A Short Seller Tanked A Multifamily REIT's Stock. Now Its Target Is Having The Last Laugh

A combination of borrowers struggling or failing to pay loans on properties, trouble at regional banks and continuously rising interest rates is already enough to make multifamily investors jumpy.

Add in a short seller report making unproven accusations, and Arbor Realty Trust’s stock tumbled nearly 24% in March, only slowly recovering in the weeks since. But during an earnings call Friday, Arbor CEO Ivan Kaufman was quick to brag about the trust’s financial success this year and dispel misinformation from a “so-called research company.”

Arbor Realty, a commercial and multifamily lender based in New York, raised its cash dividend on common stock by 2 cents, or 5%, to 42 cents per share in Q1 2023, according to its earnings report. Net income for the quarter was $84.3M, up from $64.1M in the first quarter of 2022, and earnings of 62 cents a share surpassed analyst expectations by 41% — the fourth quarter in a row it has beat forecasts.

This was despite the short selling campaign by the anonymously run Ningi Research, which put out a report that drove its stock down from $15.24 on March 6 to $10.32 on April 14. The stock was back up to $12.33 as of Tuesday afternoon.

The short seller report was an attempt to mislead the investing public, Kaufman said during the call.

“It should be obvious to everyone at this point that the reports are an attempt to capitalize on fear instead of rational thought,” Kaufman said.

We are short Arbor Realty Trust ($ABR), a Mortgage REIT focused on real estate bridge financing. We believe $ABR hid debt off-balance, faked revenue and hundreds of millions of dollars are missing. We think the stock is downside up to 67%, read our report: https://t.co/6Q9lr847Sppic.twitter.com/NiWi5dHoGp

— NINGI RESEARCH (@NingiResearch) March 14, 2023

In a fragile, financially unstable market, it appears that attempt had some success, prompting ABR to issue a March 14 press release calling the report meritless. 

"This false and inflammatory report is a transparent effort to mislead the public for the purpose of enabling Ningi and its affiliates to profit from short positions on Arbor’s stock," the company stated at the time.

Jonathan Weber, an investor who follows ABR and owns a small share of its stock, came across the short seller report on Seeking Alpha, he told Bisnow, prompting him to pen his own column advising investors to ignore it. 

Short seller reports are released fairly often, though not daily, he said, adding that Ningi Research’s report was “high profile” and got more attention than most. The state of the market played a role in that as did the fact the report came out in March, when smaller banks like Silicon Valley Bank and behemoths like Credit Suisse were running into trouble, he said.

“There was a lot of uncertainty about financial stocks, and since ABR is a mortgage REIT, it’s kind of a financial stock as well,” Weber said. “I think two years prior, it wouldn’t have gotten a lot of attention.” 

Worries were overblown and ABR offers an attractive investment opportunity, Weber said.

Arbor hasn't been the only stock affected by rising fears. In February, the S&P 500 had its worst day in months. Bloomberg attributed it to fears about the Federal Reserve continuing its fight against inflation, Walmart and Home Depot reporting dire forecasts and geopolitical tensions. 

“We are currently operating in an environment led by fear, whereby investors are on edge for any news of mismanagement, fraud, or malice of any stock in the financial sector,” financial blogger Sam Kovacs wrote in a piece for Seeking Alpha.

It’s the perfect environment for a group like Ningi Research to leverage that fear, he said in the blog. But Ningi’s claims, such as asserting that Arbor is hiding a “toxic mobile homes portfolio to manipulate its stock price and avoid insolvency,” are either without evidence, misleading or show fundamental misunderstanding of Arbor’s financing model, Kovacs wrote.

The issue of the hidden portfolio was raised during ABR's earnings call, with Kaufman dismissing that and other claims of trouble cited in the Ningi report as "false and misleading information."

Ningi Research hasn't given up it's anti-Arbor campaign, though.

In our opinion, there are so many red flags in $ABR's latest 10-Q for the investing public to watch out for. Substandard loans are up, 5.6m shares were issued, disclosures on critical audit matters were changed...and so forth. We are confident about our findings.

— NINGI RESEARCH (@NingiResearch) May 5, 2023

“And what is so ironic is that they took one of the most successfully restructured transactions in our history, that was highly lucrative for our shareholders, and tried to turn it into a negative,” Kaufman said, referring to the foreclosure on a group of loans totaling $229M for a multifamily portfolio throughout Houston. 

Applesway Investment Group stopped paying on those loans from Arbor, leading Arbor to sell the assets to “one of the existing investors who was deeply committed to the project [and able to] recapitalize and restructure the debt with the appropriate guarantees, putting our loans in a much more favorably protected position,” Kaufman said.

Kaufman said Arbor recorded no loss on the original debt and recovered all outstanding interest as part of the restructuring. Harris County sale documents showed Fundamental Partners took the assets at a foreclosure sale for $32.5M under the original loan value, but that doesn’t necessarily reflect all of the components of the prearranged transactions.

“This was an extraordinary successful debt restructuring, which clearly demonstrates the incredible depth and experience of our asset management team,” Kaufman said.

Though the Ningi Research ABR campaign continues, it is finding fewer people buying into its claims. The anonymous firm was mocked on Twitter following ABR's first-quarter results. "Schadenfreude feels too good watching your short trade fall on its face," one user responded to Ningi's latest claim. "Another fail by your kindergarten research company," wrote another.

"I've been doing this for about 60 years and I've never seen a situation where a short report came out where I couldn't find a phone number of the firm, no internet address, and no name of the firm," ABR investor Lee Cooperman said during the question-and-answer period of last week's earnings call. "So this guy is an idiot and the [Securities and Exchange Commission] should be looking into him."

CORRECTION, MAY 15, 12:45 P.M. CT: This story has been updated to better characterize the accuracy of Ningi Research's report.