Arbor Realty Trust suspended its dividend after releasing third-quarter results Friday that show the mortgage REIT’s core business line slowing down while debt maturities loom.
New York-based Arbor reported an $85.4M loss in the third quarter and a significant dip in its core structured debt business from the prior year, with its agency loan business totaling $819M at the end of September, down from $1.2B at the end of the second quarter.
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The weak third-quarter results, which also included an expansion in the number of nonperforming assets on the REIT’s books, sent Arbor’s stock plummeting by more than 25% in early trading Friday.
CEO Ivan Kaufman said rising debt costs, driven largely by the increase in yields on 10-year U.S. Treasury bonds, continued to put pressure on Arbor’s legacy loan book and drag on returns.
“This is a very material development, which has resulted in further reduction in values across the multifamily sector of between 5% to 15%, and has significantly curtailed transaction volumes from the increased cost of debt and equity,” he said on the third-quarter earnings call Friday morning.
The suspension of the REIT’s dividend, which had already been slashed nearly in half over the last year to 17 cents per share, was framed by management as a cash-raising effort ahead of a $275M loan payoff in March.
Arbor plans to raise $60M through the suspension, another $150M through sales and loan payoffs, $55M through leverage from bank lines, and another $35M through sales of assets the mortgage REIT has taken from owners that defaulted to cover the debt service bill.
“Our primary focus is to preserve and create the appropriate level of liquidity that we pay our short-term debt maturities and execute our business plan,” Kaufman said. “This will afford us the necessary time needed to work through the teeth of this downturn and realize the true value of our franchise for our shareholders.”
Management estimated it will take between four and six quarters to work through the debt facing refinancing challenges.
“Given the drastic recent change in the interest rate environment, we anticipate our earnings to likely bottom out over the next two quarters and then start to build back up each quarter on a consistent basis as we continue to make more progress in resolving our delinquencies and working through our legacy book,” Chief Financial Officer Paul Elenio said.
Cash flow from Arbor’s key business line has slipped. Structured net interest income has fallen roughly 37% in the last year to $117M on an annualized basis despite Arbor’s debt balance rising nearly $1B to $10.8B.
The mortgage REIT has been writing down debt in recent quarters to budget for future losses, with Arbor recording a $53M net provision for loan losses in the third quarter, lifting its total allowance for loan losses to $210M for the year.
Arbor has 32 nonperforming loans on its books with a total unpaid principal balance of $647.6M, up from 19 loans totaling $428.8M that weren’t performing at the end of the second quarter.
It modified six additional loans with an aggregate balance of $192.1M across the third quarter, the majority of which included additional capital investments to recapitalize the deals.
Arbor’s total portfolio was $12B at the end of September, with an average loan size of $25.2M and 93% of debt being bridge loans. Multifamily assets make up 71% of the loan book, with single-family rentals accounting for nearly all of the remainder. The portfolio is concentrated in Texas, Florida, New York, Arizona and Georgia, which together make up 66% of the portfolio.
Wall Street analysts have slashed Arbor’s rating in recent months in the face of its difficult debt environment. Citizens downgraded the stock in September from outperform to hold. Keefe, Bruyette & Woods cut its price target from $5 to $3 per share, and Piper Sandler similarly cut its price target to $3.50 earlier this month. The stock was trading around $2.25 per share Friday.
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