• Credit quality of our assets - Effective asset and portfolio management is essential to maximizing the performance and value of a real estate/mortgage investment. Maintaining the credit quality of our loans and investments is of critical importance. Loans that do not perform in accordance with their terms may have a negative impact on earnings and liquidity.

• Cost control - We seek to minimize our operating costs, which consist primarily of employee compensation and related costs, management fees and other general and administrative expenses. If there are increases in foreclosures and non-performing loans and investments, certain of these expenses, particularly employee compensation expenses and asset management related expenses, may increase.

We are organized and conduct our operations to qualify as a real estate investment trust ("REIT") for federal income tax purposes. A REIT is generally not subject to federal income tax on its REIT-taxable income that it distributes to its stockholders, provided that it distributes at least 90% of its REIT-taxable income and meets certain other requirements. Certain of our assets that produce non-qualifying income are owned by our taxable REIT subsidiaries, the income of which are subject to federal and state income taxes. We did not record a provision for income taxes related to the assets that are held in taxable REIT subsidiaries during the three months ended March 31, 2009 and 2008. Sources of Operating Revenues
We derive our operating revenues primarily through interest received from making real estate-related bridge, mezzanine and junior participation loans and preferred equity investments. For the three months ended March 31, 2009 and 2008, interest income earned on these loans and investments represented approximately 93% and 99% of our total revenues, respectively.
Interest income may also be derived from profits of equity participation interests. No such interest income had been recognized for the three months ended March 31, 2009. For the three months ended March 31, 2008, interest earned on these equity participation interests represented approximately 1% of our total revenues.

We derived interest income from our investments in CRE collateralized debt obligation bond securities. For the three months ended March 31, 2009, interest on these investments represented approximately 3% of our total revenues. No such income was recognized for the three months ended March 31, 2008.
Property operating income is derived from our real estate owned. For the three months ended March 31, 2009, property operating income represented approximately 4% of our total revenues. No such income was recognized for the three months ended March 31, 2008.
Additionally, we derive operating revenues from other income that represents loan structuring and miscellaneous asset management fees associated with our loans and investments portfolio. For the three months ended March 31, 2009 and 2008, revenue from other income represented less than 1% of our total revenues.
Income or Loss from Equity Affiliates and Gain on Sale of Loans and Real Estate We derive income or losses from equity affiliates relating to joint ventures that were formed with equity partners to acquire, develop and/or sell real estate assets. These joint ventures are not majority owned or controlled by us, and are not consolidated in our financial statements. These investments are recorded under either the equity or cost method of accounting as appropriate. We record our share of net income and losses from the underlying properties on a single line item in the consolidated statements of operations as income from equity affiliates. For the three ended March 31, 2009, income from equity affiliates totaled approximately $2.5 million. No such income was recognized for the three months ended March 31, 2008.
We also may derive income from the gain on sale of loans and real estate. We may acquire (1) real estate for our own investment and, upon stabilization, disposition at an anticipated return and (2) real estate notes generally at a discount from lenders in situations where the borrower wishes to restructure and reposition its short term debt and the lender wishes to divest certain assets from its portfolio. No such income has been recorded to date. Critical Accounting Policies
Please refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2008 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Significant Accounting Estimates and Critical Accounting Policies" for a discussion of our critical accounting policies. During the three months ended March 31, 2009, there were no material changes to these policies, except for the updates described below. Revenue Recognition
Interest Income. Interest income is recognized on the accrual basis as it is earned from loans, investments and securities. In many instances, the borrower pays an additional amount of interest at the time the loan is closed, an origination fee, and deferred interest upon maturity. In some cases, interest income may also include the amortization or accretion of premiums and discounts arising from the purchase or origination of the loan or security. This additional income, net of any direct loan origination costs incurred, is deferred and accreted into interest income on an effective yield or "interest" method adjusted for actual prepayment activity over the life of the related loan or security as a yield adjustment. Income recognition is suspended for loans when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Several of the loans provide for accrual of interest at specified rates, which differ from current payment terms. Interest is recognized on such loans at the accrual rate subject to management's determination that accrued interest and outstanding principal are ultimately collectible, based on the underlying collateral and operations of the borrower. If management cannot make this determination regarding collectibility, interest income above the current pay rate is recognized only upon actual receipt. Additionally, interest income is recorded when earned from equity participation interests, referred to as equity kickers. These equity kickers have the potential to generate additional revenues to us as a result of excess cash flows being distributed and/or as appreciated properties are sold or refinanced. We did not record interest income on such investments for the three months ended March 31, 2009 as compared to $0.3 million for the three months ended March 31, 2008.

