature related to the transfer of credit risk that is not solely in the form of subordination. This guidance was effective for the third quarter of 2010 and its adoption did not have a material effect on the Company Consolidated Financial Statements.

     In January 2010, the FASB issued updated guidance on fair value measurements and disclosures, which requires disclosure of details of significant asset or liability transfers in and out of Level 1 and Level 2 measurements within the fair value hierarchy and inclusion of gross purchases, sales, issuances, and settlements in the roll forward of assets and liabilities valued using Level 3 inputs within the fair value hierarchy. The guidance also clarifies and expands existing disclosure requirements related to the disaggregation of fair value disclosures and inputs used in arriving at fair values for assets and liabilities using Level 2 and Level 3 inputs within the fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, and its adoption did not have a material effect on the Company’s Consolidated Financial Statements. The gross presentation of the Level 3 roll forward is required for interim and annual reporting periods beginning after December 15, 2010 and its adoption is not expected to have a material effect on the Company’s Consolidated Financial Statements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Note 3 — Loans and Investments

     The following table sets forth the composition of the Company’s loan and investment portfolio at the dates indicated:

																		At September 30, 2010								At December 31, 2009
		September 30,				Percent				December 31,				Percent				Loan				Wtd. Avg.				Loan				Wtd. Avg.
		2010				of Total				2009				of Total				Count				Pay Rate(1)				Count				Pay Rate(1)
		(Unaudited)																(Unaudited)
Bridge loans		$	1,062,921,331				59	%		$	1,245,497,015				61	%			50				4.91	%			56				5.00	%
Mezzanine loans			303,878,013				17	%			343,494,118				17	%			35				4.03	%			37				5.43	%
Junior participation loans			249,398,320				14	%			255,076,554				13	%			14				5.15	%			15				5.46	%
Preferred equity Investments			187,992,959				10	%			190,967,267				9	%			18				2.76	%			18				2.84	%
			1,804,190,623				100	%			2,035,034,954				100	%			117				4.57	%			126				4.93	%
Unearned revenue			(14,665,322	)							(7,932,627	)
Allowance for loan losses			(287,798,787	)							(326,328,039	)
Loans and investments, net		$	1,501,726,514							$	1,700,774,288

Concentration of Borrower Risk

     The Company is subject to concentration risk in that, as of September 30, 2010, the unpaid principal balance related to 30 loans with five unrelated borrowers represented approximately 34% of total assets. At December 31, 2009 the unpaid principal balance related to 32 loans with five unrelated borrowers represented approximately 31% of total assets. As of September 30, 2010 and December 31, 2009, the Company had 117 and 126 loans and investments, respectively. As of September 30, 2010, 36%, 13%, and 11% 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, 2009, 38%, 13%, and 11% 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 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. As a result of the Company’s normal quarterly loan review at September 30, 2010, it was determined that 32 loans with an aggregate carrying value, before reserves, of $622.7 million were impaired. At December 31, 2009, it was determined that 31 loans with an aggregate carrying value, before reserves, of $693.7 million were impaired.

     The Company performed an evaluation of the impaired loans and determined that the fair value of the underlying collateral securing the loans was less than the net carrying value of the loans, resulting in a $15.2 million and $65.8 million provision for loan losses for the three and nine months ended September 30, 2010, respectively. In addition, the Company recorded $3.8 million in recoveries of previously recorded loan loss reserves related to two of the Company’s assets during the third quarter of 2010. These recoveries were recorded in provision for loan losses on the Statement of Operations. Of the $3.8 million in recoveries, $3.5 million was related to one asset in which the property was sold and the Company provided financing to the new operator, and as a result of this

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

restructuring, the Company recorded a net recovery of $3.5 million. The Company also recorded a cash recovery of $0.8 million received in the second quarter of 2010 for a fully reserved loan. The effect of these recoveries resulted in a provision for loan losses, net of recoveries, of $11.3 million and $61.2 million for the three and nine months ended September 30, 2010, respectively. Of the $15.2 million of loan loss reserves recorded during the three months ended September 30, 2010, $9.6 million was on loans on which the Company had previously recorded reserves, while $5.6 million of reserves related to other loans in the Company’s portfolio. Of the $65.8 million of loan loss reserves recorded during the nine months ended September 30, 2010, $42.9 million was on loans on which the Company had previously recorded reserves, while $22.9 million of reserves related to other loans in the Company’s portfolio. In October 2010, the Company received a $14.1 million recovery related to a loan that was previously fully reserved which will be recorded in the fourth quarter of 2010.

     The Company recorded a $51.0 million and $141.5 million provision for loan losses for the three and nine months ended September 30, 2009, respectively.

     As a result of the quarterly review process at September 30, 2010, the Company identified loans and investments that it considers higher-risk loans which had a carrying value, before reserves, of approximately $439.4 million and a weighted average loan-to-value (LTV) ratio of 98%, as compared to lower-risk loans with a carrying value, before reserves, of $1.3 billion and a weighted average LTV ratio of 89%. 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.

     A summary of the changes in the allowance for loan losses is as follows:

		For the Nine Months Ended
		September 30, 2010
Allowance at beginning of the period		$	326,328,039
Provision for loan losses			65,761,004
Charge-offs			(92,048,619	)
Market value adjustments			(7,658,597	)
Recoveries of reserves			(4,583,040	)
Allowance at end of the period		$	287,798,787

     As of September 30, 2010, ten loans with a net carrying value of approximately $53.1 million, net of related loan loss reserves of $66.2 million, were classified as non-performing and nine of the ten loans had loan loss reserves. Income 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. As of December 31, 2009, 13 loans with a net carrying value of approximately $110.8 million, net of related loan loss reserves of $115.0 million, were classified as non-performing for which income recognition had been suspended. The Company had previously established loan loss reserves on all of these loans.

