Arbor Short Sellers Yet to Get Last Laugh

Despite being targeted multiple times by short sellers, Arbor Realty Trust is withstanding the pressure.

Arbor’s short sellers are playing a costly game as they wait for delinquencies, property forfeitures or foreclosures to surge, the Wall Street Journal reported. They may ultimately come out in front, but not without some — literal — opportunity costs.

Expecting a spike in defaults on its $12.25 billion loan portfolio, short sellers have piled into Arbor’s stock. Approximately 40 percent of the company’s shares are on loan — a proxy for short interest — making Arbor the most heavily shorted property stock in the country, according to MarketWatch.

Arbor’s loan book is exposed to multifamily borrowers who used floating-rate bridge debt to buy thousands of units across the country while interest rates were low. After rates soared in 2022, those same firms started suffering cash crunches and struggled to make monthly mortgage payments.

The promised defaults seemed to be coming at the start of the year. Borrowers of roughly 9 percent of Arbor’s securitized debts were at least 30 days late on payments, according to CRED iQ. Average debt service coverage ratio on the company’s collateralized loan obligations fell as landlords were nowhere near covering interest payments with building income.

But rather than succumbing to distress, Arbor has been playing the “extend and pretend” game, spending months negotiating over its troubled mortgages. The multifamily lender modified almost $1.9 billion in loans in the first quarter.

At the end of March, Arbor had roughly $465 million in non-performing loans, or debt at least 60 days past due. If it weren’t for the loan modifications, Arbor would have reported $957 million in non-performing loans.

The delinquency rate on Arbor’s securitized loans is down to 3.8 percent.

Meanwhile, short sellers are saddled with Arbor’s dividend at a yield above 12 percent as they borrow shares and sell them in hopes of buying them back more cheaply at a later date. That calculation on the $100 million cumulative short position in Arbor could cost short sellers more than $13 million per year as a whole when factoring in the borrowing price.

— Holden Walter-Warner