Apartment industry lender Arbor Realty Trust is pushing back against investor concerns about delinquencies in its portfolio while warning of difficulties ahead that may extend past the first half of the year.
The Uniondale, New York-based mortgage real estate investment trust focuses on commercial real estate collateralized loan obligations, a type of security that has grown in popularity among investors but had weak performance in 2023. A fresh round of criticism against the company was delivered Wednesday.
So-called CRE CLOs are pools of short-term loans made mainly by nonbank lenders such as Arbor. The loans are usually originated on newly built properties or those going through a transition to reach stabilized cash flow. They pose a risk for investors when those properties run into financial trouble.
With only two CRE CLO transactions in the fourth quarter, the market fell well short of expectations, bond-rating firm DBRS Morningstar said in a recent report, blaming high interest rates and a dearth of property sales.
In Arbor's case, a 16% increase in annual revenue was overshadowed by an increasing number of loan delinquencies the company said has been brought about by the lengthy process of raising capital, in part due to high interest rates, and some borrowers who have decided to default before negotiating.
“We are in a period of peak stress and expect the next two quarters to be challenging, if not more challenging than the fourth quarter,” CEO Ivan Kaufman said last week on an earnings call with Wall Street analysts. “As a result of this environment, we are experiencing elevated delinquencies.”
The company reported a net increase of $115 million in delinquencies over the fourth quarter. The number of nonperforming loans increased to 16, valued at $262.7 million, from 12 at the end of the third quarter with a value of $150.5 million. Executives said they expect more delinquent payments over the next several quarters on loans Arbor made and have increased the company’s total allowance for loan losses to $195.7 million from the $132.6 million it had in reserves in the fourth quarter of 2022.
“We do think the next couple of quarters will be increasingly challenging,” Paul Elenio, Arbor’s chief financial officer, said on the call. If interest “rates stay elevated for longer, that could leak into the third quarter, and we will continue to look as we work through our deals and determine whether we need additional reserves. … Intuitively, I believe reserves will stay elevated for the next couple of quarters.”
Critics Call Foul
Arbor has pushed back against criticism that delinquencies in its portfolio have ballooned to unmanageable levels that included a report from Banco Santander that claimed 16.5% of Arbor’s outstanding loans by volume were past due in December, nearly 2.5 times higher than the average across the CRE CLO market.
While the proportion of delinquent loans in December, and another estimate from short sellers cited by Eleino that showed delinquent loans in January reached 26.6%, may have been accurate at the time of the report, most of those loans have now been cured, Arbor said.
“This is a perfect example of using select data as of a point in time,” Kaufman said. It “does not contain the full picture or represent the industry’s focus, only to inject fear into the market for personal gain,” referring to short positions held by analysts who authored some of the reports.
Data provided by the Arbor said the delinquency rate in December was 1.3% after accounting for customers who paid at different times during the month, sometimes after the initial due date. For January the number was 5.6%. The 30-day delinquency rate, which Kaufman said was the industry standard for representing actual delinquency, was 0.9% for December and 1.2% for January.
“The numbers that you're seeing in those reports are total delinquencies, most of which you can gather by the numbers we're giving you are less than 30 days and are subsequently cured,” Elenio said.
Short seller Viceroy Research, a critic of Arbor, pushed back Wednesday on the company's comments in its earnings call as "baloney with a side of flimflam."
The firm argues that Arbor has systematically misrepresented the quality of its loans, pointing to company data that shows loans with a "pass" risk rating have declined from 61.3% of its multifamily loan book in the fourth quarter of 2021 to just 1.7% in the final quarter of 2023. More than half of Arbor's loan book is now rated "special mention," which indicates a potential deterioration of creditworthiness, or worse.
It also pointed to Arbor's 10-K yearly filing showing that in addition to the 16 nonperforming loans mentioned on the call, the company has 24 multifamily bridge loans less than 60 days past due amounting to $956.9 million. On the earnings call, Viceroy says Arbor continually, knowingly or unknowingly, conflated delinquencies, which is a loan past due by any amount of time, in favor of nonperforming loans, those overdue by more than 60 days, to bring December's delinquency rate below 2%.
In addition, Viceroy said the reversal in proportions of delinquencies reported on the call was not the result of improvements in operations, but rather Arbor clients dipping into reserves and other loan modifications to offset losses, which the firm says Arbor has underreported. These are "limited-use strategies," Viceroy said, that don't make up for the majority of Arbor's CLO borrowers that are unable to meet debt service expenses.
"Kicking this can is not sustainable, especially as Arbor's new business shrinks quickly," Viceroy said.
CoStar News reached out to Arbor for comment on Viceroy's take but did not immediately hear back.
Arbor's stock has fallen nearly 6.5% over the past month.
More Delinquencies to Come
Still, by Arbor’s own estimates and those of other industry professionals, delinquencies are likely to increase this year. Bond-rating firm Fitch expects delinquencies in the apartment sector to rise to 1.3% in November 2024, up from 0.62% in the same month in 2023. By 2025, delinquencies are expected reach 1.5% during that time. For those that do default, Arbor said it’s prepared.
“We expect to be extremely busy in the first two quarters of this year, managing through the most challenging part of this dislocation,” Kaufman said.
In addition to raising its allowance for delinquencies, Arbor said it is actively working with borrowers to set new interest rate caps on expiring loans. Over the past four months, the company said it had $2.5 billion in rate-capped loans expire, of which $1.7 billion has been executed with new rate caps or cash in lieu of caps. For borrowers who can’t see the loans through, the company said demand for those assets is so strong it’s had to limit the number of borrowers due to an overabundance of requests.
“Clearly to get people to the table is very easy,” Kaufman said. "People are raising distressed funds and there’s plenty of liquidity to step in.”