     In the first quarter of 2010, the Company entered into an agreement to sell a mezzanine loan for $25.0 million. As a result, the loan is recorded at fair value, equal to the purchase price less expected costs to complete the sale, in loans and investments on the Company’s Consolidated Balance Sheet as of September 30, 2010 and is expected to close in the fourth quarter of 2010. The Company has received $2.0 million in non-refundable deposits from the purchaser which were recorded in other liabilities on the Company’s September 30, 2010 Consolidated Balance Sheet.

     During the fourth quarter of 2009, the Company entered into an agreement to sell one of its bridge loans for $35.0 million. The Company received $20.5 million in non-refundable deposits from the purchaser during the fourth quarter of 2009, which were recorded in other liabilities on the Company’s Consolidated Balance Sheet. The remaining purchase price of $14.5 million was collected at the close of the transaction in April 2010, and the

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Company recorded a charge-off to previously recorded reserves of $35.4 million during the second quarter of 2010 to remove the amount of allowance for loan losses that had previously been recorded related to this loan.

     During the quarter ended September 30, 2010, the Company received $21.4 million in principal payoffs on three bridge loans with an aggregate carrying value of $34.4 million recording a loss on the restructuring of approximately $1.6 million and a charge-off to previously recorded reserves of $11.5 million; wrote down four bridge loans with a aggregate carrying value of $96.9 million, after principal paydowns of $7.3 million, to $78.3 million, recording a loss on the restructuring of approximately $3.8 million and a charge-off to previously recorded reserves of $7.4 million; wrote off a mezzanine loan to previously recorded reserves of $26.8 million; and recorded market value adjustments of $7.7 million on two loans due to a modification of loan valuation assumptions. During the quarter ended June 30, 2010, the Company received $19.9 million in principal payoffs on two bridge loans and a mezzanine loan with an aggregate carrying value of $20.7 million and wrote down a mezzanine loan with a carrying value, after principal paydowns, of $15.4 million to $10.0 million, recording a loss on the restructuring of approximately $0.8 million and a charge-off to previously recorded reserves of $5.4 million, respectively. The Company also reclassified a $5.6 million loan loss reserve related to a junior participation loan on a property that was acquired through deed-in-lieu of foreclosure and recorded to real estate owned, net on the Company’s Consolidated Balance Sheet in the second quarter of 2010, and then terminated the loan and removed the reserve. See Note 7 — “Real Estate Owned and Held-For-Sale” for further details. There were no losses on restructuring or charge-offs for the quarter ended March 31, 2010.

     During the quarter ended September 30, 2009, the Company charged-off a $5.0 million loan loss reserve on a bridge loan for a hotel property that was assumed by another borrower and a $10.0 million loan loss reserve on a bridge loan for another hotel property that was modified by the Company. The Company also reclassified a $4.3 million loan loss reserve related to a bridge loan on a property that was acquired through foreclosure and recorded to real estate owned, net. See Note 7 — “Real Estate Owned and Held-For-Sale” for further details. The Company also settled a bridge loan with a carrying value of $1.5 million, at a discount, for approximately $1.2 million and recorded a loss on restructuring of $0.3 million. During the quarter ended June 30, 2009, the Company sold a bridge loan with a carrying value of $47.0 million, at a discount, for approximately $23.2 million and recorded a loss on restructuring of $23.8 million. In connection with this transaction, the Company used the proceeds to settle a $37.0 million repurchase facility in which this asset was financed for a cash payment of approximately $22.0 million, resulting in a gain on extinguishment of debt of approximately $15.0 million. During the quarter ended March 31, 2009, the Company received $11.8 million in principal paydowns on two loans with a carrying value of $22.9 million and recorded a loss on the restructuring of these loans of approximately $9.0 million.

     At September 30, 2010, the Company did not have any loans contractually past due 90 days or more that are still accruing interest. Also, the Company had unfunded commitments totaling $0.3 million on modified loans considered “troubled debt restructurings” and there were three loans in the Company’s portfolio with an aggregate carrying value of $99.5 million which are considered troubled debt restructurings that are not included in the discussions above.

Note 4 — Available-For-Sale Securities

     The following is a summary of the Company’s securities available-for-sale at September 30, 2010:

										Other-Than-
		Face				Amortized				Temporary				Unrealized				Estimated
		Value				Cost				Impairment				Gain / (Loss)				Fair Value
Common equity securities		$	—			$	88,184			$	(29,395	)		$	29,395			$	88,184
Collateralized debt obligation bond			10,000,000				7,975,405				(6,975,405	)			—				1,000,000
Total available-for-sale securities		$	10,000,000			$	8,063,589			$	(7,004,800	)		$	29,395			$	1,088,184

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

     The following is a summary of the Company’s available-for-sale securities at December 31, 2009:

										Other-Than-
		Face				Amortized				Temporary				Unrealized				Estimated
		Value				Cost				Impairment				Gain / (Loss)				Fair Value
Common equity securities		$	—			$	529,104			$	(440,920	)		$	—			$	88,184
Collateralized debt obligation bonds			25,000,000				11,607,136				(11,207,136)	(1)			—				400,000
Total available-for-sale securities		$	25,000,000			$	12,136,240			$	(11,648,056	)		$	—			$	488,184

     The following is a summary of the underlying credit rating of the Company’s collateralized debt obligation bonds investments available-for-sale at September 30, 2010 and December 31, 2009:

		At September 30, 2010												At December 31, 2009
						Amortized				Percent								Amortized				Percent
Rating (1)		#				Cost				of Total				#				Cost				of Total
BBB+			—			$	—				—				1			$	10,219,636				88	%
BB-			1				7,975,405				100	%			—				—				—
B			—				—				—				1				1,387,500				12	%
			1			$	7,975,405				100	%			2			$	11,607,136				100	%

     In March 2010, the Company sold a AAA rated commercial mortgage-backed security (“CMBS”) investment, with an amortized cost of $1.5 million, for $1.8 million and a BBB rated CMBS investment with a amortized cost of $9.6 million for $12.5 million and recorded an aggregate gain of approximately $3.3 million in its Consolidated Statement of Operations. These securities were classified as held-to-maturity at December 31, 2009, however, the Company made the decision to sell the securities at a gain due to favorable market opportunities. Accordingly, because this is considered a change of intent to hold the securities, the Company reclassified all remaining held-to-maturity securities, with a carrying amount of $54.4 million, to available-for-sale at their estimated fair value of $35.8 million, with a net unrealized loss of $18.6 million recorded in accumulated other comprehensive loss on the Company’s Consolidated Balance Sheet in the first quarter of 2010. See Note 5 — “Securities Held-To-Maturity” for further details. During the first quarter of 2010, the Company had also purchased an additional $4.5 million investment grade CMBS, at a discount of less than $0.1 million.