Property operating income. Property operating income represents operating income associated with the operations of an office building recorded as real estate owned, net. For the three months ended March 31, 2009, we recorded approximately $1.5 million of property operating income relating to real estate owned. There was no property operating income for the three months ended March 31, 2008.
Derivatives and Hedging Activities
In accordance with SFAS No. 133, the carrying values of interest rate swaps and the underlying hedged liabilities are reflected at their fair value. As of December 31, 2007 we retained the services of Chatham Financial Corporation, a Statement on Auditing Standards No. 70 ("SAS 70"), "Service Organizations" compliant, third party financial services company to determine these fair values. Changes in the fair value of these derivatives are either offset against the change in the fair value of the hedged liability through earnings or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. Derivatives that do not qualify for cash flow hedge accounting treatment are adjusted to fair value through earnings.
SFAS 161, "Disclosures about Derivative Instruments and Hedging Activities", an amendment of FASB Statement No. 133, amends and expands the disclosure requirements of SFAS 133 with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by SFAS 133, we record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether a company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risk, even though hedge accounting does not apply or we elect not to apply hedge accounting under SFAS 133.
During the three months ended March 31, 2009 we did not enter into new swaps. During the three months ended March 31, 2008, we entered into six additional interest rate swaps, that qualify as cash flow hedges, having a total combined notional value of approximately $121.6 million. During the three months ended March 31, 2009, we terminated a $33.5 million portion of an interest rate swap with a total notional value of approximately $67.0 million. The loss on termination will be amortized to expense over the original life of the hedging instrument. The fair value of our qualifying hedge portfolio has increased by approximately $12.6 million from December 31, 2008 as a result of the terminated swap, combined with a change in the projected LIBOR rates and credit spreads of both parties.
Because the valuations of our hedging activities are based on estimates, the fair value may change if our estimates are inaccurate. For the effect of hypothetical changes in market interest rates on our interest rate swaps, see "Interest Rate Risk" in "Quantitative and Qualitative Disclosures About Market Risk", set forth in Item 3 hereof.
Recently Issued Accounting Pronouncements For a discussion of the impact of new accounting pronouncements on our financial condition or results of operations, see Note 2 of the "Notes to the Consolidated Financial Statements" set forth in Item 1 hereof.

Changes in Financial Condition
Our loan and investment portfolio balance, including our held-to-maturity securities, at March 31, 2009 was $2.1 billion, with a weighted average current interest pay rate of 5.74% as compared to $2.2 billion, with a weighted average current interest pay rate of 6.13% at December 31, 2008. At March 31, 2009, advances on financing facilities totaled $1.9 billion, with a weighted average funding cost of 3.65% as compared to $2.0 billion, with a weighted average funding cost of 3.51% at December 31, 2008.
During the quarter, five loans paid off on properties that were either sold or refinanced by a third party with an outstanding balance of $19.0 million, five loans partially repaid totaling $31.3 million and eight loans were refinanced during the quarter totaling $161.3 million. These totals included a $9.0 million loss on the restructuring of two loans during the first quarter of 2009. In addition, one loan of approximately $2.7 million was extended during the quarter in accordance with the extension options of the corresponding loan agreements.
In March 2009, we exchanged our 16.67% interest in Prime Outlets Member, LLC ("POM") for preferred and common operating partnership units of Lightstone Value Plus REIT L.P. at a value of approximately $37.0 million. As a result, during the first quarter of 2009, we recorded a gain on exchange of profits interest of approximately $56.0 million and income attributable to noncontrolling interest of approximately $18.7 million related to the third party member's portion of income recorded. See Note 6 of the "Notes to the Consolidated Financial Statements" set forth in Item 1 hereof for further details.
Cash and cash equivalents increased $13.4 million, to $14.2 million at March 31, 2009 compared to $0.8 million at December 31, 2008. All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The increase was primarily due to payoffs and paydowns of our loan investments.
Restricted cash decreased $10.2 million, or 11% to $83.0 million at March 31, 2009 compared to $93.2 million at December 31, 2008. Restricted cash is kept on deposit with the trustees for our collateralized debt obligations ("CDOs"), and primarily represents proceeds from loan repayments which will be used to purchase replacement loans as collateral for the CDOs. The decrease was primarily due to the redeployment of funds during the first quarter of 2009 from proceeds received from the full satisfaction of loans held in the CDO and the transfer of loans from other financing facilities to the CDOs.
Investment in equity affiliates increased $57.8 million to $87.1 million at March 31, 2009. In June 2008, we entered into an agreement to transfer our 16.67% interest in POM, in exchange for preferred and common operating partnership units of Lightstone Value Plus REIT L.P. Upon closing this transaction on March 30, 2009, we recorded an investment of approximately $56.0 million for the preferred and common operating partnership units. See Note 6 of the "Notes to the Consolidated Financial Statements" set forth in Item 1 hereof for further details.
Due from related party increased $12.7 million to $15.6 million at March 31, 2009 compared to $2.9 million at December 31, 2008 primarily as a result of $9.7 million of loan repayment proceeds and $3.0 million of restructuring fee proceeds due from ACM. These payments were remitted to us in April 2009.
Other assets decreased $40.9 million, or 29%, to $98.8 million at March 31, 2009 compared to $139.7 million at December 31, 2008. The decrease was primarily due to a reduction of a $16.5 million third party member receivable in March 2009 in connection with the closing of the POM transaction as well as a $9.1 million decrease in interest receivable in the first quarter of 2009 from a portion of our interest rate swaps as a result of a decrease in LIBOR rates from the fourth quarter of 2008. This decrease was also due to a $2.8 million decrease in collateral posted for a portion of our interest rate swaps whose value had previously declined as a result of reductions in the projected LIBOR rates, a $5.1 million decrease in funded cash collateral from the termination of a $33.5 million swap and a $4.2 million decrease in interest income accrued as a result of non-performing loans and lower LIBOR rates. See Item 3 "Quantitative and Qualitative Disclosures About Market Risk" for further information relating to our derivatives.

