- Arbor Realty recently reported strong second-quarter earnings and raised its dividend for the fifth consecutive quarter.
- Second-quarter earnings showed a strong 17% Return On Equity and growth in key metrics to new highs.
- While it's always important to keep an eye on value metrics, Arbor's repeated dividend increases and outperformance vs. the S&P 500 continue to reward shareholders.
I have been covering real estate lender Arbor Realty Trust, Inc. (NYSE:ABR) since March 24, 2015, when I wrote " Arbor Realty Trust: Earn 7% Outside The Box." My most recent article on the company was "Arbor Realty Is A Buy On The Dip," published on June 20, 2021.
Since I last wrote about Arbor, it has gone up slightly but remains within the same general range. As the chart above illustrates, ABR has a history of sharp upward movements followed by sideways consolidation. We appear to be in an area of consolidation, but the stock price remains above the key moving averages and remains in a bullish posture.
Since Arbor just released its earnings for the second quarter of 2021, this article will update those articles to see if it remains a worthy investment for your consideration.
Arbor Has Survived the Pandemic in Good Shape
Before getting into the details of Arbor's most recent earnings report, I always like to provide an overview of how the company has performed over time. This gives us some context for the most recent numbers and a proper frame of reference.
Arbor wasn't formed yesterday even though it may not be a company you've heard a lot about. While past performance is no guarantee of future returns, it does reflect a journey that leads somewhere.
|ABR||Total Revenues||Diluted Earnings/ Share||Net Income||Dividend/ Share||Revenue/ Share|
TTM is Trailing Twelve Months as of June 30, 2021. Total Revenues in $millions. Source: Seeking Alpha.
Arbor's annual numbers, including the recently released TTM ones (bottom row), show a steady progression upwards over time. If anything, the latest TTM numbers show that Arbor's performance has reached new heights over the past year.
So, with every category is at its highest level in the most recent period, it's hard to find fault with these results. Considering the fact that the past twelve months include some of the worst moments of the pandemic, that's impressive for any company.
Let's look at Arbor's performance over recent quarters to get a more granular perspective.
|ABR||Total Revenues||Diluted Earnings/ Share||Net Income||Net Debt||Revenue/ Share|
Total Revenues and Net Income in $millions. Source: Seeking Alpha.
It's clear from the metrics that Arbor had one bad quarter at the onset of the pandemic. This isn't unusual, as most of the companies I've looked at had poor results in Q1 2020.
To me, what's important is how the company rebounded from Q1 2020. The numbers show that Arbor recovered quickly and has maintained good revenue and earnings performance since.
Year-over-year comparisons can be a little misleading due to the 2020 stress test. However, it's always good to see progress, and Q2 2021 clearly was a stronger quarter for Arbor than Q2 2020.
Net Debt was up 10% during Q2 2021. Placing that in context, it is up about 25% since Q1 2020. With interest rates so low, adding on a little debt makes sense as long as the company sees opportunities and doesn't let debt get out of hand. The last thing you want to see is a company taking on debt to pay the dividend, for example.
It doesn't appear that Arbor is in any trouble with its debt. Total Debt/Capital is 78.95%, while its Dividend Payout Ratio is 62.02%. While these numbers are substantially above the sector median, they're certainly sustainable.
Now that we've placed earnings in context, let's see what the company has to say about its most recent quarterly performance.
Arbor Reported Solid Second-Quarter Earnings
Arbor's headline numbers were that its Q2 Non-GAAP EPS were $0.45, with GAAP EPS of $0.51. Net interest income of $58.77M (+40.7% Y/Y), beating the estimates by $4.5M.
During Arbor's Q2 2021 Earnings Conference Call held on July 30, 2021, CFO Paul Elenio noted that the company's strong quarterly returns are enabling dividend increases:
These results once again translated into industry high ROEs of approximately 17% for the quarter and have allowed us to increase our dividend to an annual run rate of $1.40 a share.
Arbor has reported very high Returns on Equity, which flow down to the bottom line. In the first quarter of 2021, the ROE was approximately 20%. Arbor now has authorized five consecutive dividend increases, an unusually long streak for any company. In addition, Arbor has increased the dividend 21 times in the last decade.
Regarding the company's debt, Elenio acknowledged that it was up a bit. He noted the reasons:
The average balance in our debt facilities was up to approximately $5.9 billion for the second quarter from $5.2 billion for the first quarter, mostly due to financing the growth in our portfolio and issuing $175 million of new unsecured notes during the second quarter. And the average cost of funds on our debt facilities decreased to 2.89% for the second quarter from 2.99% for the first quarter.
If you're going to take on more debt, at least you want to decrease the average cost of the debt. Arbor is taking advantage of low rates and putting the money to good use, as evidenced by the high ROE.
CEO Ivan Kaufman noted that the company's actions in the capital markets are what are enabling the company to keep raising the dividend:
But this capital is $0.08 to $0.10 accretive in our annual earnings run rate, allowing us to increase our dividend again this quarter. Every time we raise capital is to fund our growing balance sheet loan business, which is not only high accretive to our current earnings and dividends, but also allows us to build a pipeline for two to three years of new GSE agency loans, showing the long-term growth of our platform and creating higher quality earnings and dividends in the future.
