Trade Ideas for 2024

#85: Metals, mREITs and More!

Last week, we discussed the macro outlook for the year ahead. Along with it, I included a long-only, prudent, diversified and passive investment portfolio. This week, we throw caution to the wind and evaluate more speculative long and short trading opportunities for the year ahead. We will touch on uranium, mREITs, precious metals, crypto, small-caps and more.

These ideas are speculative and come with significantly higher risk. This article is meant to stimulate ideas and further research, and isn’t investment advice.

With the disclaimers out of the way, let’s jump in.

Arbor Realty Trust (NYSE:ABR)

Over the past several years, I’ve spent a lot of time sniffing around for an actionable thesis on credit stress, and for the most part have come up empty handed. From subprime auto securitizations to bank balance sheets, there simply hasn’t been much to report on. Credit losses have been few and far between across the board as the private sector de-levered or refinanced at favorable rates during the pandemic, and existing debt balances were shrunk via inflation.

But mortgage REIT, Arbor Realty, could buck the trend. In my opinion, it represents the most at-risk major pool of debt in the market today — a $13 billion portfolio of floating-rate, high-LTV multifamily bridge loans underwritten at zero-percent base rates and peak asset prices. And despite some growing public awareness of the frail state of the multifamily lending market, Arbor trades with no signs of credit stress.

For more background on the company and circumstance, see my November write-up, Bridge to Nowhere, along with Viceroy Research’s extensive reporting on the company.

The short version is that rate hikes have caused debt service to exceed the operating income from the properties, while property prices have fallen considerably. The average borrower is now cash flow negative and their equity is underwater. Current data shows that delinquencies on these loans have spiked in recent months as borrowers exhaust their resources and have no choice but to miss payments or hand the keys back to the lenders. Trepp reports that multifamily delinquencies in collateralized loan obligations (CLOs) surged 117% in November, and now make up a majority of delinquent CLO loans across all CRE asset types.

If there are any credit losses on these loans — which seems likely — Arbor common equity holders take the first loss. If credit losses reach ~20% of principal loan values, Arbor’s equity value is wiped out entirely.

Arbor is now playing a delicate game of balance sheet management. Its largest form of financing, $7.0 billion of CLOs, are already near their covenant thresholds. Therefore Arbor must buy any problematic loans out of its CLOs using either its cash on hand or availability on its many bank credit lines. As the number of problematic loans grows, this dance becomes harder.

While the company has $1.0bn in cash on hand and incremental borrowing capacity, its largest bank facilities include margin call provisions based on the underlying property values, as determined by the bank lender. The key issue then is not really whether Arbor is willing to overstate collateral values and amend and extend their loans to multifamily borrowers — naturally they will. Rather, it is how long Arbor’s bank lenders are willing to hold this growing credit risk before demanding repayment or incremental collateral. Given that the company maintains 16 separate credit lines (excluding its Agency business), presumably with many different banks, there is a first mover incentive to grab cash or collateral if things continue to go south.

Management, meanwhile, is presenting strength by raising its dividend, refusing to meaningfully provision for losses, and announcing a “buy-back” program (despite the fact that the company has been a net issuer of equity this year).

And while the market ignores credit risks today, I see three realistic catalysts that would force the market to reprice ABR lower in the coming year:

• Increase in loss provisions

• Suspension or reduction of dividend

• Margin call on credit lines

Risks: Rate cuts will benefit borrowers to some degree. Arbor’s credit profile appears to be the worst among mREITs but its available liquidity and dividend coverage today is actually better than several of its peers. The company’s dividend increases the cost of a short position.

Trade ideas:

• Short ABR (current price: $15.81)

• ABR July-19-2024 $12.50 Puts (current ask: $1.25)

Cameco Corporation (NYSE:CCJ)

Uranium has been the standout among energy and commodity plays over the past two years, as consumption outpaces production, public opinion of nuclear improves, and uranium spot prices have increased over 3x from $25/lb in 2020 to $91/lb today. Since September, uranium spot prices have surged 50%, leading to massive gains in physical trusts and producers over the past several months.

But this isn’t a 2023 retrospective, it’s a 2024 prospective, and over the coming year it may be time to fade yellowcake fever.