In March 2009, we purchased from our manager, ACM, approximately $9.4 million of junior subordinated notes originally issued by a wholly-owned subsidiary of our operating partnership for $1.3 million. In 2009, ACM purchased these notes from third party investors for $1.3 million. We recorded a net gain on extinguishment of debt of $8.1 million and a reduction of outstanding debt totaling $9.4 million from this transaction. In addition, during the three months ended March 31, 2009, we purchased, approximately $23.7 million of investment grade rated notes originally issued by our CDO issuing entities for a price of $5.6 million. Of the $23.7 million purchased, $8.8 million of the CDO notes were purchased from ACM for a price of $3.2 million. In 2008, ACM purchased these notes from third party investors for $3.2 million. We recorded a net gain on extinguishment of debt of $18.2 million and a reduction of outstanding debt totaling $23.7 million from these transactions in our first quarter 2009 financial statements.
Other liabilities decreased $14.0 million, or 10.4%, to $120.7 million at March 31, 2009 compared to $134.6 million at December 31, 2008. The decrease was primarily due to a $12.6 million decrease in accrued interest payable primarily due to a reduction in LIBOR rates, the timing of reset dates and a decline in the outstanding balance of our financing facilities.
On April 21, 2009, we issued an aggregate of 245,000 shares of restricted common stock under the 2003 Stock Incentive Plan, as amended in 2005 (the "Plan"), of which 155,000 shares were awarded to certain of our and ACM employees and 90,000 shares were issued to members of the board of directors. As a means of emphasizing retention at a critical time for Arbor and due to their relatively low value, the 245,000 common shares underlying the restricted stock awards granted were fully vested as of the date of grant. In addition, on April 8, 2009, we accelerated the vesting of all unvested shares underlying restricted stock awards totaling 243,091 shares previously granted to certain of our and ACM employees and non-management members of the board.
Comparison of Results of Operations for the Three Months Ended March 31, 2009 and 2008
The following table sets forth our results of operations for the three months ended March 31, 2009 and 2008:

                                                     Three Months Ended
                                                          March 31,                         Increase/(Decrease)
                                                  2009                 2008               Amount             Percent
                                                         (Unaudited)
Revenue:
Interest income                                 $30,500,023        $ 55,416,330        $ (24,916,307 )            (45 )%
Property operating income                         1,470,796                   -            1,470,796               nm
Other income                                         16,250              20,693               (4,443 )            (21 )%


Total revenue                                    31,987,069          55,437,023          (23,449,954 )            (42 )%


Expenses:
Interest expense                                 19,150,816          31,304,099          (12,153,283 )            (39 )%
Employee compensation and benefits                2,391,984           1,977,343              414,641               21 %
Selling and administrative                        2,082,342           1,538,066              544,276               35 %
Property operating expenses                       1,331,145                   -            1,331,145               nm
Depreciation and amortization                       283,022                   -              283,022               nm
Provision for loan losses                        67,500,000           3,000,000           64,500,000               nm
Loss on restructured loans                        9,036,914                   -            9,036,914               nm
Management fee - related party                      722,377           2,579,433           (1,857,056 )            (72 )%


