About three months ago, I wrote an article about Arbor Realty Trust's (NYSE:ABR) Series C preferred offering as an alternative to owning the common stock. While ABR's common stock yield is a very strong one in its own right, the preferred offers investors less volatility and a known source of steady income. However, preferreds aren't for every income investor, so in this article, I'll highlight another way to get exposure to Arbor while reaping a large yield in the process.
The security in question is Arbor's new exchange-traded debt security, ABRN. This is an exchange-traded note that was issued in the past couple of weeks and has been trading for a few sessions as of this writing. The note is brand new, so we'll begin by defining what it is and how it could help you achieve the income you need.
ABRN is similar to investors in some ways to a traditional preferred stock offering; it has a price that doesn't move much, and it provides reliable, fixed distributions each quarter. However, there are some very important differences that investors should be aware of. First, ABRN is debt and not preferred equity. This means that ABRN is senior to preferred equity in the event of bankruptcy, offering additional protection to holders if such an eventuality should befall Arbor. It also means that, unlike traditional preferred equity, ABRN has a stated maturity date. Debt cannot, by definition, be perpetual, so whereas preferred shares could theoretically exist forever, exchange-traded debt securities like ABRN will mature at some point.
Speaking of that, ABRN is set to mature seven years from its issue date, May 15th, 2021. ABRN also has a call feature whereby ABR can redeem ABRN early if it deems that outcome desirable any time after May 2017, or three years from now. If it does so, ABR will have to pay holders the full issue price, making whole any investor who holds this security. Whether ABR will choose to do that or not is anyone's guess, but know that this is a possibility.
ABRN was issued at a price of $25 per unit, so in essence, if you buy a unit of ABRN, you own $25 worth of ABR debt. This issue yields a whopping 7.375% at face value, meaning it pays 46 cents in quarterly interest payments, good for $1.84 per year, per unit. Of course, the price will move up and down some as it trades, so the yield will change periodically, but not by much unless we get some material movements in Arbor's business prospects (bad moves, that is) or interest rates in general. As of this writing, ABRN is trading for $24.89, so it has moved down less than a half percent since opening up for trading. That also means the current yield is slightly higher than the coupon, at 7.4%.
Now that we know what ABRN is, what could it do for your portfolio? To start, ABRN is debt and not preferred equity, and as such, its distributions are interest and not dividends. This is important for tax purposes, because many dividends are eligible for a favorable tax rate but interest payments are never eligible. Thus, if you hold ABRN in a taxable account, it gets taxed as income instead of dividends. Of course, if you hold it in a retirement account, it doesn't matter whatsoever.
ABRN will also trade differently than preferreds in another way, and that is due to maturity. As the maturity date nears for ABRN, it will begin to trend towards its redemption value, regardless of where it is trading prior. Since preferreds have no stated maturity date, they move freely based upon interest rate movements and company-specific news; debt will tend to trade near its redemption value as the time nears, and this is something to keep in mind if you're comparing ABRN to a preferred. You should also see lower volatility with ABRN than a comparable preferred, such as the Series C from ABR.
If you want to gain exposure to ABR but aren't willing to risk the common or preferred shares, ABRN could be a good fit. It offers a very nice 7.4% yield that can't be cut or suspended, and in the case of a total catastrophe, you're in better shape than equity holders. ABRN is for those investors that want a nice yield but don't want to check their portfolio's value everyday as markets move up and down. You'll be giving up some potential gains on the upside versus ABR common shares, but the same goes for the downside as well. If you need some steady, strong income, you can do much worse than ABRN.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.