mREIT Arbor Realty (ABR) is getting hammered today with news that the Justice Department is investigating the company. The company has undergone a number of short attacks over the last 18 months or so of claims improper accounting etc.
Here is the report from Ningi Research on ABR from 3/23.
Common shares are off $2.57 to trade at $12.99. The 3 preferred issues are all off $1.50 to $2.70.
Just a HU, if you like the ABR prefs and have IBKR, check out 038923AW8. Have been offered as low as 90 today. Very illiquid.
“I’m not saying Viceroy has done 100% accurate homework on this company, but it has been extensive and available for anyone to read. Here is their latest piece from 7/12/24, showing an ABR loan (which required a capital call from investors) marked at $52M where the property might be worth $30M.”
I looked into this. Viceroy is basing their analysis on questionable numbers with no sourcing. They say the NOI of the property is $1.86M. There is no source for this other than “Viceroy Analysis”.
In contrast, the actual owners of the building estimate that NOI after renovations and re-leases will be $3.7M. That comes to $11,600 of income per unit for a prime location near the medical center in Houston. That seems a bit high but not outrageous.
The property was purchased for $63M in July 2022 and ABR is now valuing it at $52M. That’s a 17% reduction from the purchase price and seems generally in line with the decline in overall multifamily valuations. Viceroy is valuing the property at $30M which is insane.
The property was built in 2013 and the owners claim that new construction of comparable apartments in that location costs $300K/unit. That seems reasonable. If you value the property at $281K/unit, it is worth $89M.
That said, I would not mark a $52M loan secured by a property only worth $52M at par.
Arbor Reiterates its Confidence in its Financials and Business Practices
UNIONDALE, N.Y., July 15, 2024 (GLOBE NEWSWIRE) — Following recent news reports, Arbor Realty Trust, Inc. (NYSE: ABR) is issuing this announcement to reiterate that its financials and business practices have been and are compliant with all of its accounting and regulatory obligations. As it has throughout its history, Arbor continues to conduct its business operations and practices in the best interest of its shareholders and consistent with its obligations to its broader stakeholders. Arbor complies with all notice and disclosure obligations and other terms of its CLO agreements. Arbor also complies with all of its disclosure and reporting obligations, including those relating to its second quarter activities.
Arbor’s annual financial statements are audited by an independent auditor and its quarterly reports are also reviewed by its external auditor. Arbor stands behind its accounting, as well as its originating and investing practices. Further, Arbor’s policy and practice is to cooperate with its regulators. Arbor looks forward to discussing its second quarter performance in its upcoming earnings call in early August.
https://www.globenewswire.com/news-release/2024/07/15/2913096/0/en/Arbor-Reiterates-its-Confidence-in-its-Financials-and-Business-Practices.html
Issuing this so long after the drop on Fri is shameful- it shows disrespect toward their investors. Did they have to double check with their auditors?
hmm… I see in a comment below, they did issue one.
Since I’m posting a lot about how the Viceroy/fraud allegations are bunk, I also want to post about ABR’s actual difficulties.
It’s no secret that multifamily bridge loans are currently in a world of pain. The borrowers can’t afford to pay higher floating rates on properties that produce modest or no cash flow until construction is complete. Exacerbating that is the glut of new supply, concentrated in ABR’s primary markets of TX and FL.
You’re seeing the result of this in RC’s Broadmark portfolio and SACH. MFA and NYMT’s bridge loan portfolios have taken some hits.
But the most important thing in the bridge loan business is liquidity. You’re on the hook for future commitments as borrowers complete each phase of construction and if loans aren’t getting paid at maturity, you’re in a real bind. ABR has done a great job of being laser focused on liquidity (something biting SACH right now). If they have the liquidity to get them past the next 12-18 months, the supply glut will be out of the way.
The thing about bridge loans is they default easily because there’s little cash flow supporting them but recovery rates are very high. If you have the liquidity to get to the recovery phase without having to fire sale assets, you’ll be fine.
ABR is also focused on workforce housing. That’s the housing that’s most in demand and has the least oversupply. It’s the best part of multifamily. The issues are mainly in Class A new builds. The fact that Viceroy tries to disparage ABR as a slumlord when that’s actually the best part of the market is one of several tells that their analysis is not serious.
Well said Landlord. ABR maybe one of the survivors of all these companies that have backed new construction and then are able to extend financing to the borrower when the project is finished and starts to see cash flow as units are rented out. If the loan company knows what it is doing and pays out as each phase of construction is completed and the value covers the money loaned then even if the builder defaults the value of the project should more than cover what is owed. The over supply and slowing economy are going to be the two of the important issues.