Total expenses                                  102,498,600          40,398,941           62,099,659              154 %


(Loss) income before gain on exchange of
profits interest, gain on extinguishment
of debt and income from equity
affiliates                                      (70,511,531 )        15,038,082          (85,549,613 )             nm
Gain on exchange of profits interest             55,988,411                   -           55,988,411               nm
Gain on extinguishment of debt                   26,267,033                   -           26,267,033               nm
Income from equity affiliates                     2,507,134                   -            2,507,134               nm


Net income                                       14,251,047          15,038,082             (787,035 )             (5 )%
Net income attributable to
noncontrolling interest                          18,504,785           2,333,290           16,171,495               nm

Net (loss) income attributable to Abor
Realty Trust, Inc                               $(4,253,738 )      $ 12,704,792        $ (16,958,530 )           (133 )%

nm - not meaningful

Revenue
Interest income decreased $24.9 million, or 45%, to $30.5 million for the three months ended March 31, 2009 from $55.4 million for the three months ended March 31, 2008. This decrease was primarily due to a 39% decrease in the average yield on assets from 8.35% for the three months ended March 31, 2008 to 5.12% for the three months ended March 31, 2009. This decrease in yield was the result of a decrease in average LIBOR over the same period, along with the suspension of interest on our non-performing loans and a decrease in loans and investments due to payoffs and paydowns. In addition, interest income from cash equivalents decreased $1.6 million to $0.2 million for the three months ended March 31, 2009 compared to $1.8 million for the three months ended March 31, 2008 as a result of decreased average cash balances, as well as decreases in interest rates from 2008 to 2009. Interest income for the three months ended March 31, 2008 also included the recognition of $0.3 million from a 25.0% carried profits interest in a $0.3 million preferred equity investment.
Property operating income of $1.5 million for the three months ended March 31, 2009 represents operating income associated with the operations of an office building recorded as real estate owned net. There was no property operating income for the three months ended March 31, 2008.
Other income decreased $4,443 to $16,250 for the three months ended March 31, 2009 from $20,693 for the three months ended March 31, 2008. This is primarily due to decreased miscellaneous asset management fees on our loan and investment portfolio.
Expenses
Interest expense decreased $12.2 million, or 39%, to $19.2 million for the three months ended March 31, 2009 from $31.3 million for the three months ended March 31, 2008. This decrease was primarily due to a 30% decrease in the average cost of these borrowings from 5.64% for the three months ended March 31, 2008 to 3.94% for the three months ended March 31, 2009 due to a reduction in average LIBOR on the portion of our debt that was floating over the same period. In addition, there was an 11% decrease in the average balance of our debt facilities from $2.2 billion for the three months ended March 31, 2008 to $2.0 billion for the three months ended March 31, 2009 as a result of decreased leverage on our portfolio due to the paying down of certain outstanding indebtedness by repayment of loans, the transfer of assets to our CDO vehicles which carry a lower cost of funds and from available capital.
Employee compensation and benefits expense increased $0.4 million, or 21%, to $2.4 million for the three months ended March 31, 2009 from $2.0 million for the three months ended March 31, 2008. This increase was primarily due to an increase in employee salaries and benefits related to asset management and the restructuring of our loans. These expenses represent salaries, benefits, stock-based compensation related to employees, and incentive compensation for those employed by us during these periods.
Selling and administrative expense increased $0.6 million, or 35%, to $2.1 million for the three months ended March 31, 2009 from $1.5 million for the three months ended March 31, 2008. These costs include, but are not limited to, professional and consulting fees, marketing costs, insurance expense, director's fees, licensing fees,

travel and placement fees, and stock-based compensation relating to the cost of restricted stock granted to our directors and certain employees of our manager. This increase was primarily due to increased general corporate legal expenses and professional fees associated with certain transactions, partially offset by decreased costs related to restricted stock awards granted to directors and certain employees of our manager, ACM due to a lower stock price.
Property operating expenses of $1.3 million for the three months ended March 31, 2009 represents all expenses related to the operations of an office building recorded as real estate owned, net. There were no property operating expenses for the three months ended March 31, 2008.
Depreciation and amortization expense of $0.3 million for the three months ended March 31, 2009 represents depreciation on property, leasehold improvements, and equipment associated with the consolidation of an office building as real estate owned, net. There were no depreciation and amortization expenses for the three months ended March 31, 2008.
Provision for loan losses totaled $67.5 million for the three months ended March 31, 2009, and 3.0 million for the three months ended March 31, 2008. The provision recorded for the three months ended March 31, 2009 was based on our normal quarterly loan review at March 31, 2009, where it was determined that 18 . . .