There is nothing wrong with raising capital as long as the funds are turned into productive assets. According to Kaufman, this is financing the company's pipeline in a way that will continue to pay off over the next several years.
Arbor’s Single-Family Rental Portfolio Platform has been an area of growth for the company. It recently announced multiple closings in nine states. Kaufman noted:
Second-quarter, we closed another $110 million of single-family rental product, we currently have well over $1 billion of additional deals in our pipeline, making us very optimistic about the growth in this segment of our business.
With that many deals remaining in the pipeline, it's likely that Arbor's strong performance will continue for the remainder of the year.
Reasons to be Cautious about Arbor
There are several reasons to be cautious about Arbor Realty Trust. For one thing, the company trades at a big premium to book value.
|ABR||Q1 2020||Q2 2020||Q3 2020||Q4 2020||Q1 2021||Q2 2021|
|Book Value Per Share||$8.92||$9.06||$9.52||$10.19||$10.76||$11.90|
ABR Book Value per Share 2020-2021. Source: Seeking Alpha.
With a share price as I am writing this of $18.28, ABR trades at about a 53% premium to book value. The company noted that the book value has been rising:
Our adjusted book value at June 30 was approximately $11.35, adding back roughly $61 million of non-cash general CECL reserves on a tax-effective basis. This is up approximately 5% from $10.86 last quarter, largely due to our second quarter capital raises.
Conservative investors generally like to buy REITs that trade at a discount to book value. That's certainly not the case with Arbor, and rarely has been aside from periods of market turbulence.
Another reason to be cautious about Arbor is its debt. As explained above, the company's debt is not a problem. However, conservative investors may want to keep an eye on that metric. No matter how good the returns on new funds, you don't like to see a company get over-extended.
Another metric that can become an issue for fast-growing companies is share count.
|Basic Weighted Average Shares Outst.||51.3||57.9||70.2||92.9||113.8||123.6|
Arbor Realty Averages Shares Outstanding in millions 2016 - mid-2021. Source: Seeking Alpha.
Arbor began pressing on the gas pedal of shares outstanding in 2017 and hasn't let up yet. As noted above, the company believes it can put those funds to good use with an ROE of 17% in the latest quarter.
So far, the company appears to be succeeding in making the new funds accretive in a hurry. Alert investors will always want to keep an eye out for share dilution that starts to affect per-share results.
The most important thing on most income investors' minds is the dividend. The good news is that, just as when I wrote my first article about Arbor in 2015, the stock still pays a dividend well in excess of 7% despite roughly a tripling of the stock price since then.
According to the company, the dividend should be secure;
We produced distributable earnings of $0.45 per share, which is an incredible accomplishment and well in excess of our current dividend, representing a payout ratio of around 78%.
There's an old saying in the investment world that the safest time to buy a stock is after the company raises the dividend. In its earnings release, Arbor declared a $0.35/share quarterly dividend. This is a2.9% increase from the prior dividend of $0.34.
Arbor's total-return performance has remained steady during the recovery from the 2020 pandemic, as shown in the below chart.
Arbor Realty's total return compared to the S&P 500 over the past year. Source: Seeking Alpha.
Arbor has a 5 Year Dividend Growth Rate of 21.67%. The current yield is around the long-term average of between 7-8%.
One of the good things about owning Arbor is that the yield on cost has risen remarkably over time. The longer you have held Arbor, the better those quarterly dividend payments look.
If you had bought Arbor back in 2016 or early 2017, your yield on your original investment now would be 20%. That means your money would double in less than four years (using the rule of 72). That seems like a good use of capital to men.
In my view, the best way to manage any stock with a rising dividend like Arbor is also the easiest way: just buy it and let it ride. If you reinvest the dividends, your investment may compound dramatically over time, as the chart above suggests.
Or, if you live off the dividend, it's nice to see those quarterly payments rising well above the inflation rate. You also could invest the proceeds in other dividend stocks and spread out your risk. It's nice to have investment options!
Arbor Realty Trust is not one of the more well-known REITs. However, as the chart above shows, it has outperformed the S&P 500 and income-investor favorites Realty Income (O), Stag Industrial (STAG), and W.P. Carey (WPC) handily during the recovery phase of the pandemic.
There are no guarantees that Arbor's outperformance will continue. Past performance is never a guarantee of future returns. All things considered, I continue to add Arbor here and there when it drops below $18 and look always forward to counting my growing dividends.
Arbor Realty has established a strong track record in recent years. By repeatedly raising its dividend, Arbor has stayed ahead of the valuation curve and maintained a high dividend yield despite a rising stock price. According to the company's comments during its second-quarter earnings conference call, there's no reason to expect this type of performance to deteriorate, as Arbor has many deals remaining in its pipeline. It's important to keep an eye on valuation, shares outstanding, and similar issues. However, with a high ROE and heavy management commitment to the dividend, Arbor has shown it can continue to perform at a very high level.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ABR either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.