The following commentary and analysis is from the May 5th issue of my Short Sellers Journal newsletter.
Arbor Realty (ABR) – “Rising interest rates have negatively impacted real estate values and have limited certain borrowers abilities to make debt service payments, which may limit new mortgage loan originations (sic) and increase the likelihood of additional delinquencies and losses incurred on defaulted loans if the reduction in collateral value [i.e. the stunning decline in CRE prices] is insufficient to repay their loans in full.” That statement is from the ABR 10-Q.
“It would require great analytical gymnastics and limited financial literacy to promote these results as anything close to “outperform” – Viceroy Research
LOL they “beat” consensus, huh? Revenues dropped 11.5% YoY. Income from mortgage servicing rights was clobbered 45%. This is a result of much lower loan origination activity. Despite lower revenues, expenses were basically flat YoY. Net income before dividends and non-controlling interests was down 28.4%. Net income for common shareholders plunged 32.1%. Great, they “beat,” though.
The earnings call transcript made for some interesting reading. Management did its best to slather mascara all over the earnings report and related statistics which show the rapid deterioration in its loan portfolio. In addition, management made no mention whatsoever of its intent to issue more shares. But after the market closed Friday, ABR filed a prospectus to issue up to 30 million shares as well as preferred stock, debt securities and warrants. And yet, in the liquidity section of the MD&A and on the earnings call management boasted about the amount of liquidity on hand. If that’s true, why further dilute shareholders by issuing more stock?
In March 2023 ABR had declared four loans as non-performing (NPLs) with a carrying value of $7.7million. By the end of Q1 2024, ABR had 21 NPLs with a carrying value of $465 million. It would have been worse but they kicked the can down the road by modifying $1.9 billion worth of loans in Q1. That’s 15.8% of its loan portfolio. The modifications occur because the borrower can’t make payments. The modifications include interest reductions and maturity extensions, with the delinquent interest payments deferred by being added to the principal amount at maturity. Given the third-tier quality of the multi-family and office buildings on which ABR has loaned money, in all likelihood the modifications merely defer default/foreclosure.
The only thing holding the stock up is the shareholder base, which won’t sell because of the 13% dividend. The dividend size is imposed on ABR because in order to maintain its status as a REIT, it has to pay out at 90% of its taxable income to shareholders. Note that net income available to common shareholders plunged 32% YoY and 36.8% from Q4 2023. Though net income was $57.8 million, the Company paid out $98.6 million in dividends to shareholders in order to maintain the 13+% dividend yield. At some point ABR will not have the liquidity to supplement the dividend in order to maintain that 13% yield.
The shareholders are largely high net worth investors looking for high-yielding stocks and registered investment advisors catering to their clients who want high current yielding stocks. They won’t sell until the Company hits the wall.
Per the chart below, ABR jumped 10.5% Tuesday on no news. Apparently management, which has highly questionable ethics, is trying to orchestrate a “meme-style” short-squeeze given the 42% short-interest in the stock. However options market-makers don’t seem concerned. The implied volatility of ARB’s shortest duration, near-money options is 55%. This compares to GME, for which the weekly, near-money implied vol is over 600%.
Arbor is furiously modifying and defering payment requirements on the garbage CRE loans that it has stuffed into CLO’s that is sponsors. In many cases it’s swapping current-pay loans it holds from non-performing loans in the CLO’s. Given the low quality of the multi-family apartment complexes that ABR has financed, these measures merely defer the inevitable default and foreclosure of these loans.
One last point, NYCB reported its numbers last week. The amount of defaulted loans surged 400%, amounting to $800 million in Q1. Multi-family loans, which is a big lending segment for ABR, accounting for 42% of the new defaults. It would be naive to think that the same issues plaguing NYCB are not affecting ABR’s loan portfolio. But entities both finance the dregs of office buildings and multi-family apartment complexes. I think the possibilty that ABR hits the wall before the end of 2025 is very real.
Disclosure: I own a large quantity of long-dated, near-money puts on ABR.