By Allison Landa
A relative newcomer to the REIT universe, Arbor Realty Trust (NYSE: ABR) already has strong roots in the mortgage business and looks toward the future with optimism and an energetic set of plans. This is matched with a focus on creating and sustaining long-term working relationships with a strong base of repeat customers.
First incorporated in July 2003, the Uniondale, N.Y.-based company went public less than a year later (April 7, 2004). "We've increased our capital base, which has definitely enhanced our ability to close larger transactions and given us greater flexibility with maturity terms," says Arbor President and Chief Executive Officer Ivan Kaufman.
Arbor's roots can be traced back to 1983 when Kaufman founded Arbor National Holdings, Inc., and its lending subsidiary Arbor Mortgage, Inc. He presided over the company as it grew to 25 branches in eight states and then took it public in 1992. In 1995, Kaufman sold Arbor National Holdings to Bank of America (at nearly twice the IPO price), but retained the commercial side of the business, which would eventually branch out into Arbor Realty.
The Sagamore Hotel, Miami Beach, Fla. |
Arbor Realty focuses its investments in real estate-related bridge and mezzanine loans, preferred and direct equity investments, mortgage-related
securities and other real estate assets. The company chose to become a REIT because, according to senior management, it was the most efficient structure for both Arbor and its investors, providing stability, consistency and a growing dividend for its shareholders. Being a REIT allows the company to raise additional funding when necessary while providing investors with tax transparency.
Through the third quarter of 2004, Arbor's assets had increased to $900 million, more than double the $400 million of 12 months earlier. On Jan. 13, the company announced a dividend of $0.47, an increase of 9 percent from the previous quarter.
From IPO to CDO
Arbor's core operating strategies and underwriting/credit policies have remained steady following its IPO. However, the company says it has deepened relationships with its borrowers and enjoys a significant repeat borrower rate. Building relationships with its consistent customers is a strong part of Arbor's business strategy, according to Kaufman.
James Hotel, Scottsdale, Ariz. |
In addition, Arbor's increased portfolio size from the IPO allowed the company to issue its first collateralized debt obligation (CDO) late in the fourth quarter of 2004, a move which it believes will lower debt costs and allow greater flexibility in funding future growth.
The CDO consisted of approximately $305 million of investment-grade debt. Arbor itself retained an equity interest in the portfolio of $164 million. According to an Arbor press release, the face value of the collateral in the initial portfolio was expected to be approximately $469 million, consisting primarily of bridge and mezzanine loans.
Kaufman says he's looking to the CDO to strengthen Arbor's franchise. The company will own the portfolio until its maturity, and will show the transaction as a financing on its balance sheet. Arbor plans to use the proceeds to repay borrowings under current repurchase agreements and warehouse credit facilities.
Carving a Market Niche
Kaufman credits the experience of the 17 Arbor Realty Trust and 143 Arbor Commercial staff members for the company's ability to do business on an advanced level.
"We're highly specialized in terms of types of loans," he says. "We have the ability to move quickly (and engage in) sophisticated transactions. ... We just have a lot of expertise in all segments of a real estate transaction, including structuring and issuing senior debt, securitization, subordinate debt and equity pieces. We're highly experienced in all aspects of the transaction from every angle."
Kaufman sees this one-stop-shop positioning as one of Arbor's strongest competitive advantages.
The Prime Retail, Inc. portfolio, which owns or controls 27 factory outlet centers in 26 states, is an example of a transaction typifying this do-it-all ability. Arbor arranged the portfolio's full financing package, including its first mortgage debt, mezzanine financing and equity for its borrower. In addition, through the mezzanine financing Arbor retained a participating interest in the project's equity. This represents Arbor's first equity kicker—an arrangement that grants the lender a percentage of interest in the property, in this case 24 percent. To date, the Prime Retail portfolio has been a moneymaker for Arbor, earning the company $665,000 during the third quarter of 2004.
Sharpening the Competitive Edge
Kaufman says his company also stays competitive by offering a mix of securitization and real estate know-how, and securitization plays a significant role in Arbor's originations. The company provides B-pieces and C-pieces to financing packages that come as structures with an A-piece.
Arbor Chief Financial Officer Rick Herbst explains that A-piece loans are the most secure. "They're the most senior," he says. "B-pieces are subordinate to the A-pieces, and C-pieces are subordinate to the Bs. Of course, the rates go up as you go through the alphabet because they're riskier loans."
Arbor says it has already achieved its goal of growing and diversifying its portfolio. More specifically, the company says it has increased its average loan size and duration, expanded its credit facilities, maintained a pristine credit quality, and increased earnings. The average loan size over the last 18 months has jumped from $8 million to $14 million.
Confronting Challenges
Though Arbor continually seeks to increase its portfolio, it has also had to find ways to finance this growth. The company has toyed with the idea of issuing additional common stock, but will do so only when it is convinced such a move would be accretive to current shareholders. Herbst also believes issuing extra stock may not appropriately reward long-term shareholders.
"We believe we have built up some off-balance sheet value. If we were to issue additional stock now, to the extent some of that value monetizes, it would get to shareholders who have been with us for (a short time)," Herbst says. "We'd like to reward the current shareholders appropriately because they've been along for the ride."
A more palatable solution was the recent CDO, which the firm's senior management says is a preferable funding source. Arbor plans to issue additional CDOs in the future, though it has not announced specific dates for these, while continuing to rely on more traditional funding sources.
The company is also tussling with what it views as an influx of capital into the commercial lending arena. In Arbor's view, this incoming stream of capital is partially under priced and holds the potential to create competitive marketplace imbalance. Still, Arbor senior management sees this as part challenge and part opportunity, since it considers itself adept at investing and lending along all parts of the capital stack of a transaction.
Though today it is an externally managed REIT, Arbor may consider internalizing its management structure in the future, though Herbst says there is no specific timetable for doing so. "We're going to take a look at (internalizing) this year," he says. "That doesn't mean we are definitely going to do it this year, but we're going to look at it."
Arbor also wants to continue strengthening its rapport with a consistent clientele. "We're not just about the lending," Kaufman says. "We're about developing long-term relationships. We've been very effective in doing that in the past and are effective in doing that today."
Allison Landa is a regular contributor to Portfolio.
