Arbor Realty: The Money Train Barrels Forward

Summary

• 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.

Steven_Kriemadis/E+ via Getty Images

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.

Data by YCharts

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
2016	171.4	$0.83	50.4	$0.64	$3.34
2017	272.9	$1.12	73.4	$0.76	$4.71
2018	347.8	$1.50	115.9	$1.04	$4.95
2019	402.1	$1.27	128.6	$1.17	$4.33
2020	426.6	$1.41	170.9	$1.26	$3.75
TTM	620.9	$2.55	329.3	$1.33	$5.02

Click to enlarge

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
Q1 2020	(0.9)	($0.54)	(57.4)	5,294.2	($0.01)
Q2 2020	108.3	$0.40	46.0	4,517.7	$0.98
Q3 2020	141.8	$0.72	83.9	4,989.2	$1.25
Q4 2020	177.4	$0.80	98.5	5,643.4	$1.48
Q1 2021	144.2	$0.55	71.4	6,000.5	$1.15
Q2 2021	147.8	$0.51	75.5	6,601.0	$1.09

Click to enlarge

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

Click to enlarge

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.

ABR	2016	2017	2018	2019	2020	TTM
Basic Weighted Average Shares Outst.	51.3	57.9	70.2	92.9	113.8	123.6

Click to enlarge

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.

Looking Ahead

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%.

Arbor Realty Trust five-year yield history Source: Seeking Alpha.

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.

Arbor Realty Trust five-year yield on cost history Source: Seeking Alpha.

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's total return compared to the S&P 500, Realty Income (O), Stag Industrial (STAG), and W. P. Carey Inc. (WPC) over the past year. Source: Seeking Alpha.

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.

Conclusion

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.

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.

Comments

[Centrino]

Thanks!
I don't understand the logic of the

old saying pretending that the safest time to buy a stock is after the company raises the dividend.

For me, if there is a increase, in the contrary there is a risk they cannot sustain such increase.
So could you explain how I should understand the saying? And the logic behind it?
Thank you :-)

[James Bjorkman]

@Centrino Sure, Centrino. The logic is that boards of directors are very conservative about their companies' finances. Their jobs are not dependent on satisfying investors or anything like that. The motivation lies in protecting the health of the company. They will only raise the dividend if they are certain that the company's finances can support it. If, say, the CEO alone could raise the dividend, then dividends might be raised solely to curry favor with investors, which would help the CEO.

So, the reason for the saying "the safest time to buy a stock is after the dividend has been raised" is because the board has reviewed the company's finances and found them solid enough to support the new, higher dividend. They have determined that there are few risks of some looming fiscal cliff, and they have all the inside knowledge possible at their disposal.

Directors have a special fiduciary duty and are, to some extent at least, independent voices outside of the executive chain of command. Many executives, say VPs and CFOs, might be inclined to support ideas like dividend raises despite misgivings just because the CEO wants them to. Directors overall take this independent role very seriously and their jobs don't depend on pleasing the CEO, they depend on the company surviving in a healthy manner. Of course, I'm speaking in very general terms about this.

History shows that, barring some general market meltdown, companies that raise their dividends can sustain the higher dividend and are in good financial shape with improving prospects. That's my personal observation, and evidently, I'm not alone in that.

Of course, that is no guarantee of anything. Circumstances can always change. A pandemic may hit, a recession might occur, a housing crash, a war, unexpected Fed action, some unexpected variable that changes the financial equation for everyone in a hurry. These types of market-changing events do happen with great regularity, maybe once a decade.

But you are getting the nod now from the people best placed to know what is actually going on with the company, people who have better information than any analyst, that the company is in good shape.

Hope that helps! Thanks for asking.

[Centrino]

@James Bjorkman Thanks a lot for your explanation. It is crystal clear. Have a nice day ! :)

[Sandstone Capital]

I'm considering adding this as a major holder in my passive dividend income portfolio. Any techies out there know a good entry point? I want a little more capital appreciation. Much appreciated.

[calbrit]

Keep in mind that sale of stock by ABR at a premium to book is accretive to existing shareholders. Most high quality REITS expand this way.

[James Bjorkman]

@calbrit Thanks for the tip, calbrit! Stock offerings are good for shareholders as long as the company puts the funds to good use, as Arbor appears to be doing.

[RealRural]

Well done analysis, pointing out the positives and negatives.

Owned ABR after being alerted to it in 2017, added in the pandemic crash, and sold at a nice profit (too early) when it recovered dramatically last year. Bought back in and again reaping rewards with $15 cost basis. As Brad Thomas said in a post today, "the safest dividend is one that has just been raised." However 50% over book value is indeed cautionary, and the yield now is less appealing than a few months ago.

On the other hand, it is hard to go against CEO Kaufman's secret sauce, in the safe agency space. Wonder if the COVID delta variant concerns might knock ABR and many stocks down? But ABR seems to exist in its own below the radar world (until it doesn't). Can't make up my mind on adding more.

