'One Of Our Best Years': Arbor Realty Seeks To Reassure Market Shaken By Distress, Short Sellers

Arbor Realty Trust’s leadership appeared to calm market jitters Friday with an earnings report it characterized as “another outstanding quarter” despite a rise in nonperforming loans and continued attacks from short sellers.

Many eyes were on Friday’s fourth-quarter earnings report and subsequent call after The Wall Street Journal highlighted a recent Cred iQ report on the eve of its Friday announcement. That report showed that borrowers representing a quarter of Arbor’s securitized debt were late on payments last month, though many became current in the weeks that followed, according to the WSJ.

The multifamily lender with a $12.6B portfolio ended Q4 with a net income of $91.7M, or 48 cents per share, compared to net income of $88.2M, or 49 cents per share, in Q4 2022, according to the earnings report. Its performance beat analysts' expectations after its shares dipped about 13.6% since the beginning of the year amid widespread wariness about its backlog of floating-rate bridge loans for aging apartment buildings.

Arbor Realty Trust stock closed Friday up about 6.6%.

“2023 was one of our best years as a public company, despite an extremely challenging environment,” Arbor President and CEO Ivan Kaufman said on the company's call.

Arbor painted an upbeat picture, though its leadership acknowledged it is in “a period of peak stress” and expects the next two quarters to be tricky to navigate. The company seems to be preparing for potential trouble, boosting its provisions for loan losses to almost $196M. Arbor also recorded four new nonperforming loans for the quarter, bringing its number of nonperforming loans to 16 valued at a total of $262.7M at the end of the year, up from 12 loans valued at $150.5M at the end of Q3.

Arbor's two biggest loan origination quarters were the fourth quarter of 2021 and the first quarter of 2022, so two-year maturities are hitting now, said Stephen Laws, a managing director for Raymond James and an Arbor stock analyst.

“Everybody in the market, whether it’s Arbor or others, are worried about that late ’21, early ’22 vintage, given where rates, cap rates and attachment points were,” Laws said in a phone call with Bisnow. 

The overall multifamily market has $9.6B of outstanding distress and another $67B of potential distress hovering, according to fourth-quarter data from MSCI. 

“We're experiencing elevated delinquencies,” Kaufman said. “One of the many reasons this is occurring is certain borrowers are taking the position that they will default first and negotiate second, which is not a strategy that works well with us.”

The Arbor executive said the trust isn't afraid of having defaults on its books, and the threat isn't the fruitful negotiation tactic it might be with other lenders.

“Borrowers need to bring capital to the table to rightsize their deals and raising capital is a lengthy process in today's climate,” Kaufman said, adding that Arbor expected to see an initial jump in defaults as borrowers struggle to recapitalize properties. “We feel we have done a very good job to date in collecting payments and have been highly effective in refinancing deals for our agency businesses as well as getting borrowers to recapitalize their deals and purchase interest rate caps where appropriate.”

Arbor's earnings call came amid scrutiny from the financial press and short seller buzz that it is in trouble. Viceroy Research last month issued a report, its second critical hit on Arbor since November, highlighting an almost 50% month-over-month increase in delinquent loans making up Arbor’s leading profile. Arbor Realty was also targeted earlier last year by a different short seller.

“There is no rate cut large enough, no rate caps cheap enough, and no investors dumb enough to save Arbor,” Viceroy Research said in the January report. 

The short reports are based on incomplete and inaccurate data, Kaufman said during Friday's call. 

“I want our loyal investor base to understand that these reports are written in a way that was purposely designed to drive down the company's stock price to achieve the desired goal and profit from a short position,” Kaufman said. 

The short reports seized on Arbor’s January collateralized loan delinquencies of about 25%.

Kaufman said that figure is now down to 5.6%, as borrowers become current on their payments, adding that 30-plus-day delinquency numbers are considered more important in the industry.

The rate of Arbor’s 30-plus-day delinquencies in its CLO book was 1.2% as of January and remains so today, he said. Sixty-day delinquencies are down to 0.8%, “so it’s very, very nominal,” Kaufman said. 

Laws said that he was pleased with Arbor’s earnings report Friday, especially the 30- and 60-day delinquency numbers.

“I think that people had heightened concerns because of those inaccurate numbers, and it was good to see Arbor clear the air,” Laws said.

Laws said runoff, or borrowers paying down debt through repayments, of $817.4M in Q4 showed that loans aren't getting stuck on the balance sheet. Meanwhile, share count was flat for the quarter, meaning Arbor didn't feel the need to sell more shares to raise capital, and it is reassuring that Arbor has enough liquidity given the stress in the market and in its portfolio, he said. 

“We’re not out of the woods yet. … There’s still work to do,” Laws said, adding that the results gave analysts some solace given the concerns heading into the most recent quarter.

Laws said there is ample liquidity and potential equity sponsors interested in the multifamily market right now, pointing to $250B of private equity capital now set aside to invest in commercial real estate, half of it allocated for multifamily.

Arbor has many tools at its disposal to handle distress, including refinancing, agency takeouts through Arbor’s Fannie Mae or Freddie Mac programs, modifications and replacing the equity sponsor, he said.

The latter option is what Arbor did when it foreclosed on a $229M portfolio of multifamily properties in Houston last year and foreclosed on more this quarter, Laws said.

Asked about the “slumlord” label short seller Viceroy slapped on the company and whether Arbor was worried assets and loans in its portfolio were of insufficient quality to be refinanced into permanent Freddie Mac or Fannie Mae loans, Kaufman said Arbor's sole motivation for making bridge loans was to turn them into agency loans.

“You have to have a quality sponsor and you have to have a quality asset. So our idea, of course, is that every sponsor that we take on is going to perform correctly,” he said. “Not all sponsors do that, and ... sometimes they'll be a sponsor who couldn't hit his business plan or who had all the problems or isn't what we thought and they don't qualify. That's just the way it goes. Nobody is perfect.”

But Arbor expects to convert between 75% and 80% of its loans to agency status and sell the rest to new ownership, he said.