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Arbor Realty Trust
 

re_banker2's picture
IB
 
Points)
 on 8/8/12 at 1:17pm

Has anyone done a transaction with this firm? What is the perception in the marketplace of them?

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re-ib-ny's picture

They are a debt REIT, meaning

PE
(Gorilla, 688
 
Points)
 on 8/8/12 at 1:35pm

They are a debt REIT, meaning that they acquire or originate loans and financing on a hodge-podge of real estate assets as opposed to acquiring direct real estate ownership. As debt REITs go, this one is small and struggling.

re-ib-ny's picture

Someone PM'ed me to ask how I

PE
(Gorilla, 688
 
Points)
 on 8/8/12 at 4:06pm

Someone PM'ed me to ask how I can tell Arbor is struggling. If you pull up Arbor on Yahoo Finance, first you can see there isn't much equity in the company. The market cap is only $155MM. Yahoo says this equity sits behind about $1.3BN of debt. I don't mean for this to be a primer on debt REIT analysis, but to understand the capital stack of a debt REIT you really should pull open the balance sheet and figure out where all the debt comes from and how much of it is recourse or non-recourse to the parent.

Nevertheless, you can tell that the firm is overlevered, and has seen considerable equity value eroded over the last five years (see stock chart). That low equity cushion increases risk of financial distress and pushes the company's cost of capital above peers. For a company in the business of lending, this is a big problem. The way you make money in lending is by borrowing cheaply, and lending at a higher rate, thereby earning spread. If your peers can all borrow money more cheaply than you, you quickly lose the ability to compete.

This isn't to say that the stock won't do well and the company can't recover. Indeed, by some return metrics, the stock has done well recently (up ~25% in last six months, better than peers). But a lot of this is also attributable to the leverage. If you think that the value of mortgages is going to rise, then of course buying the debt REIT that's 90% leveraged will give you the most pop. Tough for anyone who works there, though.

Flake's picture

re-ib-ny: Someone PM'ed me to

ER
(Neanderthal, 3,586
 
Points)
 on 8/9/12 at 12:29am
re-ib-ny:

Someone PM'ed me to ask how I can tell Arbor is struggling. If you pull up Arbor on Yahoo Finance, first you can see there isn't much equity in the company. The market cap is only $155MM. Yahoo says this equity sits behind about $1.3BN of debt. I don't mean for this to be a primer on debt REIT analysis, but to understand the capital stack of a debt REIT you really should pull open the balance sheet and figure out where all the debt comes from and how much of it is recourse or non-recourse to the parent.

Nevertheless, you can tell that the firm is overlevered, and has seen considerable equity value eroded over the last five years (see stock chart). That low equity cushion increases risk of financial distress and pushes the company's cost of capital above peers. For a company in the business of lending, this is a big problem. The way you make money in lending is by borrowing cheaply, and lending at a higher rate, thereby earning spread. If your peers can all borrow money more cheaply than you, you quickly lose the ability to compete.

This isn't to say that the stock won't do well and the company can't recover. Indeed, by some return metrics, the stock has done well recently (up ~25% in last six months, better than peers). But a lot of this is also attributable to the leverage. If you think that the value of mortgages is going to rise, then of course buying the debt REIT that's 90% leveraged will give you the most pop. Tough for anyone who works there, though.

I have to disagree with some of this. I wouldn't say Arbor is struggling at all and is doing fine relative to its peers.

1. Arbor uses non-recourse (CDO) financing for its CRE loan and CMBS portfolio which accounts for $900mm of that $1.3bn of debt. If you're so worried about financing costs, I quickly looked at their latest Q and saw that they had a bunch of high cost swaps mature last quarter, which effectively decreased their cost of funds by about 100bps. Those swaps will be replaced with cheaper ones given where rates are today.

2. Cost of funds are comparable to other commercial REITs (look up NRF, STWD, SFI, RSO, NCT).

3. Similarly to peers who finance their portfolios with CDO debt, Arbor has been repurchasing its own CDO bonds at huge discounts as banks and Europe continue to deleverage. This creates good shareholder value as these discounts to par could be realized later and can also represent embedded cash flows in the future.

4. All of Arbor's CDOs are passing their overcollateralization tests. Cash flows are going to senior tranches without impacting subordinate/equity tranches. If Arbor is like the other commercial mortgage REITs, they hold on to the equity piece of their own CDOs after issuance.

5. I'm not spending more than 5 minutes looking at this 10Q.

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Flake's picture

Just one last thing to add:

ER
(Neanderthal, 3,586
 
Points)
 on 8/9/12 at 12:55am

Just one last thing to add: the differentiator here should be their origination platform, investment team, and the ability to negotiate new and attractive financing options/credit lines to fund new acquisitions/originations. All of this is just my rushed opinion since I haven't looked at this company in detail. I would look at their liquidity such as unrestricted cash available, undrawn credit facilities, equity invested in liquid RMBS...also look into industry trends. CMBS originations and performance this year, CRE loan and cmbs maturities, etc. Guys like arbor don't usually compete with conduits I don't think but can originate loans for conduit deals and a maturity wall should create opportunities.

In terms of what the opinion of them is from the point of view of their competition or people who deal with them....no idea.

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.

prospie's picture

Flake: In terms of what the

(King Kong, 1,680
 
Points)
 on 8/9/12 at 9:45am
Flake:

In terms of what the opinion of them is from the point of view of their competition or people who deal with them....no idea.

No idea either, but I thought this was awesome: http://www.nypost.com/p/news/regional/item_cHKVr5L...
MOGUL'S DIRTY SECRET BARED AT PI'S TRIAL
By DAVID FINNIGAN in LA and DAVID K. LI in NY
A Long Island mortgage mogul knocked up a Hungarian beauty before paying her $120,000 to abort the pregnancy and keep quiet, she told jurors at private gumshoe Anthony Pellicano's trial yesterday.
Willowy knockout Timea Zsibrita turned heads on the witness stand, saying Pellicano gave her the money and personally drove her to the clinic where she had the abortion.
The cloak-and-dagger operation was done at the direction of Ivan Kaufman, president and CEO of Arbor Realty Trust in Uniondale, she said.

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Flake's picture

prospie: Flake: In terms of

ER
(Neanderthal, 3,586
 
Points)
 on 8/9/12 at 10:27am
prospie:
Flake:

In terms of what the opinion of them is from the point of view of their competition or people who deal with them....no idea.

No idea either, but I thought this was awesome: http://www.nypost.com/p/news/regional/item_cHKVr5L...
MOGUL'S DIRTY SECRET BARED AT PI'S TRIAL
By DAVID FINNIGAN in LA and DAVID K. LI in NY
A Long Island mortgage mogul knocked up a Hungarian beauty before paying her $120,000 to abort the pregnancy and keep quiet, she told jurors at private gumshoe Anthony Pellicano's trial yesterday.
Willowy knockout Timea Zsibrita turned heads on the witness stand, saying Pellicano gave her the money and personally drove her to the clinic where she had the abortion.
The cloak-and-dagger operation was done at the direction of Ivan Kaufman, president and CEO of Arbor Realty Trust in Uniondale, she said.

Hahaha...I wonder if Arbor has a few abortion clinics in their net lease portfolio.

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.

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