CBRE is Serious About a Sale

Maybe there was more to the standstill agreement with Arbor Realty Trust than I thought. CBRE Realty Finance (CBF) disclosed today that it had amended its agreement with manager CBRE Melody & Company as follows:

• [The] modifications provide the Company with the right to terminate the management agreement without paying a termination fee to the Manager and with an option to acquire the Manager.
• The management agreement now also terminates automatically upon the closing of a strategic transaction by the Company without the payment of a termination fee.
• In addition, the restriction on CBRE's and CBRE Melody's ability to compete with the Company in the commercial finance debt space ends on April 30, 2008 (this restriction previously was to end on December 31, 2008).

With the stock still sagging and the opportunity to access CB Richard Ellis's commercial origination platform, a sale of CBF could be a win-win proposition for both parties.

Catfight Comes to a Climax-Free Close

In truly disappointing fashion, CBRE Realty Finance (CBF) and Arbor Realty Trust (ABR) ended their long-standing catfight with the disclosure of a 12-month standstill agreement. Arbor agreed to drop its proxy contest and agreed to vote in favor of CBRE’s Board nominees in exchange for the right to bid on CBF should it choose to sell itself within the next 12 months.

Not much in it for Arbor, but then the $8/share they bid for CBF last fall isn’t looking so hot right now either.

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.

Arbor Realty Again Ups the Ante

As I guessed last week, Arbor Realty Trust (ABR) is taking its pursuit of CBRE Realty Finance (CBF) to a proxy fight. You can review Arbor's proposed slate of directors in this SC 13D/A. The filing states that "...the Nominees, if elected, intend to evaluate all strategic alternatives to enhance and maximize, stockholder value, including, but not limited to: (i) seeking a business combination or sale of the Company; (ii) reviewing the performance of CBRE Realty Finance Management, LLC, the manager of the Issuer (the "Manager"); (iii) replacing the Manager; and (iv) seeking the reimbursement of fees previously paid to the Manager, if warranted."

As a side note, Arbor apparently didn't submit its alternate slate in time, so they filed suit to prevent CBF from rejecting their slate.

For its part, CBF issued an acidic press release in response, saying "Our board of directors decided we have better things to do with our Company's money and resources than litigating something like this...We will take Arbor at its word that it misread our bylaws, and move on. Our Board of Directors is dedicated to maximizing stockholder value and will look forward with interest to hearing what the members of Arbor's dissident slate have to say."

Arbor Turns Up Heat on CBRE

I noted Arbor Realty Trust's (ABR) interest in CBRE Realty Finance (CBF) about two months ago, when Arbor unsuccessfully offered a $8/share bid for CBF. Two months later, with CBF shares still well below the $8/share offer price, Arbor is mightily wielding its 9.4% stake in CBRE Realty. Earlier today, the company issued an open letter to CBF's CEO, demanding an update on the CBR Realty portfolio, specifically with respect to two troubled deals and CBF's November assertion that "[w]e [CBF] have no non-performing loans in our debt portfolio."

Although there is no indication that Arbor is getting any closer to acquiring CBRE Realty, open letters such as this one often serve as a precursor to a hostile takeover and puts CBF on notice that Arbor is not going away any time soon. One long-time investor in the mREIT sector, Wally Weitz, may be putting his bets on a deal sooner than later. In a recent 13G filing, Weitz disclosed that he had recently upped his stake in CBRE from 6.5% to 8.1%, his first addition to his position in nearly a year.

Arbor Realty Chases CBRE Realty Finance

Lost in the Thanksgiving shuffle was Arbor Realty's (ABR) 13-D filing disclosing its 9.4% stake in CBRE Realty Finance (CBF), and more importantly, Arbor's desire to acquire CBRE. As detailed in the 13-D, Arbor made a $8.00/share stock-for-stock offer (though it did offer to pay up 25% in cash) in late August, which was rebuffed by CBRE.

However, Arbor didn't give up, and on November 13, after CBRE reported its third-quarter earnings, Arbor made another offer to acquire CBRE. This offer was also rebuffed.

It's now two weeks later and Arbor is keeping the pressure on, amending the 13-D to request a waiver of the 9.8% ownership threshold and to include a direct request to meet with interested parties of CBRE's board.

It's certainly an intriguing proposition for the two companies, although the $8/share offer is significantly below CBRE's third-quarter book value of $9.65/share. I believe Arbor will need to raise its offer to at least $9.50/share to get enough fire behind CBRE's independent board members for the offer to be seriously considered. Still, Form 4 filings since November 12 appear to indicate that at least some of CBRE's insiders believe the company is in play.

From a strategic standpoint, the deal does have some synergies. Both companies have shown the ability to work well with JV partners, but CBRE's current opportunities for capital reinvestment appear limited. Arbor, on the other hand, could redeploy CBRE's capital to reduce reliance on repurchase financing and retain more equity interests, which has been a real strength for Arbor.

The cost of the deal could range from $250 - $300 million, meaning Arbor would have to issue an additional 15-20 million common shares to effect a stock-for-stock swap. Nonetheless, the opportunity to acquire a cheap commercial mREIT appears to have heightened Arbor's ardor.

CBRE Can't Catch a Break

CBRE Realty Finance (CBF), a commercial originator and investor, reported solid third quarter results outside of impairment charges. The question for CBRE going forward is whether or not these impairment charges will be one-time or recurring.

During the quarter, CBF recorded a net loss net loss available to common stockholders for the third quarter of $50.0 million, or $1.64 per diluted common share. Adjusted funds from operations ("AFFO") totaled ($48.1) million, or ($1.58) per diluted common share. These losses were driven by the recognition of $54.7 million of impairments on the Company's two foreclosed assets.

Excluding the impairment charges, AFFO would have been $6.6 million, or $0.22 per diluted common share - enough to cover the $0.17/share Q3 dividend.

CBF said it expects to achieve its previously stated 2007 dividend guidance of $0.80 per share from core activities with an expected dividend of $0.21 per share to be declared in the fourth quarter, which equates to a current yield of about 20%.

Most tellingly, book value per diluted common share was $9.65 at September 30, 2007, after the impairment charges, meaning CBF is trading at just 40% of book value.

It remains to be seen if CBRE's portfolio will continue to perform going forward, which traders are obviously betting against at this point. CBRE said in its earnings release that "[a]s of the date of this press release, there are no non-performing loans within the Company's debt portfolio."

Another issue for CBRE is future earnings given limited origination activity and access to funding. As existing investments payoff and mature, CBRE has thus far been unable to redeploy the capital into higher-yielding investments due to internal capital needs. Now that the balance sheet has stabilized somewhat, it will be interesting to see how CBF chooses to put to use available capital. The Company's existing joint ventures appear to be a strong niche for CBRE, one that might well be worth expanding given the limited availability of CDO issuance for funding purposes.

Overall, given the 20% dividend yield and upside potential due to the gap in market price and book value, CBF appears to be strong speculative play.