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Arbor Realty Trust: Valuation Could Improve As Portfolio Grows

 December 31, 2012 01:05 PM

(By Mani) Arbor Realty Trust Inc. (NYSE: ABR) is poised to benefit from an attractive supply of potential new investments, as $1.5 trillion of commercial real estate (CRE) debt is scheduled to mature over the next five years.

Arbor Realty originates and manages loans in the multi-family and CRE debt markets. Its core portfolio consists of bridge loans, mezzanine loans, junior participation in first mortgages, and preferred equity investments. Arbor also invests in mortgage related assets and real estate property.

ABR's core portfolio and mortgage-backed securities (MBS) generate income from the spread between the interest income on investments and the cost to fund the portfolio less operating expenses, hedging expenses, and credit losses. Additionally, Arbor acquires real estate by foreclosure or through partial or full settlement of mortgage debt related to its loans.

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"We believe the investment pipeline coupled with ABR's ability to access capital markets through CLO transactions positions it to benefit from the improving operating environment. We also expect ABR to benefit from its established loan origination platform, new MBS investments, and opportunistic CDO debt repurchases," Deutsche Bank analyst Stephen Laws wrote in a note to clients.

Arbor's primary investment strategy involves providing interim funding to companies in the multi-family and CRE markets while also enhancing the value of properties they operate. Arbor focuses on quick turnaround time and providing customized solutions, which we believe a competitive advantage versus traditional banks.

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Arbor Realty is able to capitalize on the Manager's existing customer base and use its senior lending business as a potential refinancing vehicle for structured finance assets.

"We expect ABR's portfolio performance to improve in 2013 as the company makes new investments and continues to manage its legacy portfolio. As new investments drive portfolio growth, we expect shares to continue moving towards economic book value," Laws noted.

As of September 30, the carrying value of Arbor Realty's portfolio totaled $1.5 billion, and debt facilities amounted to $1.3 billion.

As of Nov. 2, Arbor's liquidity position totaled $97 million, consisting of $55 million in cash and $42 million of short-term credit facility capacity. Additionally, Arbor has cash collateral of $21 million posted against swaps and approximately $105 million of net unencumbered assets.

Since 2010, shares of Arbor Realty has traded at a range of 15 - 65 percent of economic book value and has a book value of $7.58 per share.

"As new investments drive portfolio growth, we expect shares to continue moving towards economic book value," Laws said.



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