     In June 2010, the Company sold three investment grade commercial real estate collateralized debt obligation (“CDO”) bonds, rated AA, BBB+ and BBB, with an aggregate face value of $44.7 million and an amortized cost of $40.4 million, for $29.9 million, and recorded an aggregate realized loss on sale of securities of $10.5 million in its Consolidated Statement of Operations. Additionally, in June 2010, the Company sold two AAA rated CMBS investments, with an aggregate face value of $6.5 million and an amortized cost of $6.3 million, for $6.5 million, and recorded an aggregate realized gain on sale of securities of $0.2 million in its Consolidated Statement of Operations. Upon the sale of these securities in the second quarter of 2010, the Company reclassified $11.6 million from accumulated other comprehensive loss into loss on sale of securities based on the specific amounts recorded to accumulated other comprehensive loss for each investment.

     During the three months ended September 30, 2010, the Company purchased a $7.4 million investment grade CMBS, at a discount for $6.9 million, and subsequently sold it for $6.9 million in the same quarter with no gain or loss on the sale of the investment.

     At December 31, 2009, a BBB+ rated investment grade CDO bond, with a face value of $20.0 million and a discount of $9.8 million, and a B rated investment grade CDO bond, with a face value of $5.0 million and a discount of $3.6 million, were reclassified from held-to-maturity to available-for-sale. The Company exchanged

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

these two bonds in the retirement of a portion of its own junior subordinated notes in February 2010. An other-than-temporary impairment of $9.8 million was recognized upon the reclassification during the fourth quarter of 2009. During the fourth quarter of 2008, the Company determined that the B rated CDO bond, with an amortized cost of approximately $1.4 million, was other-than-temporarily impaired, resulting in a $1.4 million impairment charge to the Company’s 2008 Consolidated Financial Statements. See Note 8 — “Debt Obligations — Junior Subordinated Notes” for further details. These securities bore interest at a weighted average spread of 56 basis points over LIBOR, had a weighted average stated maturity of 42.3 years, and had an estimated average remaining life of 7.3 years due to the maturities of the underlying assets. See Note 5 — “Securities Held-To-Maturity” below.

     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 the remaining CDO bond investment and it is not more likely than not that the Company will be required to sell the investment 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. The Company’s 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 September 30, 2010, the CDO bond security available-for-sale has been in a loss position as compared to its original purchase price for more than twelve months. Based on the Company’s analysis at June 30, 2010, the Company concluded that this CDO bond investment was other-than-temporarily impaired and recorded a $7.0 million impairment charge in the second quarter of 2010 to the Company’s Consolidated Statement of Operations which was reclassified from accumulated other comprehensive loss. No impairment was recorded for the three months ended September 30, 2010.

     The remaining CDO bond security bears interest at a spread of 30 basis points over LIBOR, has a stated maturity of 41.5 years, but has an estimated remaining life of 5.6 years due to the maturities of the underlying assets.

     As of the second quarter of 2010, the Company is no longer accreting income on its remaining CDO bond security which has $2.5 million of original discount at September 30, 2010. For the nine months ended September 30, 2010, the Company accreted approximately $0.8 million of CDO bond discount into interest income, representing accretion on approximately $7.5 million of the total original discount. For the three and nine months ended September 30, 2009, the Company accreted approximately $0.7 million and $1.9 million, respectively of CDO bond discount into interest income. For the nine months ended September 30, 2010, the Company accreted approximately $0.1 million of CMBS discounts into interest income. For the three and nine months ended September 30, 2009, the Company accreted approximately $0.1 million and $0.3 million, respectively, of CMBS discount into interest income.

     During the nine months ended September 30, 2010, the Company received principal repayments of $0.3 million on one of the Company’s CDO bond securities sold during the second quarter of 2010. In 2009, the Company had received repayments of principal of $2.5 million on this security.

     For the three and nine months ended September 30, 2010, the average yield on the Company’s CDO bond and CMBS securities available-for-sale based on their face values was 0.73% and 3.63%, respectively, including the accretion of discount. For the three and nine months ended September 30, 2009, the average yield on the Company’s CDO bond securities based on their face values was 4.89% and 4.74%, respectively, including the accretion of discount.

     During 2007, the Company purchased 2,939,465 shares of common stock of Realty Finance Corporation, formerly CBRE Realty Finance, Inc., a commercial real estate specialty finance company, for $16.7 million, which had a fair value of $0.1 million at both September 30, 2010 and December 31, 2009. In 2008 and 2009, the

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Company concluded that these securities were other-than-temporarily impaired and recorded $16.2 million and $0.4 million of impairment charges to the Consolidated Statements of Operations in 2008 and 2009, respectively. During the second quarter of 2010, the Company concluded that these securities were other-than-temporarily impaired under GAAP and recorded a less than $0.1 million impairment charge to the Consolidated Statements of Operations. As of September 30, 2010, an unrealized gain of less than $0.1 million related to these securities was recorded in accumulated other comprehensive loss. At December 31, 2009, all losses in fair value on the available-for-sale securities to date were recorded as other-than-temporary impairments, and therefore recognized in earnings.

