Arbor Realty 4Q23 Preview

#91: A timely update on the "Bridge to Nowhere..."

With Arbor Realty Trust (NYSE: ABR) due to report 4Q 2023 earnings next Friday, February 16th, I wanted to provide readers with an update on the company.

If you are newer to this story — the mortgage REIT’s (mREITs) mounting credit struggles — I encourage you first to check out Viceroy Research’s ongoing reporting, my post (#80: Bridge to Nowhere), or other media reports. Today, I’ll cut straight to the chase.

Arbor’s loan portfolio is deteriorating at an alarming rate. Faced with soaring debt costs and falling operating income, Arbor’s multifamily borrowers have reached a breaking point. According to data published by Viceroy and corroborated by Bloomberg, delinquency rates in Arbor’s collateralized loan obligations (CLOs) have skyrocketed, from ~5% as of September 2023 to ~25% as of January 2024.

Extrapolating these figures over Arbor’s entire multifamily portfolio suggests a total of $2.9 billion of its $11.7 billion loan portfolio is now delinquent, with the vast majority of loans falling behind since Arbor last publicly released its financials. For reference, this delinquent loan estimate is greater than the entire book value of Arbor’s common equity. To date, Arbor has booked a mere $87 million in loss provisions, representing just 0.7% of the outstanding principal. But that could change next week.

Arbor is set to announce its year-end results amid growing angst over credit losses in Commercial Real Estate (CRE). Over the past two weeks, we have seen multiple lenders around the globe tumble on credit losses related to U.S. CRE. Even Janet Yellen has been forced to acknowledge the problem.

• New York Community Bank (NYSE: NYCB) is now down 60% after announcing credit losses and slashing its dividend last week

• Japanese lender, Aozora Bank (TSE: 8304) has fallen 30% based on its losses in its U.S. commercial

• In Germany, Deutsche Pfandbriefbank (XETR: PBB) saw its equity and junior bonds tumble as it announced a surprise loss provision

• mREIT, KKR Real Estate Finance (NYSE: KREF) has fallen 18% since announcing unexpected loan losses and cutting its dividend in half

But I believe that Arbor’s predicament is more severe. Based on current data, Arbor seems destined to report significant credit charges in the near future, and the pain could just be starting.

The market seems to agree. Since including “short Arbor” at the top of my 2024 Trade Ideas, the stock has sold off 23%¹. This dive is likely due to new troubling data and anecdotes, negative association with banks like NYCB, as well as rising yields.

But the company’s struggles have also become more widely recognized, and short interest today stands 30% — one of the highest in the market. No story is a slam dunk and Arbor is no exception. As always, there are risks.

This week, we assess the company’s immediate and long-term concerns, including:

• Underlying Credit Issues

• Delinquency and Provisions

• Implications for 4Q23 Earnings

• Liquidity & Dividends

• NAV per Share and Interest Rate Sensitivity

• Risks and considerations

Let’s dig in.

The Elephant