Arbor Realty Trust's Mezzanine Meltdown

Arbor Realty Trust (ABR) has seen a year-over-year increase in their loss provisions from 3MM to 67.5MM coupled with a 9MM loss on restructured loans in their Q1 numbers. As Ivan Kaufman, their CEO points out in their Q1 earnings call:

"We believe there will be increases in delinquencies and defaults and continued declining real estate values through 2009. No one is immune to the effects of this market and this will likely result in additional losses throughout our sector."

Worse yet, "the real estate market continues to worsen and there are no signs of available liquidity." While this first round of write-downs accounts for "$198.0 million of loan loss reserves on 18 loans with an unpaid principal balance of around $589.0 million at March 31, 2009," as noted by Paul Elenio. With $285MM in net tangible assets and 2.2B in liabilities, ABR is highly leveraged and subject to the need to write-down increased loss provisions which could eat away at the asset base if the recession continues as expected.

In terms of a breakdown,

"For the product type, about 62% were bridge, 13% junior participation, and 25% mezzanine preferred equity. By asset class, 36% in multi-family, 26% is office, 17% hotel, 11% land, and 4% condo. Our loan to value was around 85% and our weighted average million dollars outstanding was 60% and our portfolio had an average duration of around 30 months."

The next wave in defaults many analysts see befalling commercial real estate. If this be the case then the office and hotel properties could experience decreased valuations that would fall below the aggressive 85% LTV and with a duration of 30 months for most of these mezzanine agreements, given that many of these loans are non-recourse, the possibility of the owners handing the keys to a receivership clerk falls well within the realm of possibilities.

Couple this with the increase in unemployment, especially in New York, where 40% of the properties are concentrated, and even the 139 debt coverage ratio appears not suffice a buffer for these mezzanine payments due. While a company operating in a mezzanine realm of finance is well-positioned to provide the leverage necessary to do deals in the real estate hotbed of New York, it's a double-edged sword in times such as these.

Disclosure: No positions

Comments

[copesetic:]

Since I've been doubling down all the way from $16.55 ,I'm beyond caring :(
Disclosure:so long I'll never see daylight again!

Jun 11 01:26 PM

[legohead:]

ABR's up about 20% today. must be thanks to your story. not. unless you hold by the idea of "no publicity is bad publicity."

Jun 11 02:55 PM

[Veritas09:]

Above Arbor comment much like dying AID's patient saying that he is not immune from contracting HIV.

Jul 03 11:26 PM