Arbor Realty Trust
I have been seeing a lot of negative news surrounding their name recently. Does anyone have any insight on some of their properties and what their future looks like? The overall short position on their stock is relatively high, beyond macro things like interest rates, is there any justification for this?
Well their stock was over valued as were many companies in Real Estate prior to Rate hikes, those coincided with the brokered business news and I believe their SBL had some decent exposure to it not just their larger MF portfolio. So news on news and then they did a decent amount of the Agency lending, which is one of the brokered businesses that was crushed. So it all came together. I heard Fannie Mae and Freddie Mac are making lenders that did some of these deals from different brokers, buy those loans back. It's a mess. But Arbor is big they'll come out on the other end at some point, just negative news stacking on top of more negative news, on top of poor economy, and add in bad press, creates what you have now.
There are prominent names such as Viceroy who are shorting the stock: https://viceroyresearch.org/arbor-realty-research/
I don't believe that much of this has to do with their Agency DUS operations. Per conversations with DUS shops, brokered business ultimately wasn't significantly hampered. The largest change was the flow of information processes whereby borrowers had to submit DD directly into the DUS shop's upload portal and no information coming from the brokerage would be accepted. Although I'm sure in some markets where fraud was prevalent, volumes might be impaired I suppose.
The biggest issue with their stock is their CLO operations. Basically their MREIT is heavily leveraged into bridge loans that they've originated. If those loans were to ever default, losses could be huge for Arbor. Given that many of these loans were originated in 2020 and 2021 where stabilized debt yields into the 6s were commonplace, there are virtually no takeout options for these loans in the present environment and there is virtually no way that they are debt servicing (given current rates in the 8s). The only solution for arbor to liquidate their assets is to either sell them on the marketplace for a discount which could wipe out a large chunk of their equity since they're so heavily leveraged via their CLOs or to force borrowers to either paydown the loan or sell the property. Either way, they are one big shock away from bankruptcy and are only buoyed by the fact that cap rates haven't pushed into the 6s yet on the vast majority of the assets that they have loans on. But if there is an exogenous shock that prevents many of their borrowers from hitting their proformas, there is very little margin for Arbor.
Is NYMT fucked? I own their stock lol.
We'll see how things shake out given ~$11BB of multifamily is due this year before extension options, and their last dollar LTV is creeping. If you dig into their financials, they jumped up from $7.7MM non-accrual to $274MM year over year.
I think Ladder Capital (comparable company but no GSE business) is pretty cheap right now. Less than 1% of their portfolio is non-accrual. And when they've taken keys back in the past, they've done a good job.
April CLO data at Arbor looks really ugly. At least 200MM in additional credit problems just month on month,
where can i see this?
Should be seeing a viceroy report any day now.
The new viceroy report is out for April. What is going to force these companies to properly value their books? I have talked to several lenders lately and they are capitalizing interest. On paper this looks great, but in reality it is creating bigger losses for their investors. It seems like the market is playing dumb but this is a major problem. It doesn’t look like anyone is accountable to the investors.
For as long as the underlying CLO investors and/or warehouse lenders allow it. Likely until the full loan terms, including extensions, run out.
So word on the street is that Arbor is supporting its loans that cannot service the debt with preferred equity injections into underwater properties.
Have people seen this happening?
Are other CLOs and debt funds doing the same thing.
If true this would massively manipulate earnings in the short run but in the long run be terrible for its investors and bond holders.
They have raised preferred equity for a long time so it wouldn't be surprising. At the end of the day, it's still the sponsors that are placing preferred equity on their deals, no? And if you're a CLO investor, I'm not sure how this would be terrible for your position.
They are using arbor’s shareholder and bond holder money to put preferred equity on underwater deals, so those deals look like they are performing.
The sponsors are wiped out and I assume that arbor is dictating terms to them. This isn’t outside money that sponsors are obtaining. This is arbor paying the loans for the sponsors.
Issuing new investments that are worthless is bad for shareholders. It disguises the trouble of the loans. It uses good money to pay bad debt. It also creates taxable net income from investment reserves. This is essentially a shell game that wastes money. It is compounding the problems and losses they are facing.
Wasting shareholder and bond holder money and disgusting problems is bad for the shareholders and bond holders.
Arbor’s management is supposed to act in the best interest of their shareholders and creditors. It is not supposed to make bad preferred equity investments to the hide problems of their bad loans.
Ahhh I see. Yes, in that case, seems like some manipulation.
If I play it out from their likely line of reasoning, they are in first loss position on the CLOs anyways so either way, shareholders are on the hook. By using balance sheet preferred equity, they are likely creating an easier foreclosure process and not blowing up the CLO markets and their warehouse lines (yet).
Not saying it’s the right thing to do, just playing devil’s advocate.
It just creates greater losses for Arbor shareholders and misleads the market.
AllThingsMulti nailed it. It's all about incentives.
Also consider Arbor has been the focus of many shorts, with over 40% of the float shorted. To give that number some context, even a shitco like Carvana only has 32% of their float shorted. So the struggles with the company are well known.
By manipulating their KPIs and doubling down on bad deals, they're maintaining their earnings on paper and maintaining a dividend. Both of these increase the carrying costs for short interest owners which causes pain on that end of the capital stack.
It may not be the boy scout thing to do - but it's what management is incentivized to do. They made horrible decisions at peak cycle and instead of cutting bait early on those loans they've decided to double down and hope it all works out in the end. They committed themselves to this path years ago and there's no real turning back.
It what it is.
Do you have a source for this?
I listened to their 1Q24 call last night and thought it was strange that their avg. borrower contribution on their >$1B 1Q extensions was ~ 2.5% of UPB, which they clearly stated was used to buy replacement IR caps. I thought it was strange that (a) they were advertising a majority success rate in getting borrowers to bring these funds to the table, with no context on where those funds were coming from & (b) that there was almost zero principal paydowns.
I heard it from two independent sources that are well respected. I also heard another large CLO is doing the same thing. I imagine a bunch of them are doing it.
I also saw on the TREPP data on deals I know have 0 money and negative DSCR go current this past month when they have been delinquent for months.
& There you have it. Found the $45M of new capital.
Is that roughly $60m in preferred equity? If so, that is greater than their entire Q1 Net Income. I don't generally read quarterly reports, so maybe i am not reading it correctly. I suspect we will see it explode in Q2.
It will be interesting to see if Ready Cap is doing the same thing when they release their fincials later this week.
I'm just tying back to the statement at 4:00 that the CEO made in the link below. I wouldn't be surprised if the $45.129M in Mezz/Pref originations is the "roughly $45M in fresh capital" that these borrowers "brought to the table".
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