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Longtime Sun Belt multifamily lender Arbor Realty Trust (ABR) is now feeling the heat from the rising interest rate environment of the last two years.
The real estate investment trust (REIT) reported 16 nonperforming loans with a carrying value of $262.7 million in the fourth quarter, according to its latest earnings report released Friday morning. This was up from the previous quarter’s 12 nonperforming loans with a $150.5 million carrying value.
The loan portfolio struggles facing Uniondale, N.Y.-based Arbor are largely tied to floating-rate loans on apartment assets in the Southern U.S. that were originated prior to the Federal Reserve aggressively hiking interest rates from near-zero borrowing levels in early 2022.
“We’re in a period of peak stress and expect the next two quarters to be challenging, if not more challenging than the fourth quarter,” Arbor CEO Ivan Kaufman said during the firm’s fourth-quarter earnings call. “As a result of this environment, we’re experiencing elevated delinquencies. One of the many reasons this is occurring is certain borrowers are taking the position that they will default first and negotiate second, which is not a strategy that works well with us.”
Arbor did not reveal individual properties facing distress in its earnings, but a Wall Street Journal story Thursday reported that some of the REIT’s delinquencies over the past year included loans backing apartment complexes in Columbia, S.C., Gainesville, Fla., and San Antonio. Arbor also foreclosed on a Houston multifamily portfolio owned by Applesway Investment Group last March after it defaulted on mortgage payments, The Real Deal reported.
Arbor is the 17th most shorted stock as of Friday, according to MarketWatch, an indication that many investors expect its stock price to fall. Kaufman said during the earnings call that reports about shorted stocks have provided “inaccurate” data about Arbor with out-of-date information on delinquencies.
The REIT’s stock increased by nearly 3 percent to $13.97 per share as of Friday afternoon.
Paul Elenio, Arbor’s chief financial officer, noted that while total delinquencies in its loan portfolio were 16.5 percent in December and 26.6 percent in January, most of those have been resolved, with that number now down to 1.3 percent.
He added that, of the December loan delinquencies, only 6.3 percent were for 30 days or more, and that is now at 2.9 percent as of February. And just 0.8 percent of Arbor’s delinquent loans are for 60 days or above, according to Elenio.
Arbor booked roughly $90 million in reserves for potential future losses, but still finished 2023 with a 5 percent year-over-year increase in its generally accepted accounting principles net income of $1.75 per diluted common share. The REIT reduced its multifamily balance sheet loans by $817.4 million in the fourth quarter, with 58 percent of this debt converted into new agency-backed loan originations, a strategy Kaufman said helped recoup more than $100 million of capital.
“With today’s current interest rates, we will continue to chip away at converting the loans to the agencies,” Kaufman said. “But if the 10-year [Treasury rate] goes below 4 percent again, it will become more meaningful and every quarter of a point drop in rates from here will be even more impactful.”
Arbor’s fourth-quarter lending volume of $1.36 billion was down 73 percent compared to the same time a year ago. Kaufman noted that, despite contending with rising interest rates for much of 2023, its yearly origination volume finished 2023 up 7 percent from 2022 at $4.8 billion.
Many of the Sun Belt markets Arbor has originated multifamily loans for are facing vacancy challenges now due to oversupply, but Kaufman stressed on the earnings call that there remains strong demand for workforce housing, which comprises a large part of the company’s portfolio.
He said the affordable housing sector will take on even greater importance in the near term given the high number of migrants crossing the Mexico border into the U.S.
“You have 8 or 9 million people who have come across the border rolled up in hotels,” Kaufman said. “We think once they start to begin to get their work permits, that’ll have a positive impact on the vacancy factors.”
Andrew Coen can be reached at acoen@commercialobserver.com.
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