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Arbor – Letter to the Auditor

January 8, 2024 – Below is Viceroy’s letter to Arbor’s auditor Ernst & Young outlining our concerns. Viceroy Research is of the opinion that Arbor’s financial statements and credit impairment models are fundamentally flawed. Arbor has made miniscule provisions for what we believe is an obvious wave of delinquencies which will significantly impair its book.

  • Approximately 17% of Arbor’s CLO loans are delinquent. Many appear to have defaulted.
  • 92% of Arbor’s CLO assets by loan value have a debt service coverage ratio (“DSCR”) of less than 1.0x.
  • 20% of Arbor’s CLO assets by loan value have a DSCR of less than 0.4x.
  • The underlying LTV of Arbor’s CLO assets ~77%1. These underlying assets are valued at implied cap rates of 3.8%, the same as the 10-year risk free treasury bill market rate. They are inflated.

Given that this data is so easily and readily available, we were surprised to find how vastly different a distressed and non-performing portfolio was portrayed by Arbor. We highlight Ernst & Young’s responsibilities as auditors to obtain reasonable assurance that Arbor Realty Trust’s financial statements are free of material misstatements.

This is not a radical opinion. The circumstances that have led to this conclusion are wholly laid out in Arbor’s risk profile in its own 10-K and prospectuses. Indeed, this opinion has been echoed by almost every reputable business journal in the country.