ABR Stock Alert: Arbor Realty Plunges on News of Federal Investigation

The news flow for short sellers is increasing today. Arbor Real Estate (NYSE:ABR) is among the companies seeing heavy selling pressure today. At the time of writing, ABR shares are down more than 19%, erasing the year-to-date gains the stock had made through yesterday.

This move came after news of a U.S. Department of Justice (DOJ) investigation into the company’s lending practices and loan portfolio. Short sellers appear to have followed suit, with Commercial Mortgage Real Estate Investment Trust (REIT) is apparently under fire from those who are betting against the company’s stock.

The Justice Department is reportedly reviewing the company’s disclosures, focusing in particular on how Arbor Realty shared its loan book performance with investors. This is an ongoing investigation, so the company has not yet responded for comment. But given the allegations, today’s move makes sense.

Let’s take a closer look at the announcements and why investors are massively selling ABR shares today.

ABR shares fall due to regulator probe

To some extent, the current macro environment could be driving a rise in bearish bets, regardless of these recent headlines. Most investors already realize that commercial real estate is under severe pressure. That’s because commercial real estate valuations have fallen sharply due to structural trends (like working from home) that have accelerated post-pandemic.

Given the difficulty of determining the true value of real estate assets in a company’s loan book, there is a significant gray area in which many real estate companies operate. It is unclear how successful this Justice Department investigation will be in proving wrongdoing. But of course, the mere fact of the investigation should be reason enough for many investors to look at other options in this space.

I think investors should be very cautious about the commercial real estate sector right now. Regulators are likely to take a closer look at how companies disclose their performance, and this investigation could be one of the first of many. Accordingly, I would not be surprised to see some downside across the industry in the coming days on this news.

As of the publication date, Chris MacDonald did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s disclosure policies.

At the time of publication, the editor in charge did not hold any positions (either directly or indirectly) in the securities mentioned in this article.