Research report: Arbor Realty Trust, Inc. (NYSE: ABR)

We are short Arbor Realty Trust, Inc. (NYSE: ABR), because, in our opinion, Arbor hid its toxic mobile homes portfolio to manipulate its stock price and avoid insolvency, $599 million of Arbor’s escrows evaporated overnight, the company’s escrow balances and revenue are fake, in an Archegos-like situation $2.5 billion of repo facilities are subject to margin call provisions, Arbor’s funding through repo desks is drying up, the CECL allowances and provisions have been severely understated to boost earnings, Arbor’s financial statements for the last twelve years cannot be trusted, and auditors, as well as the board, turned a blind eye on misstatements and misconduct. We estimate a median downside of 52% and, at worst a 67 percent downside for Arbor’s stock. In our opinion:

  • Arbor has been hiding a toxic real estate portfolio of mobile homes with a complex web of real and fake holding companies for more than a decade,
  • Arbor disguises its off-balance liabilities of $582 million as bad boy guarantees,
  • Arbor invested several million dollars in maintenance for the portfolio and did not account for it on its income statement,
  • If the portfolio had been consolidated, Arbor would have been insolvent in 2011,
  • Up to 2017, Arbor had a negative book value per share and would not have been able to survive,
  • Consolidating the Lexford debt today leads to a fair value of $9.54 per share,
  • Lexford generated hundreds of millions of profit, but Arbor shareholders only received a fraction of it, and the rest of the cash is missing,
  • In November 2022, Arbor started secretly selling parts of the Lexford portfolio, but the net sales profits of $15.2 million were not distributed to Arbor Realty Trust as well,
  • Arbor lowered its off-balance escrow balances for yearend 2021 retroactively by $599 million in Q3 2022 and adopted the change in its annual report, which should not be possible,
  • The escrow accounts don’t show the true picture, as the balances of the second and third quarters of 2022 differ by several hundred million dollars despite being escrow deposits,
  • The reported escrow balances of $1.25 billion and escrow revenue, totaling $65.8 million in the last five years, are fake and accounted for on Arbor’s balance sheet as interest and fee receivables in other assets,
  • Arbor does not disclose coherent information about its repurchase and credit facilities,
  • it’s an Archegos-like situation because, as a matter of fact, neither investors nor counterparties have fundamental information about the parties, conditions, agreements, and risks involved in the repurchase and credit facilities,
  • Arbor even collateralized its servicing revenue to obtain a $75m credit facility, which is not reflected in its debt obligations,
  • At the end of 2022, about $2.5 billion debt of its repo facilities are subject to margin call provisions at the repo desk’s discretion, and the provisions are up 80x from $30 million at the beginning of 2022,
  • Arbor does not account for a reasonable amount of CECL provision and allowance on its books,
  • For its $13 billion multifamily loan portfolio, the company recorded an allowance of $37 million, and that is just $1.5 million higher than in 2020 when Arbor’s multifamily loan portfolio amounted to only $3.8 billion,
  • At the same time, multifamily loans assigned a “Special Mention”-rating rose to $4 billion,
  • Arbor never recorded or accounted for a CECL allowance and provision for its $1 billion single-family built-to-rent loan portfolio, and the company’s auditor never noticed it,
  • The CECL allowances and provisions are severely understated to boost Arbor’s earnings,
  • The reported low allowances and provisions will lead to a rude awakening in the near future,
  • Arbor’s net interest income, other revenue, and other expenses have to be adjusted for the fake revenue and missing CECL allowances which lead to significantly lower net income, basic EPS, and diluted EPS for the past five years,
  • Arbor’s non-GAAP metric, distributable earnings per share, is lower as well,
  • Based on Arbor’s peer group, the downside for its stock is between 39 and 67 percent, and the median downside for Arbor’s share price is 52 percent,
  • An additional $51 million of debt is due in the next twelve months, and maturing bonds, as well as repurchase facilities of $1.2 billion, will lead to significant liquidity issues in Arbor’s cash flow,                                                                                    
  • Ernst & Young and the Chairman of the audit committee will be celebrating their 20th-anniversary auditing and supervising Arbor’s financials and the failure of such duties,
  • Ernst & Young failed its duties, and at least Arbor’s financials of the last twelve years cannot be trusted,
  • Both parties turned a blind eye to the misstatements and misconduct by the company and its management,
  • It’s not the first time Arbor and its management have been alleged of improperly transferring money, as they have been in material litigation for more than a decade, which was settled in late 2022,
  • The litigation’s expenses, which were never disclosed in Arbor’s reports, total about $49.4 million, which were paid for by Arbor’s shareholders,
  • All misstatements and misconduct will lead to restatements, and counterparties, as well as bondholders, will force repayment of Arbor’s outstanding debt,
  • A single margin call will lead to an immediate dividend cut, and deleveraging Arbor’s balance sheet will corroborate a suspension of dividends for a longer time. 

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