Arbor Realty Trust Stands Tall

Arbor Realty (ABR), a diversified commercial originator and investor, blew away analyst estimates for the third quarter, delivering adjusting earnings of $0.70/share versus an expected $0.63/share. Arbor also beat on revenue, delivering adjusted revenue of $63.5 million versus an expected $60.5 million.

On a GAAP basis, Arbor did even better, posting net income of $1.02/share due to gains from equity participation interests. GAAP book value was $20.19/share, meaning that Arbor is trading at just 83% of book value.

Part of the reason for the skepticism surrounding Arbor is liquidity concern. The Company makes extensive use of repurchase facilities, which comprise 31% of ABR's total liabilities. However, Arbor recently closed on two new committed warehouse lines that do not carry margin call risk. These lines replace expensive, short-term bridge loan financing. In addition, Arbor sold an equity investment in October that allowed the Company to raise cash. Nonetheless, I look for management to discuss its current access to the securitization market and to clarify its funding strategy going forward, particularly as it relates to their position on match funding.

Fortunately for Arbor, it sold its entire portfolio of agency RMBS in the first quarter of 2007. Given the significant valuation adjustments on MBS that most mREITs took this quarter, it was a very well-timed move for Arbor. With an attractive 15% dividend yield and a solidified balance sheet, Arbor looks poised for significant upside.

Disclosure: none