Note 5 — Securities Held-To-Maturity

     The Company had no securities held-to-maturity at September 30, 2010.

     The following is a summary of the Company’s securities held-to-maturity at December 31, 2009:

										Other-Than-
		Face				Amortized				Temporary				Carrying				Unrealized				Unrealized				Estimated
		Value				Cost				Impairment				Value				Gain				Loss (1)				Fair Value
Collateralized debt obligation bonds		$	54,989,988			$	47,823,843			$	—			$	47,823,843			$	—			$	(31,154,843	)		$	16,669,000
Commercial mortgage-backed securities			17,000,000				12,738,965				—				12,738,965				2,366,955				—				15,105,920
Total securities held-to-maturity		$	71,989,988			$	60,562,808			$	—			$	60,562,808			$	2,366,955			$	(31,154,843	)		$	31,774,920

     The following is a summary of the underlying credit ratings of the Company’s securities held-to-maturity at December 31, 2009:

		At December 31, 2009
						Amortized				Percent
Rating (1)		#				Cost				of Total
AAA			3			$	32,355,109				53	%
AA			1				10,787,743				18	%
AA-			1				7,910,558				13	%
BBB			1				9,509,398				16	%
			6			$	60,562,808				100	%

     During the second quarter of 2008, the Company purchased $82.7 million of investment grade commercial real estate CDO bonds for $58.1 million, representing a $24.6 million discount to their face value. The discount was accreted into interest income on an effective yield adjusted for actual prepayment activity over the average life of the related security as a yield adjustment. At December 31, 2009, a BBB+ rated CDO bond, with a face value of $20.0 million and a discount of $9.8 million, and a B rated CDO bond, with a face value of $5.0 million and a discount of $3.6 million, were reclassified from held-to-maturity to available-for-sale. During the fourth quarter of 2008, the Company determined that the B rated CDO bond, with an amortized cost of approximately $1.4 million, was other-than-temporarily impaired, resulting in a $1.4 million impairment charge to the Company’s 2008 Consolidated Financial Statements. The Company exchanged these two bonds in the retirement of a portion of its own junior subordinated notes in February 2010. An other-than-temporary impairment of $9.8 million was recognized upon the reclassification during the fourth quarter of 2009. See Note 4 — “Securities Available-For-Sale” above. For the three and nine months ended September 30, 2009, the Company accreted approximately $0.7 million and $1.9 million, respectively of CDO bond discount into interest income.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

     In March 2010, the Company sold a AAA rated CMBS investment with a amortized cost of $1.5 million for $1.8 million and a BBB rated CMBS investment with a amortized cost of $9.6 million for $12.5 million and recorded an aggregate gain of approximately $3.3 million in its Consolidated Statement of Operations. These securities were classified as held-to-maturity at December 31, 2009, however, the Company made the decision to sell the securities at a gain due to favorable market opportunities. As a result, the Company reclassified all remaining held-to-maturity securities, with a carrying amount of $54.4 million to available-for-sale at their estimated fair value of $35.8 million, with a net unrealized loss of $18.6 million recorded in accumulated other comprehensive loss on the Company’s Consolidated Balance Sheet in the first quarter of 2010.

     In 2009, the Company purchased $17.0 million of investment grade CMBS for $12.4 million plus accrued interest, representing a $4.6 million discount to their face value. Purchase discounts are accreted into interest income on an effective yield adjusted for actual prepayment activity over the average life of the related security as a yield adjustment. For the three and nine months ended September 30, 2009, the Company accreted approximately $0.1 million and $0.3 million, respectively, of CMBS discount into interest income.

     At December 31, 2009, the CDO bond investments bore interest at a weighted average spread of 34 basis points over LIBOR and had a weighted average stated maturity of 34.2 years, but had an estimated average remaining life of 3.7 years due to the maturities of the underlying assets. At December 31, 2009, the CMBS investments bore interest at a weighted average coupon rate of 5.80% and had a weighted average stated maturity of 29.6 years, but had an estimated average remaining life of 6.0 years due to the maturities of the underlying assets.

     Securities held-to-maturity are carried at cost, net of unamortized premiums and discounts, which are recognized in interest income using an effective yield or interest method. The Company evaluates held-to-maturity 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.

     In 2008, the Company entered into a repurchase agreement with a financial institution for the purpose of financing a portion of the Company’s CDO bond securities. At December 31, 2009, the balance of this facility totaled $0.2 million and in January 2010, the facility was repaid in full.

Note 6 — Investment in Equity Affiliates

     The following is a summary of the Company’s investment in equity affiliates at September 30, 2010 and December 31, 2009:

										Outstanding
										Loan Balance
										to Equity
		Investment in Equity Affiliates at								Affiliates at
		September 30,				December 31,				September 30,
Equity Affiliates		2010				2009				2010
930 Flushing & 80 Evergreen		$	491,975			$	491,975			$	24,151,471
450 West 33rd Street			1,136,960				1,136,960				50,000,000
1107 Broadway			5,720,000				5,720,000				—
Alpine Meadows			—				—				33,500,000
St. John’s Development			—				144,605				25,000,000

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

										Outstanding
										Loan Balance
										to Equity
		Investment in Equity Affiliates at								Affiliates at
		September 30,				December 31,				September 30,
Equity Affiliates		2010				2009				2010
Lightstone Value Plus REIT L.P			55,988,409				55,988,409				—
JT Prime			851,000				851,000				—
West Shore Café			2,147,000				—				4,000,000
Issuers of Junior Subordinated Notes			578,000				578,000				—
Total		$	66,913,344			$	64,910,949			$	136,651,471

     The Company accounts for the 450 West 33^rd Street and Lightstone Value Plus REIT L.P. investments under the cost method and the remaining investments under the equity method.