Charles:
Actually, it was not really “well said” and looks at ABR with mostly rose-colored glasses. It is not all new construction. ABR has done lots of lending to syndicates that buy fully developed properties with the hopes of boosting the rents.
ABR has a $12+B loan portfolio and had a CECL balance of only $212M as of 3/31/24. They only added $18M to the CECL balance during the first quarter. This is laughable. A kindergarten student could see their CECLs are massively understated.
During the first quarter they modified $1.7B of their loan book (a very large 14%) with capital calls, rate relief modifications, and extended maturities. ABR is of course allowed to do this. But of course ABR also marked all of those loans at par. How can a company modify that large of a percentage of the loan portfolio (obviously because the borrrowers aren’t able to pay back the loans) and still mark all of them at par?
I’m not saying Viceroy has done 100% accurate homework on this company, but it has been extensive and available for anyone to read. Here is their latest piece from 7/12/24, showing an ABR loan (which required a capital call from investors) marked at $52M where the property might be worth $30M.
So regardless of the FBI investigation, the big issue with ABR seems to be the true loan marks. Their $12B portfolio likely requires a MIMINUM of a $1B haircut (is 8% really a stretch in this environment?), which would knock down ABR’s tangible book value to $1.5B. That makes it around an $8 stock with only an 8% markdown hit. At that price for the common the preferreds would also likely get walloped. Before Friday’s 17% collapse in the common, it had recently spiked up to $15.50/share, nearly 20% above their tangible book value.
How could anyone pay that in this environment? My guess is it was just algos and bots following the chart, and it was nice to see them get shellacked on the selloff.
GLTA and please DYODD.
https://viceroyresearch.org/wp-content/uploads/2024/07/Arbor-With-Regards-to-Fraudcasting-and-Deck.pdf
“ It is not all new construction. ”
97% of the loans held on ABR’s balance sheet are bridge loans. Bridge loans can be new construction or large-scale renovations.
“ A kindergarten student could see their CECLs are massively understated.”
Agree and NAV is over stated. But not so much that auditors won’t sign off.
“ How can a company modify that large of a percentage of the loan portfolio (obviously because the borrrowers aren’t able to pay back the loans) and still mark all of them at par?”
PSEC has a loan on their books that’s marked as performing from a company that’s literally in bankruptcy. Aggressive marks happen.
“ Here is their latest piece from 7/12/24, showing an ABR loan (which required a capital call from investors) marked at $52M where the property might be worth $30M.”
I haven’t looked at that specific loan but have looked at other loans where Viceroy made similar claims and it was total bunk. They’re doing things like looking at cash flow from a property under renovation and assigning a value based on that.
“ Their $12B portfolio likely requires a MIMINUM of a $1B haircut (is 8% really a stretch in this environment?),”
Yes, 8% cap rates — based on rents from 2021 mind you — is absolutely a stretch.
Landlord – this is very well said. Only to add – ABR simply does not have a liquidity issue because of the use of CRE CLOs the debt matures quite far into the future. Also – because of the CLO structures ABR are using non-recourse debt.
This is a big difference with SACH. SACH have Sr unsecured debt maturities which they can not roll over, are using Sr Secured term loans and repo to finance their loan portfolio.
FWIW
Lets not jump to conclusions. The fact Sachem chose not to pull the trigger on issuing new baby bonds recently doesn’t mean they are unable to do so. Given the likelihood of credit easing starting in September, waiting two or three of months to refinance debt that doesn’t mature until the end of the year makes sense.
ABR was smart to use CLO financing and on top of that, they’re maintaining a huge cash balance. ABR management gets it. From the last earnings call:
“Clearly in this environment having adequate liquidity is paramount to our success. As a result, we have focused heavily on maintaining a very strong liquidity position. Currently we have approximately $1 billion of cash between $800 million of corporate cash and $600 million of cash in our CLOs that result in additional cash equivalent of approximately $150 million.
And having this level of liquidity is crucial in this environment, as it provides us with the flexibility needed to manage through this downturn and taking advantage of opportunities that will exist in this market to generate superior returns on our capital.”
If SACH is waiting for a 25 bps cut before addressing their inadequate liquidity, they’re being foolish. Their liquidity situation shouldn’t be where it is to begin with.
Not only does ABR’s liquidity ensure they won’t have to fire sale half constructed assets in foreclosure, they may have enough liquidity to buy bargains from lenders who weren’t as prepared for the storm.