[James Bjorkman]

@RealRural Thanks, RealRural, and I appreciate your analysis. I can't let this slip by, though, without pointing out that in this article I also said "There's an old saying in the investment world that the safest time to buy a stock is after the company raises the dividend." ;)

[Veeon]

ABR is a three legged REIT where one of its legs is a commission agency that generates cash income and which justifies an above book value price that recognizes earnings not requiring capital.

[James Bjorkman]

@Veeon Well put, Veeon, thanks for sharing that!

[RoyalAce]

Thanks for making me aware of this interesting situation.

Before acting on it I'd have to know a lot more about exactly what they do and how they get such high ROE at a time there is so much money and so many smart operators floating around.

Returns seem far out of financial reit norms. When mreit stocks get nosebleed when they approach BV I view 2x book suspiciously. Has the 7% dividend blinded all consideration of valuation?

[James Bjorkman]

@RoyalAce How to value a hybrid REIT like Arbor is tricky. It doesn't fit into the normal REIT boxes such as just being a landlord. I have to say that Arbor has mystified a lot of investors over the years, but they keep on producing solid results. Thanks for reading and commenting!

[Investrava Analytics]

@James Bjorkman Thanks for your thorough analysis and update on ABR, much appreciated. ABR is a top REIT, but also thanks for pointing out the cons / risks - well balanced analysis.

[James Bjorkman]

@INVESTRAVA Thanks, glad you liked it!

[Income4ever aka Cyclenut]

Intresting article. ABR is very volatile as is the entire Mreit sector.
I recently sold out after reading another SA contributor with an extensive RE background write he wouldn't be suprised if ABR returned to $13. He also declared ABR possibly the best reit out there today,
If ABR does dip significantly im back in.
In the meantime I'm fan of BRMK as well

[James Bjorkman]

@Income4ever aka Cyclenut Thanks for your considered analysis, much appreciated!

[ckarabin]

Looking at the book value of $11, one wodners how they earn $2.20/share on just $11? That it itself makes you want to poke at the sustainability of earnings because 20% ROE's are pretty hard to find in finance. Do they have a magic and if so, what is it?

[James Bjorkman]

@ckarabin Thanks for commenting, ckarabin. They claim to have an ROE of 17%, and 20% last quarter, as you point out. I can only go on what they say and declare to the SEC as honest financial data. Wherever their magic well is, I wish I could take a few drinks myself!

[ckarabin]

@James Bjorkman Thanks for your reply! You just wonder what it is they do and how they are doing it! I don't question the accuracy, just the sustainability of their method.I guess it's like they say, you can;t tell who is swimming naked until the tide goes out!"

[James Bjorkman]

@ckarabin It's always good to be skeptical. However, the tide sure went out last year and they swam right through it, so who knows!

[sacking]

I started buying ABR when divided was 0.25 a share. It's now 0.35 a share. Long ABR and loving it. Great summary.

[James Bjorkman]

@sacking Thanks, sackling! Always like to hear a success story!

[Legitimate]

Where do you go to determine book price? Does seeking alpha show this metric for reits?

[James Bjorkman]

@Legitimate Thanks for asking! It's under the Financials tab. I don't know if that's accessible to everyone, but that's where to find it.

seekingalpha.com/...

[ChuckXX]

Shares outstanding have more than doubled in 4 years. I don’t like that.

[James Bjorkman]

@ChuckXX Yes, it's a concern. However, it's not a problem as long as the company puts the money to good use, which is what appears to be happening with ABR. But, you are right to notice it and take it into consideration, that's why I point it out. Thanks for reading and sharing your thoughts with us!

[albertciampi]

@ChuckXX my feeling exactly. I exited last month after my holding period went to L/Term Capital Gains. They keep adding more shares and insiders are selling also.

[ckarabin]

@ChuckXX Does one care when dollar earnings grew faster than that?

[Mr.Sir]

Long ABR, but I am troubled by the overvalued share price. Hopefully low rates mean people will be less likely to default in the coming years. And ABR will have a nice stream from dependable customers.

[James Bjorkman]

@Mr.Sir Valuation is always important no matter how well a company is performing. A problem with decreasing rates is that borrowers refinance to lower rates, so rate changes become a double-edged sword. Thanks for reading and commenting!

[Hamilton3]

The 53% market value over book value is cause for concern, considerably higher than other REITs of its kind. In event of liquidation, one loses roughly half of his/her capital. Just be aware of this factor. And if interest rates rise, there could be a squeeze on margins. Look before you leap.

[James Bjorkman]

@Hamilton3 Always keep your eyes open! Thanks for reading and sharing your thoughts!

[Rdhughes]

Love ABR! Thank you for the great article and all you bring to us small investors!

[James Bjorkman]

@Rdhughes Many thanks for your kind words, and I appreciate your reading and commenting!

[cfrd]

Best kept secret of all financial REIT's. Sad to se such a favorable article....will only push ptice higher and deprive me of adding as i have in last 3 months.

[James Bjorkman]

@cfrd Arbor sure was a secret six years ago when I began writing about it! Thanks for reading and commenting!