     The following represents the significant changes in the Company’s investments in equity affiliates:

West Shore Café

     In August 2010, the Company invested $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, $4.0 million of which was initially funded, that matures in August 2013 and bears interest at a weighted average yield of 10.5%.

St. John’s Development

     In December 2006, the Company originated a $25.0 million bridge loan with a maturity date in September 2007 with two three-month extensions that bore interest at a fixed rate of 12%. The loan is secured by 20.5 acres of usable land and 2.3 acres of submerged land located on the banks of the St. John’s River in downtown Jacksonville, Florida and is currently zoned for the development of up to 60 dwellings per acre. In October 2007, the borrower sold the property to an investor group, in which the Company has a 50% non-controlling interest, for $25.0 million. The investor group assumed the $25.0 million mortgage with a new maturity date of October 2009 and had a change in interest rate to LIBOR plus 6.48%, with a LIBOR floor of 4.50%. In connection with this transaction, the Company contributed $0.5 million to cover other operational costs of acquiring and maintaining the property. During the fourth quarter of 2009, the mortgage loan was modified to extend the maturity date to January 2010 and modified to change the interest rate to LIBOR plus 6.48% with no LIBOR floor. During the first quarter of 2010, the mortgage loan was modified to an interest rate of LIBOR plus 2.00% and, as of June 2010, was in default.

     The managing member of the investor group is an experienced real estate developer who retains a 50% controlling interest in the partnership and funded a $2.9 million interest reserve for the first year. The Company was required to contribute $2.9 million to fund the interest reserve for the second year and made an additional capital contribution of $0.1 million during 2008. Interest received on the $25.0 million loan is recorded as a return of capital and reduction of the Company’s equity investment and the loan has a $15.0 million allowance for loan loss recorded against it at September 30, 2010. During the nine months ended September 30, 2009, the Company received $1.6 million of such interest, reducing the Company’s investment to $1.9 million. Current accounting guidance requires the Company’s investments in equity affiliates 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 third quarter of 2009, the Company recorded an other-than-temporary impairment of $1.9 million for the remaining amount of the investment which was recorded in loss from equity affiliates in the Company’s Consolidated Statements of Operations. In the fourth quarter of 2009, the Company was able to recover $0.6 million of the loss reducing the balance to $0.1 million at December 31, 2009. In the first quarter of 2010, the Company contributed $0.4 million to this investment and recovered $0.5 million reducing the balance of the investment to zero at September 30, 2010. The Company accounts for this investment under the equity method.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Note 7 — Real Estate Owned and Held-For-Sale

     The Company had a $5.6 million junior participating interest in a first mortgage loan secured by an apartment building in Bear Canyon, 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, terminated the loan as well as the provision. In April 2010, the Company purchased the property securing this loan by deed-in-lieu of foreclosure and assumed the $20.8 million senior 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. For the three and nine months ended September 30, 2010, the Company recorded property operating income of $0.6 million and $1.2 million, respectively, and property operating expenses, including depreciation, of $0.9 million and $1.8 million, respectively. At September 30, 2010, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation and allowances, totaling approximately $20.4 million, cash of $0.1 million, other assets of $0.6 million, mortgage note payable of $20.8 million and other liabilities of $0.3 million.

     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 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. For the three and nine months ended September 30, 2010, the Company recorded property operating income of $0.2 million and $0.7 million, respectively, and property operating expenses, including depreciation, of $0.4 million and $1.2 million, respectively. For the three and nine months ended September 30, 2009, the Company recorded property operating income of $0.3 million and $0.5 million, respectively, and property operating expenses, including depreciation, of $0.5 million and $0.9 million, respectively. At September 30, 2010, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation and allowances totaling approximately $2.7 million, other assets of $0.1 million and other liabilities of $0.4 million.

     The Company had a $9.9 million bridge loan secured by a motel located in Long Beach, California that matured in 2008 and bore interest at a variable rate of LIBOR plus 4.00%. During 2008 and 2009, the Company recorded a $4.3 million provision for loan loss related to this property reducing the carrying amount to $5.6 million. In August 2009, the Company was the winning bidder at a foreclosure sale of the property securing this loan which was recorded as real estate owned. The carrying value represented the then fair value of the underlying collateral at the time of the sale. During the third quarter of 2010, the Company agreed 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 $5.5 million and reclassified property operating income and expenses for current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements. The Company sold the property to the third party and received proceeds of approximately $6.8 million in October 2010.

     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 and 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 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 third quarter of 2009, the Company mutually agreed with the first mortgage lender to appoint a receiver to operate the property and the Company is 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 the current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements, and recorded an impairment loss of $4.9 million in

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

2009. The Company had originally planned to transfer the property to the first mortgage lender within one year of the date of this designation, however, due to circumstances beyond the Company’s control, the transfer has not been completed within the one year time frame. The Company believes it is reasonable to expect the transfer to be completed in 2011. Based on the facts and circumstances related to this property, the Company will continue to account for this investment as real estate held-for-sale.

     As of September 30, 2010, real estate held-for-sale consisted of land and building, net of accumulated depreciation and allowances of approximately $41.4 million from the office building located in Indianapolis and approximately $5.5 million from the motel located in Long Beach, California. At September 30, 2010 the Company also had a mortgage note payable held-for-sale of $41.4 million and other liabilities of $1.2 million from the office building, and cash of $0.2 million, other assets of less than $0.1 million and other liabilities of $0.1 million from the motel. The Company did not record interest expense related to the note payable, as the interest expense is non-recourse and the Company is 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 subject to the $41.4 million first mortgage. For the three and nine months ended September 30, 2010, the receiver’s issued financial statements reported net income for the office building investment. The Company believes these amounts are not realizable at this time and, as such, did not record any income or loss on this held-for-sale investment. For the three and nine months ended September 30, 2010, loss from discontinued operations consisted of property operating income of $0.2 million and $0.4 million, respectively, and property operating expenses of $0.1 million and $0.7 million, respectively. For the three and nine months ended September 30, 2009, loss from discontinued operations consisted of property operating income of approximately $0.6 million and $3.4 million, respectively, property operating expenses of approximately $0.5 million and $3.1 million, respectively, and depreciation and amortization of approximately $0.1 million and $0.7 million, respectively, which was reclassified to discontinued operations in the Company’s Consolidated Statement of Operations. In addition, discontinued operations have not been segregated in the Company’s Consolidated Statements of Cash Flows.