Ivan has always been aggressive with the marks on their books, and is great at “promoting” the stock.
With all that said, I expect some fines associated with their processes, especially valuation and dealings w 3rd parties, but I would be surprised at a donut.
Will take a closer look at ABR-F if it drops further.
This is a DOJ investigation (allegedly). That’s what’s absurd about it. They don’t do fines, they get involved in criminal fraud.
Do you know how many people the DOJ sent to prison for the mind boggling amount of fraud in the GFC? Exactly one shmuck from Credit Suisse. The idea that the DOJ is investigating a crime for a few related party transactions is absurd.
It would be obvious if investors felt they were defrauded here. For starters, Leon Cooperman would have an army of lawyers after ABR. You can’t have the crime of fraud without victims and investors don’t think they were defrauded.
Sure maybe an SEC fine is warranted for accounting irregularities. But is the SEC even looking at them?
The idea that Kaufman committed crimes is absurd. What would even be his motivation? Keep the stock price up temporarily so he could dump shares? There’s no evidence he did that. I think he’s actually been a net buyer which makes no sense if he was defrauding investors.
The DOJ is investigating mortgage fraud by a large appraisal firm. This is way bigger than just ABR, but some loans that ABR obtained were done by the same appraiser that was seemingly running a kickback scheme out of the appraiser’s New York office and the appraisals came back at a really suspect valuation levels.
One person has already pled guilty, and has been cooperating.
here is another news story of a suspect appraisal issued by the same group.
https://www.westsidecurrent.com/news/appraisal-company-used-by-city-for-cheviot-hills-homekey-purchase-under-review-by-freddie-mac/article_5d9d0560-33ee-11ef-8333-070e07ad216c.html
Someone needs to investigate the city of Los Angles low income housing dept. for kick backs.
hmm. You would think Arbor would be putting out some kind of statement..
but 8 hours later, nothing but crickets…
No press release, no 8-K, nothing.
Their next 10-Q is due to be published in 3 weeks, wonder what kind of crazy stuff will be in there
Justin this is a good point. ABR management did say they would give disclosure around certain Q1 deals. Any way my approach will be to close out current postion in ABR Pref. after record date. Risk/Reward is simply not here there is pleny of other stuff to buy out there.
AWest-
Since today is the ex-date ( & record date) you can sell today and still get the div.
“ You would think Arbor would be putting out some kind of statement..”
They put out a statement within two hours on a summer Friday afternoon:
Arbor Realty Trust Says It Is ‘Very Confident’ Conduct Is Proper
By Jill R. Shah
July 12, 2024 at 1:53PM EDT
(Bloomberg) — Arbor Realty Trust Inc. says it is confident that it conducts itself properly following a report that the Justice Department is probing its lending practices.
“We routinely cooperate with regulatory inquiries and are very confident that we conduct ourselves properly,” Arbor said in a statement.
“We look forward to our second-quarter earnings call,” the firm added.
https://www.bnnbloomberg.ca/business/company-news/2024/07/12/arbor-realty-trust-says-it-is-very-confident-conduct-is-proper/
“ some loans that ABR obtained were done by the same appraiser that was seemingly running a kickback scheme ”
If ABR bought loans with false appraisals then ABR is the victim and the appraiser is the criminal.
Inflated appraisals based on false data (like lying about the sqft of the property) is rampant and the DOJ is cracking down on that across the board. But the criminals are the borrowers and appraisers, not the lenders.
Let’s see if this opens a broader spotlight on Arbor’s process to value loans. It’s aggressive.
I still can’t believe that the common trades near book, an inflated book. Lots of emotion in this name, both the longs and shorts.
“ I still can’t believe that the common trades near book, an inflated book. ”
I agree. There’s nothing special about ABR. They should trade at the same discount to book as other non-agency mREITs like MFA, CIM, NYMT, etc.
My guess is inflated valuation is the shorts real thesis but Shorting 101 says to never short based on valuation and without a catalyst. So they are inventing a catalyst.
Div will likely be cut, then shorts will take a victory lap, book profits and move on.
Cut… even with that cash cushion? Or are you saying that is false?
Landlord – let me preface this comment by saying that I think viceroy has zero credibility. In fact, my view was that since ABR had survived the many short attacks by viceroy and others, ABR had been tested. I added the D as a speculative add to my portfolio.
It is worth noting that while I don’t assign any credibility to viceroy, during Q1 ABR did address one particular loan/transaction that was pointed out by viceroy and ABR said they will provide detailed disclosure during Q2. One question, of course, is why wait…
ABR is being accused of several things by viceroy that go beyond irregular appraisals these include using offbalance sheet entities to hide bad assets (Enron style). My take on this has been that if I see FBI/SEC involvement then I will take action. Well we now have FBI involvement.
