Why Arbor Realty's Chasing CBRE Realty Finance

I wasn't really sure why Arbor Realty Trust (ABR) was pursuing CBRE Realty Finance (CBF) until I read through the transcript of Arbor's conference call earlier today. As a bit of an aside, Arbor hit another home run on earnings, delivering full-year earnings of $4.44/share, yet creating enough tax deferment in the gains on their equity kickers to limit the 2007 special dividend obligation to just $0.15 - $0.20/share. It's precisely this sort of shrewd forward-looking business decisions that has differentiated Arbor from its peers and limited ABR's exposure during the credit crunch.

So the question again, why go after CBRE Realty Finance? I suspect Arbor is seeking to expand its origination platform -- and they have the opportunity to exploit (if somewhat begrudgingly)CBF's relationship with CBRE/Melody, the mortgage origination and servicing subsidiary of CBRE.

On Arbor's 4Q call, David Choksi at Lehman Brothers really surfaced the most serious issue at Arbor -- "And then, Ivan in your comments, you sounded somewhat of a cautious tone, given the prepayments you have upcoming, you are just seeing liquidity. What’s kind of the timing to redeploy those proceeds?"

Indeed, Arbor originated five new loans and investments totaling $116 million during the quarter, but seven loans paid off with an outstanding balance of approximately $138 million. Ivan Kaufman, Arbor's CEO, tapdanced around the answer, citing liquidity needs, etc.

Choksi pressed on, asking "And then, one final question. Ivan, you mentioned that you were looking at JV opportunities. Can you elaborate on some of the things that you are looking at?"

Kaufman appeared very interested in this possibility, replying "And clearly, if we could utilize other people’s capital and just a little bit of our capital and enhance our returns through promotes, that would be an attractive structure for us and we’ve been evaluating those options."

CBF has $76.8 million invested in joint venture equity investments, but it is looking to exit these investments quickly for liquidity purposes. Arbor, on the other hand, has the ability to take a longer-term view of these JV investments and monetize them at attractive times.

In short, Arbor's talent for managing investments is becoming constrained by its access to opportunities. Arbor has recognized an avenue to access more originations through a (forced) partnership with CBRE and has recognized that CBF does not have the ability and experience to run a commercial REIT. Perhaps CBF's shareholders will agree.