Fitch affirms all classes of Arbor Realty Mortgage Securities (ARMSS) floating-rate notes Series 2005-1 Ltd./LLC as follows:
--$161,500,000 class A-1 at 'AAA';
--$40,375,000 class A-2 'AAA';
--$57,000,000 class B 'AA';
--$28,248,476 class C 'A+';
--$9,717,476 class D 'A';
--$8,587,537 class E 'A-';
--$16,723,098 class F 'BBB+';
--$12,429,329 class G 'BBB';
--$16,949,085 class H 'BBB-'.
Deal Summary:
Arbor Realty Mortgage Securities Series 2005-1 Ltd./LLC (ARMSS 2005-1) is a revolving commercial real estate cash flow collateralized debt obligation (CDO) that closed on Jan. 11, 2006. It was incorporated to issue $475,000,000 of floating-rate notes and preferred shares. As of Feb. 28, 2007, the CDO was invested in a portfolio of commercial mortgage whole loans/A-notes (28.3%), B-notes (24%), commercial real estate mezzanine loans (36.8%), preferred equity (2.3%), and cash (8.6%). The CDO is also permitted to invest in REIT debt, CMBS, and CRE CDOs.
The portfolio is selected and monitored by Arbor Realty Trust, Inc. (Arbor). ARMSS 2005-1 has a five-year reinvestment period during which, if all reinvestment criteria are satisfied, principal proceeds may be used to invest in substitute collateral. The reinvestment period ends in January 2011.
Asset Manager:
Arbor Realty Trust, Inc. is rated 'CAM2' by Fitch as a manager of commercial real estate CDOs. Arbor Realty Trust's commercial asset manager (CAM) rating can be attributed to their depth in underwriting and asset management staff, which is critical to their role in originating, underwriting, and servicing CRE loans. They maintain a focused investment strategy and an emphasis on their relationship with borrowers. Arbor manages three CRE CDOs.
Arbor Realty Trust (NYSE:ABR) is a real estate investment trust (REIT) formed in July 2003 to invest in CRE debt and securities, including CMBS, CRE CDOs, bridge loans, whole loans, B-notes, mezzanine loans, and preferred equity investments. Arbor Realty Trust is externally managed by Arbor Commercial Mortgage, LLC (ACM) which was founded in 1993 as a commercial real estate finance subsidiary of a residential mortgage bank.
Arbor Realty Trust's headquarters are in Uniondale, NY however they have sales teams throughout the country, a servicing organization in Buffalo, NY, and the securitization group in New York, NY. Arbor currently manages approximately $1.7 billion and has 100 assets in its portfolio. Incremental staffing growth plans match its projected growth in assets under management over the next year.
For more details refer to the Derivative Fitch Asset Manager Profile on Arbor Realty Trust at www.derivativefitch.com
Performance Summary:
As of the February 2007 trustee report, the CDO maintains a significant amount of reinvestment flexibility. The CDO's covenanted Fitch Poolwide Expected Loss (PEL) varies depending on the in-place weighted average spread (WAS) and weighted average coupon (WAC) (the WAS/WAC PEL matrix). The overall PEL for the CDO is 31.50%, compared to 35.50% at close. Based on the WAS/WAC PEL matrix, the reinvestment cushion is 24.25%.
The improvement in as-is PEL is primarily due to a recently defeased loan (7.8%), which has a 0% Fitch expected loss; and the addition of new collateral that has on average a better Fitch expected loss than the average at close.
Although reinvestment cushion is above average, upgrades during the reinvestment period are unlikely given the pool could still migrate to the PEL covenant. The Fitch PEL is a measure of the hypothetical loss inherent in the pool at the 'AA' stress environment before taking into account the structural features of the CDO liabilities. Fitch PEL encompasses all loan, property, and poolwide characteristics modeled by Fitch.
The WAS/WAC PEL matrix can be adjusted to a maximum PEL of 57.50% should additional equity be contributed to the deal by Arbor Realty SR, Inc. or an affiliate.
The transaction contains a structural feature that diverts a portion of excess interest to pay down the subordinate notes, classes C through H, (the highest cost liabilities) in advance of any distribution to the preferred shares ('reverse turbo'). During the reinvestment period, the classes will be paid $4.72 million annually. Only after the scheduled amount is met will the preferred shares receive distributions. To date, the reverse turbo feature has provided approximately 4.8% paydown to classes C through H.
The WAS has increased since the effective date to 4.86% from 4.71%, and remains above the covenant of 4.57%. The WAC has also increased over the same period to 7.37% from 6.99%, which is above the 6.79% covenant. Approximately 1.37% of the loans in the pool are fixed rate and unhedged, which is below the covenant of 15%. The weighted average life (WAL) has decreased to 2.67 years from 3.13 years at the effective date, implying that the pool composition will fully turnover during the reinvestment period. Additionally, the over collateralization (OC) and interest coverage (IC) ratios of all classes have remained above their covenants, as of the February 2007 trustee report.
Collateral Analysis:
The pool has remained invested primarily in whole loans/A-notes, B-notes, mezzanine debt, and preferred equity as of February 2007. The remaining 8.6% is held in cash.
Since the effective date, six loans totaling approximately $121.85 million have been paid off in full and seven loans totaling $102.18 million have been acquired. Further, one defaulted loan totaling approximately $8.32 million was purchased out of the CDO. The defaulted loan was a result of property mismanagement by an inattentive sponsor. Arbor intends to accept a deed in lieu of foreclosure; and a more hands on investor has already expressed an interest in purchasing the asset. Arbor elected to purchase the asset from the pool, in order to maintain a fully performing portfolio.
Currently, based on Fitch categorizations, condominium conversions comprise the largest percent of assets in the pool at 26.0%, up from the effective date percentage of 18.0%. Office properties are the second largest percentage at 25.3% of the loan portfolio. The property type composition is within the covenant guidelines, as of the February 2007 trustee report.
The Fitch Loan Diversity Index is 574 compared to the covenant of 714, which represents an above average concentration of assets as compared to other CRE CDOs. The CDO is within all of its geographic location covenants with 54.8% of the assets located in New York based on Fitch categorizations.
For a summary of the Fitch Loans of Concern and the 10 largest loans, please refer to the ARMSS 2005-1 CREL Surveyor Snapshot on the Fitch Research website, www.fitchresearch.com. The report will be available beginning April 3, 2007.
Rating Definitions:
The ratings of the class A-1, A-2 and B notes address the likelihood that investors will receive full and timely payments of interest, as per the governing documents, as well as the aggregate outstanding amount of principal by the stated maturity date. The ratings of the class C, D, E, F, G, and H notes address the likelihood that investors will receive ultimate interest and capitalized interest payments, as per the governing documents, as well as the aggregate outstanding amount of principal by the stated maturity date.
Ongoing Surveillance:
Fitch will continue to monitor and review this transaction for future rating adjustments. The surveillance team will conduct a review whenever there is approximately 15% change in the collateral composition or semi-annually. Additional deal information and historical data are available on the Derivative Fitch web site at www.derivativefitch.com. For more information on the Fitch Rating Methodology for CREL CDOs, see 'Rating Methodology for U.S. Commercial Real Estate Loan CDOs' dated Sept. 25, 2006 and also available at www.derivativefitch.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.derivativefitch.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. Fitch means Fitch, Inc., Fitch Ratings, Ltd. and their subsidiaries including Derivative Fitch, Inc. and Derivative Fitch Ltd. and any successor or successors thereto.