Note 8 — Debt Obligations

     The Company utilizes a repurchase agreement, a term credit agreement, loan participations, collateralized debt obligations and junior subordinated notes 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

     The following table outlines borrowings under the Company’s repurchase agreements as of September 30, 2010 and December 31, 2009:

		September 30, 2010								December 31, 2009
		Debt				Collateral				Debt				Collateral
		Carrying				Carrying				Carrying				Carrying
		Value				Value				Value				Value
Repurchase agreement, financial institution, $1.5 million committed line at September 30, 2010, expiration June 2011, interest is variable based on one-month LIBOR; the weighted average note rate was 2.79% and 2.77%, respectively		$	1,478,997			$	523,938			$	2,435,332			$	2,523,938
Repurchase agreement, financial institution, an uncommitted line, expiration May 2010, interest was variable based on one and three-month LIBOR; the weighted average note rate was 1.52%,			—				—				222,000				400,000
Total repurchase agreements		$	1,478,997			$	523,938			$	2,657,332			$	2,923,938

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

     At September 30, 2010, the weighted average note rate for the Company’s repurchase agreement was 2.79%. There were no interest rate swaps on this repurchase agreement at September 30, 2010.

     The Company has a repurchase agreement that bears interest at 250 basis points over LIBOR. In June 2009, the Company amended this facility extending the maturity to June 2010, with a one year extension option. In June 2010, the Company exercised the option, extending the maturity to June 2011. In addition, the amendment includes the removal of all financial covenants and a reduction of the committed amount reflecting the one asset currently financed in this facility. During the nine months ended September 30, 2010, the Company paid down approximately $1.0 million of this facility. At September 30, 2010, the outstanding balance under this facility was $1.5 million.

     In April 2008, the Company entered into an uncommitted master repurchase agreement with a financial institution for the purpose of financing its commercial real estate (“CRE”) CDO bond securities. The facility had a term expiring in May 2010, bore interest at pricing over LIBOR, varying on the type of asset financed, and a balance of $0.2 million at December 31, 2009. In January 2010, the facility was repaid in full.

Collateralized Debt Obligations

     The following table outlines borrowings under the Company’s collateralized debt obligations as of September 30, 2010 and December 31, 2009:

		September 30, 2010								December 31, 2009
		Debt				Collateral				Debt				Collateral
		Carrying				Carrying				Carrying				Carrying
		Value				Value				Value				Value
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 4.72% and 4.22%, respectively		$	230,607,155			$	349,575,130			$	254,101,853			$	389,985,735
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 3.17% and 3.28%, respectively			302,985,239				387,599,717				329,549,487				401,729,747
CDO III — Issued 10 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 1.80% and 1.76%, respectively			542,160,709				550,454,583				516,863,845				547,908,818
Total CDOs		$	1,075,753,103			$	1,287,629,430			$	1,100,515,185			$	1,339,624,300

     At September 30, 2010, 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 2.81%. Excluding the effect of swaps, the weighted average note rate at September 30, 2010 was 0.85%.

     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.

     Amortization proceeds from CDO II will be distributed quarterly with approximately $1.1 million to be paid to investors as a reduction of the CDO liability, through the end of the replenishment period in April 2011.

     CDO III has a $100.0 million revolving note class that provides a revolving note facility. The outstanding note balance for CDO III was $542.2 million at September 30, 2010 which included $92.2 million outstanding under

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

the revolving note facility. CDO III is not required to make any amortization payments prior to the end of its replenishment period in January 2012.

     In the third quarter of 2010, the Company purchased, at a discount, a $6.0 million investment grade rated note originally issued by its CDO I issuing entity for a price of approximately $3.1 million from a third party investor and a $15.0 million investment grade rated note originally issued by its CDO II issuing entity for a price of approximately $6.2 million from the Company’s manager, ACM, who had purchased it in the third quarter of 2010 from a third party investor for approximately $6.2 million. The Company recorded a net gain on extinguishment of debt of $11.8 million from these transactions in its third quarter 2010 Consolidated Statements of Operations.

     In the second quarter of 2010, the Company purchased, at a discount, approximately $10.0 million of investment grade rated notes originally issued by its CDO I issuing entity for a price of $4.5 million, $8.9 million of investment grade rated notes originally issued by its CDO II issuing entity for a price of $1.7 million and $0.2 million originally issued by its CDO III issuing entity for a price of less than $0.1 million from third party investors. The Company recorded a net gain on extinguishment of debt of $12.8 million from these transactions in its second quarter 2010 Consolidated Statements of Operations.

     In the first quarter of 2010, the Company purchased, at a discount, approximately $5.3 million of investment grade rated notes originally issued by its CDO I issuing entity for a price of $1.8 million, $15.3 million of investment grade rated notes originally issued by its CDO II issuing entity for a price of $4.2 million and $7.0 million originally issued by its CDO III issuing entity for a price of $1.4 million from third party investors. The Company recorded a net gain on extinguishment of debt of $20.2 million from these transactions in its first quarter 2010 Consolidated Statements of Operations.

     In February 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. During 2009, the purchase of approximately $42.8 million consisted of $16.1 million of investment grade rated notes originally issued by the Company’s CDO I issuing entity for a price of $3.3 million, $9.3 million originally issued by the Company’s CDO II issuing entity for a price of $3.1 million, and $17.3 million originally issued by the Company’s CDO III issuing entity for a price of $5.4 million. 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. See “Junior Subordinated Notes” below for further details.

