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The last time I wrote about Arbor Realty (NYSE: ABR) in 2012. At the time, the stock was trading at around $5, and I viewed recent insider buying and performance as reasons to be optimistic. I’ve been watching this stock for a while, but a number of recent events have piqued my interest again. This stock has been down recently due to some negative headlines and since I like to buy dips, I wanted to take a look at what the bulls and bears seem to be focusing on, so let’s take a closer look:
Arbor Realty is a popular mortgage real estate investment trust, or “mREIT,” that invests in a variety of loans secured by real estate. This allows it to provide an income stream that many shareholders find attractive. I like that Arbor Realty’s management team has significant experience in this space. industry, and in particular, that Ivan Kaufman, Chairman of the Board and President of Arbor Realty Trust, has been with the company since 1983 and has significant experience capital participationAs noted below, many other senior executives at this company have been with the company for 10, 20, or even 30+ years.
Arbor Realty Trust, Inc.
Table
As the chart below shows, this stock was in rally mode until very recently. Shares of Arbor Realty bottomed out at around $11 in November and December 2023. The stock has seen a few spikes in recent months, seemingly when the market was hoping for lower interest rates. Those moments of hope have been mostly dashed by the Federal Reserve continuing to hold rates higher for longer. But hopes of the Fed cutting rates are resurgent, and that seems to have fueled the recent rally to near $16 per share. However, the stock has dipped back into the $12 range due to some negative headlines.
The 50-day moving average is $13.80 and the 200-day moving average is $12.97. In June, a bullish “golden cross” formed on the chart, with the 50-day moving average crossing above the 200-day moving average. If this stock stays at current levels or drops lower, this bullish chart formation will be in danger. At this point, I don’t think technicals are as big a factor as they normally would be, as there is some major news that seems to be controlling the stock price at the moment. However, over the past few months, this stock has bottomed out in the $11 per share range multiple times, so I wouldn’t be surprised if that happens again.
StockCharts.com
The dividend
Arbor Realty pays a quarterly dividend of $0.43 per share, which totals $1.72 per share on an annual basis. This generates a yield of over 13%, which is very attractive for income investors. However, the volatility in the stock price is certainly not appealing to most income investors who typically seek stability. Another important factor for income investors is whether or not the dividend is safe. Based on current earnings estimates and the payout ratio, which Seeking Alpha estimates to be close to 100%, I believe this company will need to start producing stronger results if it wants to maintain this dividend level.
What caused the stock price to drop?
In recent days, there have been reports suggesting that Arbor Realty may be under investigation for its lending and disclosure practices. Some short sellers have alleged that the company has a problem with distressed loans and that as a result, it may be overstating the value of its loan portfolio. A recent news article detailed these concerns and the company’s response, stating:
“We regularly cooperate with regulators and are confident that we are conducting ourselves appropriately,” Arbor said in a statement. “We look forward to our second-quarter earnings call.”
I can certainly see that the short sellers are right that some loans could be non-performing and that the company may need to establish or maintain current loan loss reserves, but the company has a long history of processing and restructuring loans if necessary. Furthermore, at this point, much of this is already potentially priced into the stock price, after a sharp decline. In the best case scenario, any potential investigation could end up validating Arbor Realty and its lending and disclosure practices. In what could be the worst case scenario, I could see a potential investigation resulting in a write-down of some loans and possibly a fine, as well as the need to settle potential shareholder class actions.
Second quarter earnings report and guidance expected on July 26
According to Earningswhispers.com, the company is expected to report its second-quarter results on Friday, July 26. Consensus estimates are calling for earnings of $0.42 per share, on revenue of about $301 million. Arbor Realty beat consensus estimates for the first quarter, and I think they can meet (or maybe slightly beat) expectations for the second quarter, but I don’t think current earnings are driving the stock price at this point. I think management’s guidance and commentary that addresses negative headlines is what will move this stock up or down.
A short squeeze could occur
According to Shortsqueeze.com, there are currently nearly 70 million shares shorted. Based on recent average daily trading volumes of less than 4 million shares, I find this worrisome for both longs and shorts. It is clear to me that the shorts are seeing something that the longs are not seeing, or at least not recognizing. It is also clear to me that even if the shorts are right, they could be vulnerable and help fuel a potentially major short squeeze.
What I’d Like to See Before Buying Arbor Realty Again
For now, I’m going to sit on the sidelines and wait for further developments and hopefully clarity. I think this stock will be volatile and could remain under pressure. If this stock falls further to the low $11 per share range, or if I see significant insider buying, I would consider buying a small position that I could build on over time. I think the business model is solid; the only question in my view is whether loan values have been too aggressive and whether the company has set aside enough provisions for loan losses. Loan values are somewhat subjective, and both shorts and longs need to take that into account.
Potential downside risks
I think the risks are pretty balanced for longs and shorts right now. I think there are potential downside risks for longs due to more negative news. I also see the possibility of a wave of class action lawsuits being announced in the coming days and weeks. I think given the support levels of the last few months, this stock could retest the $11 low, which could suggest more downside risks for longs.
I also see a lot of downside risks for short sellers. This market looks very crowded now, and the stock has wiped out a significant chunk of market cap, which in itself helps address (partially or perhaps fully price in) the potential need for portfolio depreciation. Shorting a stock can be very risky, and many market participants are now looking to exploit vulnerabilities that can arise from stocks with significant short interest. This can lead to a squeeze on short positions, even if the short sellers have a logical reason to be short.
It is possible that the short sellers are right that there are potentially distressed or overvalued loans, but this could be a blip in the rearview mirror as interest rates are expected to fall later this year. This could lead to higher values for loans held by this company. A drop in interest rates could push potentially distressed or non-performing loans back into the performing category.
In summary
A decline in this stock price from nearly $16 per share to below $13 already has a significant amount of bad news priced in. I think that even if the short sellers are right, the bad news may already be priced in. What could happen next is that the Fed could start lowering interest rates later this year, which would likely result in an increase in the valuations of the portfolio assets held by Arbor Realty. This could effectively reverse the need for any portfolio valuation issues that the short sellers are alleging.
This stock has become a battleground and could result in a draw for shorts and longs at current levels, as I view the upside and downside risks as equally weighted at this point. However, barring any twists and turns, I see a stock that many shorts will need to cover at some point, and the potential for lower interest rates to boost the portfolio value and operating results of this company. I believe this stock warrants a Hold rating for now, but could become a Buy in the future on further downside or with additional clarity that could come from management when Q2 results and guidance are released later this month.
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