March 24, 2008 | last updated May 26, 2012 3:48 am
BATTLE BREWING

CBRE Preps For Proxy Showdown | Credit crisis, loan losses expose REIT to upheaval

Stung by loan losses to Manhattan real estate investor Harry Macklowe and by dangerously illiquid credit markets, CBRE Realty Finance Inc. now faces a proxy battle with its largest shareholder, Arbor Realty Trust Inc.

Last August, the Hartford-based commercial real estate giant rejected a takeover offer from Arbor at $8 a share. Now, as CBRE's shares have slumped to about half that, Arbor seeks to place seven representatives on CBRE's board.

CBRE failed earlier this year to block Arbor's bid to obtain a list of its shareholders — a prelude to a proxy fight. Then, it confirmed the coming battle in its annual 10K report filed with the Securities and Exchange Commission on March 17, saying: "We anticipate future lawsuits from Arbor. In addition, we will be engaging in a proxy contest for the election of directors."

The company said it hasn't set a date yet for its annual meeting or disclosed when its 2008 proxy statement detailing Arbor's plans will be made public.

But CBRE President and CEO Kenneth Witkin said in a conference call with analysts March 13: "Just to be clear, we believe that in these troubled times, replacing our board is the last thing our stockholders should do and we have some real questions about Arbor's motives."

CBRE was formed in 2005 and operates as a real estate investment trust (REIT). It went public a year later by offering stock at $14.50 a share. News of its problems with the Macklowe loans and general malaise in the REIT sector drove the stock below $3 at one point.

Many REITs, have been hammered by fallout from the subprime lending crisis.

Subprime Contamination

Although CBRE's portfolio is comprised entirely of commercial real estate debt and equity investments with no subprime exposure, the subprime credit crisis has contaminated the market for CBRE's primary source of funding: mortgage-backed securities and collateralized debt obligations tied to commercial real estate.

"The structured credit markets, including the CMBS and CDO markets have 'seized up' as investors have shunned the asset class owning to the subprime and transparency worries," CBRE said in its recent 10K report. As funding sources dry up, the company could be exposed to margin calls from its creditors or a host of other liquidity problems that could jeopardize its ability to pay dividends or even its favorable tax status as a REIT, the company said in the report.

None of that seems to have discouraged Arbor, which owns 2.9 million CBRE shares, or a 9.5 percent stake.

When Arbor executives told analysts in a conference call in February that it was launching the proxy battle with CBRE, David Fick, an analyst with Stifel Nicolaus, casually asked, "What kind of diligence have you been able to do there? How can you proceed, given the number of portfolio issues that they have …"

Ivan Kaufman, Arbor's CEO, assured the inquisitive analyst that his company would be evaluating CBRE's portfolio critically (for a transcript, click here).

Shares Nose Dive

Then on March 6, Arbor asked the SEC to pry out more information on CBRE's involvement with Macklowe, who is struggling under the weight of nearly $7 billion in loans used to acquire seven Manhattan office towers last year.

To raise cash, Macklowe is reportedly trying to sell the General Motors Building in Manhattan, which he bought from Donald Trump in 2003.

In SEC filings earlier this month, CBRE acknowledged that $82.8 million in loans to Macklowe were non-performing. One loan for $42.8 million relates to the site of the Drake Hotel in Manhattan. Another loan for $40 million is collateralized by four Manhattan office buildings. The Macklowe credits represent most of the company's $94.8 million in non-performing assets, out of total assets of $1.7 billion.

Those and other announcements, including a report that CBRE lost $17.8 million in the fourth quarter and $70.8 million for the year, have taken a toll on the company's stock price. Citigroup downgraded the stock from hold to sell on March 5.

The credit crunch hasn't helped matters.

In the wake of news that Bear Stearns was being acquired for a mere $2 per share, REIT shares tumbled, and CBRE's stock fell about 20 percent. However, the next day, when the Federal Reserve lowered interest rates to lubricate the tight markets, CBRE shares soared by more than 32 percent to $4.

Amid all the turmoil, CBRE has hired Goldman Sachs to help it sort out its strategic options. The company doesn't plan to tip its hand about Arbor or the Goldman sessions until it has settled on a strategy.

"We do not intend to disclose interim developments … and we do not expect to be commenting further until the board has approved a specific course of action," Witkin said during the Mar. 13 conference call (for a transcript, click here), adding that CBRE would not be entertaining questions about Arbor or its annual meeting either.

Meanwhile, Witkin and a company run by another CBRE director, Douglas C. Eby, were buying CBRE stock Wednesday and Thursday, SEC filings show.

Witkin bought 15,000 shares at prices ranging from $3.47 to $3.94 Wednesday, boosting his holdings to 100,000 shares. Eby bought 100,000 shares Wednesday and nearly 200,000 more shares Thursday through affiliated companies.

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