Arbor Realty Trust used a new convertible debt offering to extend upcoming maturities and repurchase deeply discounted shares, even though the new securities carry a higher stated interest rate than the senior notes being retired.
The company completed an upsized $375 million offering of 6.25% convertible senior notes due in 2029 during July 2026.
Arbor is using the proceeds to redeem $270 million of 4.50% senior notes due in 2026 and finance approximately $114.3 million of common-stock repurchases.
The transaction replaces near-term debt with securities carrying a maturity approximately three years later.
However, the stated coupon increases by 175 basis points, from 4.50% to 6.25%.
The higher interest rate reflects the cost of extending the maturity and raising additional capital for stock repurchases during a period of significant credit pressure in Arbor’s Structured Business.
The convertible feature could eventually allow holders to exchange the notes for common shares under the terms of the securities. That creates potential future dilution, although conversion could also reduce the amount that Arbor ultimately repays in cash.
Arbor used $11.6 million of the offering proceeds to repurchase approximately 2.1 million shares concurrently with the transaction’s pricing.
Another $102.7 million was committed to repurchase approximately 18.9 million shares through a prepaid forward stock-repurchase agreement.
Combined, the two transactions cover approximately 21 million shares at an average price of $5.42 per share.
Arbor said the shares were repurchased at approximately 49% of book value.
The company separately repurchased another $20.8 million of stock at an average price of $5.85 per share, equal to approximately 53% of book value.
Across those transactions, Arbor committed approximately $135.1 million to buy back common stock at prices close to half of reported book value.
Repurchasing shares below book value can increase book value per remaining share because the company retires equity for less than its reported carrying value.
The potential benefit depends on the accuracy and durability of that book value, particularly because Arbor continues to record provisions, impairments, loan modifications, and realized losses across its commercial real estate portfolio.
The financing decision followed a quarter in which Arbor reported a net loss attributable to common shareholders of $37.3 million, or $0.20 per diluted share.
That compared with net income of $24 million, or $0.12 per diluted share, during the second quarter of 2025.
Distributable earnings declined to $21.7 million, or $0.10 per diluted share, from $52.1 million, or $0.25 per share.
Excluding $9.6 million of net realized losses associated with the resolution of legacy assets, distributable earnings were approximately $0.15 per share.
Arbor nevertheless declared a quarterly common-stock dividend of $0.17 per share.
The dividend exceeded both reported distributable earnings of $0.10 per share and the $0.15 adjusted figure excluding the legacy-asset losses.
The quarterly dividend was reduced from $0.30 per share in the prior-year period, representing a decline of approximately 43%.
For the first six months of 2026, Arbor declared dividends totaling $0.47 per share, compared with $0.73 during the same period of 2025.
Credit-related expenses were the primary reason for the earnings deterioration.
Arbor recorded a $38.2 million provision for credit losses during the quarter, compared with $19 million a year earlier.
It also recognized a $13.5 million provision associated with loss-sharing obligations and a $13.6 million impairment involving real estate-owned properties.
Those provisions and impairments totaled approximately $65 million.
Arbor had 19 nonperforming loans with an unpaid principal balance of $428.8 million at the end of June, compared with 19 loans totaling $481.5 million at the end of March.
Although the nonperforming balance declined, related reserves increased to $31.1 million from $16.1 million.
The company also had three nonaccrual loans totaling $94.9 million that were less than 60 days past due. Arbor had no loans in that category at the end of the previous quarter.
Seven loans totaling $386.9 million were modified for borrowers experiencing financial difficulty. The company said most of those borrowers contributed additional capital to recapitalize their investments.
Arbor foreclosed on five loans with a combined unpaid principal balance of $121.4 million.
It sold two of those newly foreclosed properties and three existing real estate-owned assets for $79.8 million.
Real estate owned increased to approximately $545.9 million from $498.9 million at the end of 2025.
The company’s total allowance for loan losses increased to $163.4 million from approximately $146 million at year-end.
The Structured Business generated a net loss attributable to common shareholders of approximately $49 million, while the Agency Business produced $8.4 million of net income.
The Structured Business held approximately $13.06 billion of Arbor’s $14.35 billion in total assets.
Arbor’s Structured loan and investment portfolio increased modestly to $12.11 billion from $12 billion during the quarter.
However, the average portfolio yield declined to 7.21% from 7.50% because of lower collections of default and back interest, additional delinquencies, and loan modifications.
The debt financing that portfolio declined to $10.48 billion from $10.71 billion.
Its weighted-average financing rate, including fees, improved slightly to 6.38% from 6.40%, while the average cost of borrowing declined to 6.56% from 6.67%.
Arbor also redeemed $787 million of notes associated with a legacy collateralized loan obligation.
The underlying assets were moved to existing repurchase facilities with what the company described as significantly improved terms. The transaction generated approximately $132.3 million of additional liquidity and reduced financing costs, but also increased leverage.
Agency loan originations increased sequentially to approximately $1.08 billion from $707.6 million.
However, the gain-on-sale margin declined to 1.33% from 1.86%, while mortgage-servicing-rights income as a percentage of loan commitments fell to 1% from 1.32%.
Arbor’s fee-based servicing portfolio reached approximately $36.7 billion, providing a recurring revenue source that partly offsets volatility in the Structured Business.
The portfolio generated $42.1 million of servicing revenue before $18.2 million of mortgage-servicing-rights amortization.
Cash and cash equivalents declined to $287.5 million from $482.9 million at the end of 2025.
Restricted cash increased to $138.4 million from $67.3 million, while total stockholders’ equity declined to approximately $2.78 billion from $2.95 billion.
The convertible note offering gives Arbor additional time before the refinanced debt matures and allows the company to reduce its share count at a steep discount to book value.
The tradeoff is a higher coupon, potential future dilution, and increased financial commitments during a period when credit provisions, real estate-owned assets, loan modifications, and dividend coverage remain under pressure.
KEY QUOTES:
“The company is using the offering proceeds to redeem its $270.0 million of 4.50% senior notes due 2026 and to repurchase common stock through two separate transactions.”
Arbor Realty Trust