     During the three and nine months ended September 30, 2009, the Company had purchased approximately $7.9 million and $42.8 million, respectively, of investment grade rated notes originally issued by its CDO I, CDO II and CDO III issuing entities for a price of $1.5 million and $11.8 million, respectively, and recorded a net gain on extinguishment of debt of $6.3 million and $31.0 million, respectively, in its 2009 Consolidated Statements of Operations.

     The Company intends to own these portfolios of real estate-related assets until their maturities and accounts for these transactions on its 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.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Junior Subordinated Notes

     The following table outlines borrowings under the Company’s junior subordinated notes as of September 30, 2010 and December 31, 2009:

		September 30, 2010				December 31, 2009
		Debt				Debt
		Carrying				Carrying
		Value				Value
Junior subordinated notes, maturity March 2034, unsecured, face amount of $29.4 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%		$	—			$	26,291,219
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 0.50%			25,108,450				25,057,081
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 0.50%			6,256,586				6,245,736
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 0.50%			25,108,450				25,057,081
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 0.50%			24,480,049				24,430,653
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 0.50%			—				25,057,081
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 0.50%			13,078,703				13,055,465
Junior subordinated notes, maturity April 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 0.50%			14,053,901				14,028,497
Junior subordinated notes, maturity April 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 0.50%			28,233,282				28,182,248
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 0.50%			—				25,057,081
Junior subordinated notes, maturity March 2034, unsecured, face amount of $28.7 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%			—				25,683,687
Junior subordinated notes, maturity April 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 0.50%			19,021,940				18,987,535
Junior subordinated notes, maturity June 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 0.50%			2,358,455				2,354,057
Total junior subordinated notes		$	157,699,816			$	259,487,421

     In February 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

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

with an aggregate face amount of $25.0 million and a carrying value of $0.4 million, and $10.5 million in cash. In the first quarter of 2010, 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 bonds through their maturity, a reduction to securities available-for-sale of $0.4 million representing the fair value of CDO bonds of other issuers, and a gain on extinguishment of debt of $26.3 million, or $1.03 per basic and diluted common share.

     In May 2009, the Company retired $247.1 million of its then outstanding trust preferred securities, consisting of $239.7 million of junior subordinated notes issued to third party investors and $7.4 million of common equity issued to the Company in exchange for $268.4 million of newly issued unsecured junior subordinated notes, representing 112% of the original face amount. The new notes bear a fixed interest rate of 0.50% per annum until March 31, 2012 or April 30, 2012 (the “Modification Period”). The Company paid transaction fees of approximately $1.2 million to the issuers of the junior subordinated notes related to this restructuring which will be amortized on an effective yield over the life of the notes. Furthermore, the 12% increase to the face amount due upon maturity will be amortized into expense over the life of the notes in accordance with the interest method of accounting. In July 2009, the Company had restructured its remaining $18.7 million of trust preferred securities that were not exchanged from the May 2009 restructuring transaction previously disclosed. The Company amended the $18.7 million of junior subordinated notes to $20.9 million of unsecured junior subordinated notes, representing 112% of the original face amount. The amended notes bear a fixed interest rate of 0.50% per annum for a period of approximately three years, the modification period. The Company paid a transaction fee of approximately $0.1 million to the issuers of the junior subordinated notes related to this restructuring. Furthermore, the 12% increase to the face amount due upon maturity will also be amortized into expense over the life of the notes. 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 February 2010 mentioned above.

     During the Modification Period, the Company will be permitted to make distributions of up to 100% of taxable income to common shareholders. The Company has agreed that such distributions will 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 can be terminated by the Company at any time, provided that the Company pays the note holders the original rate of interest from the time of such termination.

     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, are not redeemable during the first two years. In connection with the issuance of the original variable rate junior subordinated notes, the Company had entered into various interest rate swap agreements which were subsequently terminated upon the exchange discussed above. See Note 9 — “Derivative Financial Instruments” for further information relating to derivatives.

     In March 2009, the Company purchased from its manager, ACM, approximately $9.4 million of junior subordinated notes originally issued by a wholly-owned subsidiary of the Company’s operating partnership for $1.3 million. In 2009, ACM purchased these notes from third party investors for $1.3 million. The Company recorded a net gain on extinguishment of debt of $8.1 million and a reduction of outstanding debt totaling $9.4 million from this transaction in the Company’s first quarter 2009 Financial Statements. In connection with this transaction, during the second quarter of 2009, the Company retired approximately $0.3 million of common equity related to these junior subordinated notes.

     The carrying value under these facilities was $157.7 million at September 30, 2010 and $259.5 million at December 31, 2009. The current weighted average note rate was 0.50% at September 30, 2010 and December 31, 2009, however, based upon the accounting treatment for the restructuring mentioned above, the effective rate was 3.85% and 3.96% at September 30, 2010 and December 31, 2009, respectively. The impact of these variable interest entities with respect to consolidation is discussed in Note 10 — “Variable Interest Entities.”

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Notes Payable

     The following table outlines borrowings under the Company’s notes payable as of September 30, 2010 and December 31, 2009:

		September 30, 2010								December 31, 2009
		Debt				Collateral				Debt				Collateral
		Carrying				Carrying				Carrying				Carrying
		Value				Value				Value				Value
Term credit agreement, Wachovia Bank, National Association, $269.3 million committed line, $35.3 million revolving component, repaid on June 30, 2010, interest was variable based on one-month LIBOR; the weighted average note rate was 4.38%		$	—			$	—			$	269,256,270			$	335,960,807
Working capital facility, Wachovia Bank, National Association; $49.5 million committed line repaid on June 30, 2010, interest was variable based on one-month LIBOR, the weighted average note rate was 8.35% .			—				—				49,505,228				—
Term credit facility, $26.0 million committed line, expiration December 2010, interest is variable at 5.00% plus one-month LIBOR or Prime; the weighted average note rate was 5.33%			26,000,000				41,647,043				—				—
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 participations, maturity of July 2011, secured by the Company’s interest in first mortgage loans with principal balances totaling $5.0 million, participation interest based on a portion of the interest received from the loans which have fixed rates of 16.00%			5,000,000				5,000,000				5,000,000				5,000,000
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		$	82,457,708			$	103,935,454			$	375,219,206			$	398,249,218

     At September 30, 2010, the aggregate weighted average note rate for the Company’s notes payable was 5.13%. There were no interest rate swaps on the notes payable at September 30, 2010.

