Taking a View
Earnings Calls
Arbor Realty Trust (ABR) a commercial mortgage lender facing delinquency issues in various parts of the country similar to those of Blackstone Mortgage Trust (BXMT) which reported earnings on 2/14/23. BXMT and ABR are both floating rate mREITs and the subject of short reports by Muddy Waters and Viceroy Research, respectively. Both short reports make similar claims of overstated collateral and future credit losses. BXMT reported a significant build in credit provisions that eliminated all GAAP profits for the quarter resulting in a net loss of ($0.01)/sh. But BXMT's "Distributable EPS" which *excludes* credit provisions, came in at $0.69 per share, allowing the company to maintain its $0.62 dividend and tout a "123% coverage ratio" for 2023 on this adjusted metric. BXMTs shares rallied ~5.5% on the release since the credit provisions were not worse than feared and the dividend and "coverage" was maintained. The scenario, an increase in credit provisioning and GAAP losses but an increase in distributable earnings and dividend coverage is likely for ABR as well. In the long-term however, ABR’s book is of worse quality than BXMT’s due to a concentration of value-add multifamily properties in the Sunbelt, a higher initial LTV of around 77%, worse DSCRs of around 0.6x, smaller loans to worse sponsors, and less rate cap protection. CLO data through January shows that delinquencies in the underlying loan portfolio have surged to ~25% from just ~5% in September as borrowers capitulate and rate caps expire. The long-term credit story here is just going from bad to worse but if the dividend yield of 14% can be maintained, the market reaction is likely to be positive as shorting carry can be prohibitively expensive for most fund managers. Long-term puts are better way to play the downside scenario.
