With federal prosecutors to the left of it and short sellers to the right, Arbor Realty Trust is feeling the squeeze.
The multifamily lender reported $1 billion in delinquencies in the second quarter, a 10 percent pop over the first quarter, as loan modifications — the lender’s go-to tactic to keep potential defaults from marring its books — slowed.
In the first quarter, Arbor modified nearly $2 billion in debt to throw those struggling borrowers a bone and keep defaults from crashing its balance sheet.
In the second quarter, modifications slipped to $733 million, leading analysts to ask: Why is $1 billion in delinquent debt still sitting on your books?
“In terms of your process, is it still once you classify a loan as an NPL [non-performing loan]…could you modify that loan?” asked Steve Delaney of Citizens JMP Securities, referring to delinquent debts.
CEO Ivan Kaufman ballparked that the firm would be able to modify about 40 percent of those loans, noting that the lender is game to foreclose to speed that process.
“A big part of what we do is we proceed to foreclosure when the loan is not paying,” Kaufman said. “Foreclosure leads to a very effective process of getting modded.”
Kaufman also tossed out an estimate that 30 percent of the $1 billion in delinquent debt would “go REO,” or real estate owned, meaning Arbor would be stuck with the real estate asset.
“That’s the toughest part of it,” Kaufman said.
The top question for most analysts on the Friday morning earnings call was whether the distress Arbor’s borrowers were showing would get any worse.
Arbor lent heavily to value-add multifamily buyers who financed deals with floating-rate short-term debt. Rates rose, renovations stalled, rents flatlined and now increasingly more sponsors are struggling to pay their debts.
“Are we past the peak of identifying the problem loans?” asked Stephen Laws of Raymond James.
In response, executives projected cautious optimism, citing the market’s expectation the Federal Reserve will start cutting rates in September.
“Perhaps the third quarter may be a little bit tough,” Kaufman said. “We’re definitely seeing light at the end of the tunnel.”
Kaufman offered little commentary on the probe by the Department of Justice and Federal Bureau of Investigation in New York into its lending practices and disclosures reported by Bloomberg a few weeks back.
“It is our policy not to comment on such inquiries,” the CEO said.
Federal prosecutors started looking into Arbor after short seller reports, many of them released by Viceroy Research, alleged it had not disclosed the extent of the distress on its books and had overstated the value of its loan portfolio.
Arbor in mid-July responded to the reports of investigations, stating its financials and business practices were compliant with accounting and regulatory obligations.
Kaufman stuck to that script on Friday morning. “The best response to these attacks, which we believe are unfair and unjustified, are our financial results and our earnings call here today,” the CEO said.
Arbor reported profits, measured in distributable earnings per common share, of $0.45, down 21 percent from a year ago. Net income clocked in at $47.4 million, a 38 percent drop from the second quarter of 2023.
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