What happened
Shares of Arbor Realty Trust (ABR 2.23%) plunged 23.8% in March, according to data provided by S&P Global Market Intelligence. One factor weighing on shares of the mortgage real estate investment trust (REIT) was a report published by Ningi Research, which had also shorted the company's stock. The company responded to that report and initiated a share repurchase program to potentially capitalize on the share price decline.
So what
Arbor Realty Trust released a statement in mid-March, noting it had received a research report published by Ningi Research. The company stated that it "lacks merit and contains numerous inaccuracies, misstatements, and otherwise misleading allegations." It continued, "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 REIT also noted that contrary to what Ningi reported; it uses generally accepted accounting principles (GAAP) standards to maintain its books and records. The company has used the leading accounting firm Ernst & Young to audit its financial statements since 2003.
Arbor is the latest company under pressure from short-sellers. Fellow REIT Medical Properties Trust recently filed a lawsuit against the firm behind negative research published against the company and published a letter to shareholders to set the record straight. Meanwhile, short-sellers also published a negative report about financial technology company Block. These reports drive down share prices as investors weigh their validity, enabling short-sellers to make money.
One step Arbor took in response to the report was authorizing a $50 million share repurchase program. That program will allow the company to take advantage of the decline in its share price by repurchasing shares at a lower level. However, the authorization doesn't require the company to buy back its stock.
Now what
Short-sellers often make very compelling cases that the companies they're shorting have deeper financial problems. Because of that, the share prices of the target companies tend to fall as the market digests the report. While Arbor has dismissed the report with a press release, it might need to take additional actions. For example, it could follow the lead of Medical Properties Trust and file a lawsuit if it believes the report was entirely inaccurate.
Given that uncertainty, investors might want to wait on the sidelines for the dust to settle. However, it's worth noting that Arbor has an excellent track record of growing shareholder value. It has delivered a 13.6% average annual return over the last decade, outpacing the S&P 500 (12.4%). Meanwhile, it has steadily increased its dividend, something many peers in the mortgage REIT sector have failed to do. Because of that, the short-seller-inspired sell-off might be a good buying opportunity for investors who believe the company can continue growing shareholder value.
