Arbor Realty Trust’s Big Short Struggles to Deliver

Short sellers betting against Arbor Realty Trust are finding their trade more costly and less profitable than expected despite challenges in multifamily.

Jordan B. & Han-Gwon Lung
June 12, 2024

Together with

Good morning. Arbor Realty Trust is now the most heavily shorted real-estate stock in the U.S., with short sellers betting on loan defaults. Plus, WeWork emerged from bankruptcy and appointed Cushman & Wakefield executive John Santora as its new CEO.

Today’s issue is brought to you by PACE Loan Group — a national lender offering owners non-recourse, long-term, fixed-rate C-PACE financing.

Market Snapshot

S&P 500

GSPC

5,375.32

Pct Chg:
+0.27%

FTSE NAREIT

FNER

714.02

Pct Chg:
-0.34%

10Y Treasury

TNX

4.40%

Pct Chg:
-0.002

SOFR

1-month

5.33%

Pct Chg:
0.0%

*Data as of 6/11/2024 market close.

THE BIG SHORT

Arbor Realty Trust’s Big Short Struggles to Deliver

Short sellers betting against Arbor Realty Trust are finding their trade more costly and less profitable than expected despite challenges in multifamily.

Some background: During the pandemic, property flippers and investors poured billions into multifamily apartments using low, floating-rate debt. New York-listed Arbor wrote the checks for many of these exuberant pandemic-era deals. Now, with interest rates rising to 8%-9% from 3%-4%, many investments have soured. Higher mortgage costs and insufficient income have caused a 26% drop in multifamily apartment values since March 2022, per Green Street.

The BIG short: Arbor Realty Trust holds a $12.25 billion loan portfolio, predominantly in multifamily loans. Anticipating a wave of defaults, short sellers targeted Arbor, leading to approximately 40% of its shares being on loan. This high short interest made Arbor the most heavily shorted property stock in the U.S., according to MarketWatch data.

Arbor’s response: Despite an initial increase in defaults, with 9% of Arbor’s securitized debts being delinquent in January, the company has actively managed its troubled mortgages. Arbor modified loan terms, allowing some borrowers to defer interest payments and inject additional cash to de-risk loans. This proactive management reduced the delinquency rate to 3.8%, buying Arbor crucial time for now.

Costly bet: Short sellers are finding this trade particularly expensive. Beyond borrowing costs, they are on the hook for Arbor’s high dividend yield, which exceeds 12%. A $100 million short position could cost more than $13 million annually. This hefty expense is compounded by the fact that Arbor’s stock hasn’t declined significantly, contrary to expectations.

➥ THE TAKEAWAY

The waiting game: Arbor’s stock, down only 10% this year, has outperformed peers like Ready Capital and Blackstone Mortgage Trust, frustrating short sellers. Despite concerns about Arbor’s loans, short sellers need delinquencies to rise or borrowers to surrender properties to trigger foreclosures. This is a friendly reminder that betting against the property market requires patience as it moves slowly.

TOGETHER WITH PACE LOAN GROUP

C-PACE expands across the U.S. Is your state one of them?

Does your building need updates within a specific time frame?

The public-private partnership of the C-PACE programs has gained momentum across the country, with more than 7,000 financings completed since 2015. Each year, more and more property owners are using C-PACE to blend down the cost of capital for renovations or ground-up construction, with more than $2 billion placed in 2023.

That success is encouraging expansion across the U.S. Across the country, these states have taken steps toward creating viable C-PACE statewide programs:

Georgia: Statewide legislation was approved by the House and Senate and signed into law by Governor Kemp.
Idaho: Legislation passed both the Senate and House and was signed into law in April by Governor Little.
New Jersey: The program is finally expecting a launch in Q3 2024.

In addition, a few states, including Alaska, Hawaii, Florida, Minnesota, and New York have made updates to broaden the application of C-PACE.

✍️ Editor’s Picks

ReWorked: WeWork emerged from bankruptcy, renegotiating 190 leases and exiting 170 locations, with John Santora replacing David Tolley as CEO.
Zoning: NYC’s ‘City of Yes’ zoning changes expand areas for life sciences and indoor farming, facilitating business growth.
Banking on trouble: PIMCO’s (ALIZY) John Murray warns of more regional bank failures due to troubled CRE loans, predicting a ‘wave of distress.’
Medical lifeline: Bankrupt Steward Health Care secured a $225M loan to keep 31 hospitals running, 8 of which are in Massachusetts.
Shareholder support: KKR (KKR) boosted investor confidence in its $1.2B real estate trust with a plan to achieve a value of $27 per share.

🏘️ MULTIFAMILY

Apartment shuffle: Apartment sizes grew last year to an average of 916 SF, up from 887 SF in 2022.
Southern skyline: Resia is planning 1,296 apartments in North Miami Beach, part of a 575KSF development with 3 pools, 3 clubhouses, and 1,709 parking spaces.
River revelry: DMG Capital purchased the 47-unit Linkt Apartments in Chicago’s River West neighborhood for $14.2M, extending its $40M shopping spree.
Ascend to success: Harbor Group International just purchased Ascend at Durbin Creek, a 350-unit apartment complex in St. Johns, Florida.

🏭 Industrial

Heartland shift: Industrial activity is shifting increasingly to the Midwest, with an estimated $27B spent since the start of COVID-19.
Building on success: Stonemont Financial secured a $42.5M loan for a nearly 904KSF industrial development in Georgia with impressive features and a strategic location.
Bio-pharma boost: Kyowa Kirin plans to invest $530M in a new biologic therapies manufacturing facility in North Carolina.

🏬 RETAIL

Retail resilience: Retail sales surged, up 1.35% in May and 3.03% YoY, driven by increased consumer spending, according to NRF.
Whitestone REIT: Whitestone REIT (WSR) declined a $700M buyout offer from MCB Real Estate (MCB), citing undervaluation. The REIT boasts $1.1B in assets and 94% occupancy.
Retail renovations: Primestor Development entered the Northern California market with the purchase of 246KSF Hilltop Plaza in Richmond, worth $36.5M.

🏢 OFFICE

Fire sale: A well-known Manhattan office building was just sold for 67% less than its 2018 price, as more and more office properties sell for less than their outstanding mortgages.
Hyperloop hold-up: Tishman Speyer cancels plans for a 10-story, 222KSF office building in LA’s Arts District near the Hyperloop, after first proposing it back in 2017.
Slowing subleases: San Francisco’s sublease inventory is anticipated to fall to 7.8MSF, below last quarter’s 8MSF.

🏨 HOSPITALITY

Converting spaces: Potential solutions for the national housing shortage include converting underused hotels/offices, but face unique challenges, according to Building Design + Construction.
Touring titans: Taylor Swift’s Eras tour sold nearly 4.4M tickets, grossing around $1.4B, while Beyoncé’s Renaissance tour made over $579M with 2.7M tickets.

📈 CHART OF THE DAY

According to Redfin data, Utah has seen the largest homeownership-related expense spike over the last four years (44%), followed by Idaho (39%) and Hawaii (38%).

According to Bankrate, the average annual single-family homeowner expense stood at $18,188 in March—and that doesn’t include mortgage expenses.