     In the first quarter of 2010, the Company entered into an agreement with Wachovia Bank, National Association, owned by Wells Fargo, National Association (“Wachovia”) whereby the Company could retire all of its $335.6 million of debt outstanding at the time the parties began to negotiate the agreement for a discounted payoff amount of $176.2 million, representing 52.5% of the face amount of the debt. The $335.6 million of indebtedness was comprised of $286.1 million of term debt and a $49.5 million working capital facility.

     In June 2010, the Company closed on the discounted payoff agreement with Wachovia and entered into a new term financing agreement with a different financial institution under the following terms:

	•		A term debt facility with an outstanding balance of $26.0 million collateralized by two multi-family loans.
	•		The maturity date of the facility is December 30, 2010 which is a term of six months.
	•		Interest rate of LIBOR plus 500 basis points or Prime plus 500 basis points for the term loan facility. The Company has paid a 1% commitment fee upon closing and has agreed to pay additional commitment fees of up to 0.75% over the remaining term based on the outstanding principal balance of the facility to the extent the obligation remains outstanding.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

•

The term debt facility requires a $1.3 million reduction at the start of each of the 4th and 5th months of the term and a $2.6 million reduction at the start of the 6th month of the term.

     In addition, the significant financial covenants are as follows (see “Debt Covenants” section below for further details):

	•		Minimum quarterly liquidity of $7.5 million in cash and cash equivalents.
	•		Minimum quarterly GAAP net worth of $35.0 million.

     Upon closing on the discounted payoff agreement on June 30, 2010, the Company recorded a $158.4 million gain to its Consolidated Statement of Operations, net of $0.4 million of warrant expense and $0.6 million of other various expenses and commissions. Estimated state income taxes were $1.8 million and recorded in provision for income taxes resulting in a net gain of $156.6 million. In accordance with the management agreement with the Company’s manager, the gain and all other gains recorded as a result of discounted debt repurchases are included in the calculation of the incentive management fee. The incentive management fee for 2010 will not be finalized until the end of the fiscal year. See Note 17 — “Management Agreement” for further details. The new facility also has a compensating balance requirement of $26.0 million of average monthly collected deposits by the Company and its affiliates. In October 2010, the Company repaid the $26.0 million facility.

     In July 2009, the Company had amended and restructured its term credit agreements, revolving credit agreement and working capital facility (the “Amended Agreements”) with Wachovia. The maturity dates of the facilities were extended for three years, with a working capital facility maturity of June 8, 2012 and a term debt facility maturity of July 23, 2012. The term debt facility required a $48.1 million reduction over the three year term, with approximately $8.0 million in reductions due every six months beginning in December 2009. Margin call provisions relating to collateral value of the underlying assets were eliminated, as long as the term loan reductions were met, with the exception of limited margin call capability related to foreclosed or real estate-owned assets. The working capital facility required quarterly amortization of up to $3.0 million per quarter and $1.0 million per CDO, but only if both the CDO was cash flowing to the Company and the Company had a minimum quarterly liquidity level of $27.5 million. Pursuant to the Amended Agreements, the interest rate for the term loan facility was changed to LIBOR plus 350 basis points from LIBOR plus approximately 200 basis points and the interest rate on the working capital facility was changed to LIBOR plus 800 basis from LIBOR plus 500 basis points. The Company had also agreed to pay a commitment fee of 1.00% payable over three years. The Company issued Wachovia 1.0 million warrants at an average strike price of $4.00. 500,000 warrants are 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 warrants expire on July 23, 2015 and no warrants have been exercised to date.

     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% 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 September 30, 2010, the outstanding balance of this note was $50.2 million.

     The Company has three junior loan participations with a total outstanding balance at September 30, 2010 of $6.3 million. These participation borrowings 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 a portion of the interest received from the loans. The Company’s obligation to pay interest on these participations is based on the performance of the related loans and investments.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Mortgage Note Payable — Real Estate Owned

     During the second quarter of 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. The real estate investment was classified as real estate owned in April 2010. The mortgage bears interest at a fixed rate of 6.23% and has a maturity date of December 2013 with a five year extension option. The outstanding balance of this mortgage was $20.8 million at September 30, 2010.

Mortgage Note Payable — Held-For-Sale

     During the second quarter of 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 2009. The mortgage bears interest at a fixed rate of 6.13% and has a maturity date of June 2012. The outstanding balance of this mortgage was $41.4 million at September 30, 2010.

Debt Covenants

     The Company’s debt facilities contain various financial covenants and restrictions, including minimum net worth, minimum liquidity and a compensating balance requirement. The Company was in compliance with all financial covenants and restrictions at September 30, 2010.

     The Company’s CDO vehicles contain interest coverage and asset over collateralization 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 September 30, 2010, as well as on the most recent determination date. 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 chart below is a summary of the Company’s CDO compliance tests as of the most recent determination date:

Cash Flow Triggers		CDO I				CDO II				CDO III
Overcollateralization (1)
Current			184.24	%			171.00	%			109.47	%
Limit			184.00	%			169.50	%			105.60	%
Pass / Fail		Pass				Pass				Pass
Interest Coverage (2)
Current			404.80	%			474.64	%			447.68	%
Limit			160.00	%			147.30	%			105.60	%
Pass / Fail		Pass				Pass				Pass