Short Seller Says Arbor Realty Committed Fraud To Avoid Reporting Deeper Losses

Short seller Viceroy Research released a new report about Arbor Realty Trust on Thursday, accusing the mortgage REIT of fraud and sending its stock down almost 5%.

Viceroy alleged in the report that Arbor is carrying out “an elaborate and intentional con” where Arbor hides losses by financing the purchase of assets from its own foreclosures in off-balance-sheet transactions, the report states. Citing a recent purchase of a Houston multifamily portfolio, the report claims Arbor uses a separate entity it owns, run by a former Arbor vice president, to buy the assets.

Shares of Arbor Realty Trust, a multifamily lender, dropped up to 5.6% after the report was released, Bloomberg reported, although the price recovered slightly before markets closed.

A. Walker & Co., an investment manager led by Austin Walker, a former vice president of originations for Arbor, bought the Houston portfolio with a $95.25M loan from Arbor, according to documents in the short seller report. 

The Houston portfolio was previously owned by an LLC linked to Jay Gajavelli’s Applesway Investment Group. Arbor has foreclosed on numerous Applesway Investment Group properties after the firm fell behind on bridge loans financed by Arbor.

The price Walker paid represented a premium on the foreclosed loan, which meant Arbor didn't have to recognize a loss on the transaction, Viceroy wrote. Walker acquired the property with its first fund, AWC Real Estate Opportunity Partners I LP, which it launched in October. 

Walker is the CEO of that company, which shares an address with Arbor's New York office, according to regulatory filings. Arbor committed a $24M investment for an initial 99% noncontrolling interest in its fund, the REIT said in its 2023 annual report. 

The Houston portfolio sale “was a second quarter event and as a result will be appropriately disclosed, with all the correct facts and details, in our second quarter fillings,” Arbor Chief Financial Officer Paul Elenio told Bisnow in a statement through a spokesperson Thursday. 

Elenio referenced the press release Arbor issued Wednesday, in which it encouraged careful review of its public statements and disclosures rather than reliance on short seller reports or news articles. 

“We will not respond to short seller reports and are very comfortable with our audited financial statements, public comments and detailed disclosures,” Elenio said in the statement.

In response to Arbor’s statement, Viceroy Research head Fraser Perring told Bisnow in a text message Thursday evening “it doesn’t matter to Viceroy or the regulators in which quarter ABR commit fraud,” adding that Arbor funded the entity that was created in the fourth quarter of 2023. 

“It is a laughable suggestion that this transaction was not premeditated,” Perring said.

Arbor has attempted to shake off short sellers for more than a year, starting with a Ningi Research report issued in March 2023. That report dropped Arbor’s stock nearly 24% that month before recovering its value and then some by July. CEO Ivan Kaufman later bragged on the REIT’s success despite the reports, saying “reports are an attempt to capitalize on fear instead of rational thought.” 

Viceroy Research, a London-based short seller, issued its first report about Arbor in November. It issued another report in January, highlighting an almost 50% month-over-month increase in Arbor’s delinquent loans. 

Shortly after, securitized debt tracking firm CRED iQ published a report that showed borrowers representing a quarter of Arbor’s securitized debt were late on payments the previous month, though many became current in the weeks that followed. Kaufman responded in the REIT’s next earnings call that its delinquency rate was down to 5.6% and delinquencies of more than 30 days, which only applied to 1.2% of Arbor’s loans, are more relevant. 

It was able to bring down that delinquency rate by modifying loans to temporarily reduce interest rates and extend maturity dates. 

But troubles on its loan book, which ballooned during the low-rate buying frenzy of 2021, have continued to rise. It modified $1.9B of loans on its book during the first quarter and reported a 70% increase in nonperforming loans from the end of 2023 to $465M.

It still recorded a profit of $58M in the first quarter, according to its earnings report last week.

Perring said that Viceroy submits all of its reports to the Securities and Exchange Commission before publication. He said he was on a call with a regulator related to this matter earlier in the afternoon, but declined to specify which one.