I would also add that ABR has several lenders in the form of holders of bonds in their various real estate CLO structures. These bond holders will take a different view of any irregular appraisals (and will blame ABR) if these bonds start to default.
I don’t believe any of the fraud accusations at this time, however, given alternatives in this market, and given the involvement of the FBI, ABR prefs do not compensate for the newly added risk of an FBI probe.
“ ABR is being accused of several things by viceroy that go beyond irregular appraisals these include using offbalance sheet entities to hide bad assets”
If hiding bad assets was a crime, many BDCs would be in prison. It’s worth knowing that all these related party and off balance sheet transactions have been known for months and their auditor isn’t re-stating any financials nor is the SEC investigating them.
“ they will provide detailed disclosure during Q2. One question, of course, is why wait…”
Because they have to gather information and possibly run it by their auditors. They also don’t want to bring unnecessary attention to it by making a special release.
“ given the involvement of the FBI,”
We don’t know anything about their involvement.
If I tell the FBI my neighbor is a terrorist or tell the IRS he cheats on his taxes, they will look into it. If Viceroy hires a law firm to tell the DOJ they think ABR is committing fraud, they’ll look into it. No evidence there’s anything beyond that here.
“ These bond holders will take a different view of any irregular appraisals ”
If there were irregular appraisals (and this is a rampant issue in the mortgage industry) the fault lies with the borrowers/appraisers. ABR has every incentive to have accurate appraisals as they are in a first loss position. If mortgages default, ABR loses their entire investment before bondholders lose a dime.
Landlord not sure I understand where you are coming from. What I did was outline my personal logic around risk management of my postion, and express the rather obvious opinion that there are better risk/reward opportunities out there in this market.
Since you addressed my note point by point in an argumentative manner, then let’s take these comments (such as they are) one at a time
1)Off balance sheet entities and hiding assets.
I am not saying that ABR committed fraud by using off balance sheet entities. Viceroy clearly are and I am merely stating this fact.
Is hiding assets fraud? Could be. Certainly has been in the past.
I seem to recall Skilling was put in jail for this. I am sure you must have heard of this case. It is certainly true that EY has known about this for months (May as I recall?). The fact that they have taken no action (that we are aware of anyway) may support ABR side of the story, however, this is not flawless either. Auditors make mistakes as well.
Again I don’t think it’s fraud, but nobody is goint to call me up and ask. So why take the risk with ABR shares?
2)Why wait for disclosure.
ABR have already said that they will disclose information about particular deals discussed by Viceroy and said they would wait until Q2 is over to do so. Yes they have to do all of the things you said, but it’s Q3 now. The more information that ABR disclose the better.
If you are against disclosure that is your perogative.
In my view, sunlight is the best disinfectant. When accused of fraud, disclosure early and often is the best policy.
Obviously ABR must take appropriate legal and auditor reviews prior. That should go without saying. They have had time to prep.
3)Involvement by FBI
I never said we do know what the FBI is doing, but we do know that they are are conducting a probe. As I said in my post, I set that for myself as sort of a stop loss point. Risk management. Should you choose a different direction that is your perogative. As far as I am concerned FBI/SEC probe = sell.
For me this is just basic risk management.
After your first sentence there is some kind of excursion into the IRS and Terrorism. The intent is to somehow make IRS and Terrorism comparable to this situation is suppose? This is an example of a logical fallacy called a Red Herring. Always interesting when people use Red Herrings.
The important point is that the FBI is conducting a probe, and my only point is that FBI/SEC investigation = sell.
4)Bondholders and Appraisals
Again, you make a good point – sort of. ABRs position is in the equity and subordinated debt tranches of each of the 6 CLOs (as of 10Q filing they have collapsed one since). The CLO equity does not make $ until CLO bondholders get paid. However, these bonds have no recourse outside of the CLO structure. The bond holders of these CLOs can not go after ABR at the corporate level. Unless of course there is a legal case to do so…
Every single person on this planet knows that the mortgage industry is fraught with overstated appraisals. It is always amusing to be reminded of the obvious.
Given the inability of the industry to value assets, you can rest assured that there are due dilligance requirements on behalf of the CLO manager which relate to the quality of the collateral (bridge loans) that serve as the assets for the ABR CLOs. If an AAA tranche returns below par, you can rest assured there will be legal action taken against ABR at the corporate level. Not saying AAA will return below par, but Viceroy are. That was my point and you are free to reject it. It is immaterial to me.
