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Arbor Realty Trust (NYSE:ABR) consistently attracts investors looking for high-yield companies. With a forward dividend yield of 11.1% and a track record of more than a decade of dividend increases, it looks promising, but there may be more to it than meets the eye.
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Arbor Realty Trust is a mortgage REIT that primarily makes loans on portfolios of single-family homes and commercial real estate assets. Mortgage REITs tend to be more volatile than equity REITs because they are tied to interest rates, but their high yields make them attractive to vigilant investors. Arbor Realty Trust manages a multibillion-dollar servicing portfolio that includes a variety of loan types, from commercial mortgage-backed securities to mezzanine financing, bridge loans and preferred stock arrangements.
Storm clouds are gathering
The troubles with Arbor Realty Trust began a few months ago when short interest in the company surged, indicating that investors believed the company was headed for a sharp decline. Arbor went on the offensive in May, issuing a press release saying that the company had been the subject of short reports but was standing by its filings and not responding to individual short reports.
One of the most damning reports came late last year from Viceroy Research, which labeled the company a “slumlord millionaire.” It called Arbor the “worst of all” and noted that the company’s loan portfolio was in serious trouble and that the value of the collateral used to secure the loans had been overstated. Viceroy noted that many of the loans were maturing and that refinancing options may be limited. In its report, the research firm focused on Arbor’s multifamily portfolio, saying that much of it was dilapidated and that “some properties have already been condemned and declared slums.”
Since that report, concerns about Arbor have only grown. Our research shows that short interest is as high as 51%, and has been steadily increasing since the Viceroy report was released. That’s a major red flag. Here’s another: last week, it was reported that federal officials are investigating Arbor for its lending practices.
While this doesn’t mean everything Viceroy wrote is correct, it’s another sign that all may not be as it seems with Arbor. Analysts are mixed, but the consensus is that it will underperform. It’s worth noting, however, that many analysts still recommend the stock and see potential.
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The bigger macroeconomic picture
Beyond the problems within the company, there is a systemic weakness in multifamily lending, with more multifamily loans falling into default. In January, Freddie Mac released a report stating that because of a larger share of loans coming due in the coming years, there is increased refinancing risk for multifamily properties. The report shows that 42% of commercial loans, an estimated $500 billion, are secured by multifamily loans.
As for Arbor, astute investors will want to pay attention to both the broader economic outlook, particularly regarding rate cuts, and Arbor’s results. If interest rates fall, Arbor’s refinancing prospects could improve. Last quarter, Arbor beat earnings and revenue expectations even as lending fell more than 41%. The company said it had a strong cash position with about $800 million in cash and liquidity.
Arbor reports second-quarter earnings in a few weeks. We’ll examine how it handles federal investigations, its loan delinquency rate, and its total loan origination rate. The stock is down more than 18% in the past year. This could be a buying opportunity, but the risks for this mortgage REIT are significant.
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This article Is It Time to Say Goodbye to This High Yield REIT? originally appeared on Benzinga.com
