Arbor Realty Trust's CLO Distress Deepens: An Escalating January Update

💬 STOCKS MENTIONED: $ABR

❗this summary is based on the conclusions provided by Viceroy which has a short position in $ABR. Please conduct your own, independent research when making investment decisions❗

📝 SUMMARY: Arbor Realty Trust ($ABR) has recently disclosed alarming performance data for its Collateralized Loan Obligations (CLOs) as of January 2024, revealing a deepening crisis. The number of delinquent loans in Arbor’s CLOs has surged by approximately 50% month-on-month, now constituting over a quarter of its $7.6 billion CLO book. This trend, having compounded since October 2023, presents a dire picture for Arbor, with nearly $2 billion of its deal value now tied up in delinquent deals.

Arbor has been actively managing its CLOs by removing non-performing loans and replacing them with performing ones. However, this strategy seems to be failing, as the rapid deterioration of these books continues unabated. The updated debt service coverage data from January also paints a bleak picture, showing a continuing decline in the weighted Net Operating Income (NOI) of Arbor's deals relative to their debt servicing costs.

Arbor's management is under scrutiny for potentially being aware of these risks since early 2023, yet failing to communicate auditable impairment figures to investors. The January trustee data further reveals that Arbor’s underlying asset delinquencies and debt service coverage ratios (DSCR) are following a negative trend, indicating increasing unprofitability of these assets. This is particularly concerning given the historical context, where even during the favorable conditions of 2021-2022, Arbor's management appeared to operate with a slim margin of error.

In the context of Arbor’s CLOs, both the Interest Coverage Ratio and the Overcollateralization Ratio are critical metrics. Despite Arbor’s efforts to maintain these ratios by adjusting its CLO portfolio, the current performance data suggests that these measures are under significant strain. Furthermore, Arbor’s provisioning for impairments seems grossly inadequate at a mere $90 million across a more than $12 billion multifamily portfolio.

As defaults loom on the horizon, Arbor's reliance on collateral recovery seems increasingly uncertain. The current Treasury Bond rates and the implied weighted cap rate of underlying CLO properties do not favor Arbor in realizing the underlying value of the collateral in the event of mass defaults. This situation could lead to a substantial shortfall and potentially wipe out Arbor's equity tranche in the CLOs.

In conclusion, Arbor Realty Trust's ($ABR) CLO performance for January 2024 confirms the worrisome trends identified in previous months. The company's CLO portfolio is showing signs of distress, with underlying collateral values potentially overstated. With a significant portion of its loans maturing within the next 18 months, Arbor's financial stability is under serious threat, marking it as a particularly concerning player in an industry already facing challenges.

🔍 SOURCE: https://viceroyresearch.org/wp-content/uploads/2024/01/Arbor-Jan-Update.pdf