Good luck to you in your endevor.
But by that time, damage is done. Investors look elsewhere.
I have some of the D and will sell it after Monday’s record date for what will probably be a breakeven. This is just the kind of thing that can go on for a long time.
All of this DOJ stuff has to do with Viceroy and their varoius allegations of fraud which have been going on for a while. ABR really need to step up disclosure around certain recent loan workout transactions and need to do so quickly IMO.
There is simply better risk reward in the market at this point.
August, my accounts are at the highest they have ever been. But that being said, I didn’t want to play the risk game with RILY and now ABR
Becomes too much like meme stocks , Roaring Kitty and the Reddit crowd.
I still have memories of the dividend crowd on SA all talking about getting rich off Sea Drill and Rig and how great they were as retirement stocks for income.
But that being said, we all still take risks in the market.
Yes Charles you are very correct lots going on with these two names.
Maybe the truth about Arbor comes out and we can determine who is going to jail etc. I do have a position in a couple of the preferreds and hopefully it is the short sellers who are on the wrong end of the rope. I’m probably not the only one here with a dog in this fight.
Thanks Tim.
I have a nearly full position in ABR-F. ABR net income has been growing pretty steadily since 2016, maybe the numbers were fabricated.
The research report indicates that they may have been insolvent in 2011 but aren’t anymore and forecasts a possible “downside of 52% and, at worst a 67 percent downside for Arbor’s stock.”
Can the preferred survive that in the long run?
Has one of these research reports ever been accurate in the last couple of years? The only one I do recall being pretty darn accurate was that coffee shop stock in China. Luckin or whatever. But that report was super detailed. I know this because I read it and followed the story to the end. Also China… so being shady is par for the course.
So can anyone recall a report that was actually correct off hand?
“So can anyone recall a report that was actually correct off hand?”
Wirecard was a big one. German regulators were suing the shorts and in the pocket of the company… which turned out to be a massive fraud. Most of the shorts lost money too, since the stock ran up so much over the years of fraudulent “good” earnings and positive PR before getting wiped out.
No good deed goes unpunished it seems.
There are lots of other smaller and successful short reports if you want to follow Hindenburg Research, Muddy Waters, etc. Here’s one recent newsletter (who doesn’t actually short the stocks, but just gets paid by subscribers for the negative research reports) and they’re doing quite well:
https://x.com/BearCaveEmail/status/1807160741063221643
I added a small amount thinking this is another buying opp. Too cowardly to buy a large amount since I don’t really know what is going on.
Maybe I will take a deep breath and convert my preferred holdings to my Roth while they have been hammered, but only if I think it is going to come out mostly in Arbor’s favor.
All of the previous short sellers nonsense has corrected in ABT favor and was a good buying opp. But there has never been a DOJ involvement. Hard to tell if this is somethng real or just short sellers clout. DOJ has been severely compromised by bad actors lately. Sad to see what our game has turned into.
Martin: Your statement that the DOJ has been “severely compromised by bad actors” is surprising. What is it based on?
live again to fight another dog, so to speak
ABR i’d be cautious on the common, and keep the prefs on a tight leash. Some of the short seller allegations look credible to me and they have a decent track record. With 5x leverage (trusting their asset marks, vs book value of equity), things can go wrong pretty quickly if they are indeed overstating their asset values.
I have tons of ABR preferreds. Too late to sell. I will wait it out, hoping someone like Jeremy LaKoch in SA, an author praised by Girdbird, may write an article as he did with LUMN (very risky IMHO) and some decent Pfds such as CHMI-A, not a SWAN, but reasonable risk/reward considering the Feds and headline inflation and Fed talk seem to suggest rate cut. FBI investigation could cause more problem, as I recall Ziskind (son in law of Michael Karfunkel, the Hungarian self made billlionaire with Amtrust insurance and its worthless lazy British distributor Maiden. Then Amtrust never skipped or suspended dividend because it contains to do biz in selling insurance. Amtrust should enjoy more biz as State Farm Insurance has decided to cease selling any apartment insurance in California, presumably due to wildfire in certain property with severe heat and lots of trees to burn in California. Then no one seem to deem the problems in Texas or Florida. LOL. BTW, I may have to change my email address as Earthlink went out of biz a few years ago, the Earthlink LLC refuse to support Microsoft Outlook and gave terrible service while doubled the rent LOL.
Some smaller position should be sold with Ex Div today. Why take the risk when there are some many others, e.g. ET-I.