Arbor Realty And Its Juicy Yield Are Worth Taking A Look

Summary

• Arbor Realty Trust is a REIT with an intriguing business model.
• The juicy yield on the shares of ABR offers investors a way to generate a meaningful income stream in the current low interest rate environment.
• We appreciate Arbor Realty's robust pipeline in the single-family rental space, which supports its dividend growth outlook over the long haul.

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By Valuentum Analysts

We are big fans of Arbor Realty Trust Inc (NYSE:ABR) and its unique business model in the real estate investment trust (‘REIT’) space. Management’s commitment to rewarding income-seeking shareholders (seen via recent payout increases), Arbor Realty’s rock-solid performance during the first half of 2021, and the company’s promising growth pipeline underpin its intriguing income generation opportunity for investors. During the first and second quarters of this year, Arbor Realty's top-line performance beat consensus estimates and shares of ABR have rallied by ~32% year-to-date as of this writing in late-August 2021. Shares of ABR yield a nice ~7.7% as of this writing.

Overview

Arbor Realty is structured as an internally-managed REIT. The REIT invests in various real estate financial products and provides direct lending services for a variety of real estate assets (including multifamily, senior housing, health care, and more recently, the single-family rental space along with other commercial properties). The company has two core business segments: Structured Loan Origination and Investment Business (‘Structured Business’) and Agency Loan Origination and Servicing Business (‘Agency Business’). Virtually all of Arbor Realty’s business is conducted through Arbor Realty Limited Partnership, which Arbor Realty is the general partner of. The firm also has some taxable REIT subsidiaries as well.

In its 2020 Annual Report, Arbor Realty notes that its goal is “to maximize the difference between the yield on our investments and the cost of financing these investments, to grow the stable earnings associated with the servicing portfolio of our agency platform, to generate cash available for distribution and facilitate capital appreciation.” Management provides an overview of Arbor Realty’s business model and the potential synergies that it creates in the upcoming graphic down below.

Image Shown: An overview of how Arbor Realty sees its business model generating competitive advantages. Image Source: Arbor Realty – November 2020 IR Presentation

The REIT’s Structured Business unit primarily invests in structured finance assets (such as bridge and mezzanine loans) along with equity securities in various commercial real estate markets. Additionally, this unit invests in real estate joint-ventures, directly in real estate properties, and other real estate assets. In the upcoming graphic down below, Arbor Realty provides an overview of its loan and investment portfolio within its Structured Business segment as of June 30, 2021.

Image Shown: An overview of Arbor Realty’s investment portfolio at the end of June 2021 and the end of December 2020. Image Source: Arbor Realty – 10-Q SEC filing covering the second quarter of 2021

Pivoting now to Arbor Realty’s Agency Business, this segment originates, sells, and services multifamily finance products, and originates and sells finance products through commercial mortgage backed security (‘CMBS’) programs (also referred to as conduit programs). This unit also originates and services permanent financing loans referred to as “private label” loans. The firm pools and securitizes these private label loans and sells off certifications in those securities to third-party investors, though it retains servicing rights and the certificates covering the bottom tranche (highest risk) of these securities are retained by the company. In the upcoming graphic down below, Arbor Realty provides an overview of its Agency Business and mortgage servicing business by geographic region as of June 30, 2021. Image Shown: An overview of Arbor Realty’s Agency Business. Image Source: Arbor Realty – 10-Q SEC filing covering the second quarter of 2021

Access to Capital Markets

During the second quarter of 2021, Arbor Realty raised $440 million in capital through the issuance of common and preferred equity along with unsecured debt. The issuance of 6.375% Series D preferred stock raised $223 million and Arbor Realty used those proceeds to redeem its Series A, B and C preferred stock that had a 8.14% yield on a weighted-averaged basis. Additionally, Arbor Realty raised $172 million through the issuance of 5.00% senior unsecured notes due in 2026 and $138 million through the issuance of common stock.

Arbor Realty announced another quarterly dividend increase in conjunction with its second quarter earnings update, its fifth consecutive quarterly payout boost. The REIT exited June 2021 with an enormous total debt load of ~$6.8 billion (inclusive of short-term debt) along with ~$0.2 billion in preferred equity on the books, highlighting its need to retain constant access to capital markets for funds. Exclusive of restricted cash, Arbor Realty had ~$0.2 billion in cash and cash equivalents on hand at the end of June 2021.

Recent debt and equity issuances indicate Arbor Realty retains solid access to capital markets at attractive rates. With this in mind, the REIT should be able to continue refinancing its debt maturities while also being able to cover its dividend obligations and fund its growth trajectory going forward, in our view. During Arbor Realty's second quarter of 2021 earnings call management noted that the REIT "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%." Payout ratios (in this case, dividends per share divided by non-GAAP distributable earnings per share) below 80% in the REIT world are considered healthy.

Growth Upside

Arbor Realty is incredibly excited about the potential upside the single-family rental market offers. Here is what management had to say on the issue during the REIT's first quarter of 2021 earnings call (lightly edited):

A little over a year ago, we made a commitment to build out a premier single-family rental platform. We believe the single-family rental space is as big as the multifamily lending market and is a phenomenal business with enormous opportunities in the bridge, permanent lending and build-to-rent products...

In the first quarter, we closed $162 million of single-family rental product and 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.. --- Ivan Kaufman, founder, chairman, and CEO of Arbor Realty

Additionally, here is what management had to say on the issue during the REIT's second quarter earnings call:

We are also very pleased with the significant growth we are seeing in our single-family rental platform. 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. We also believe we are a leader in the single-family, build-to-rent space, which provides us with the opportunity to originate construction, bridge, and permanent loans on the same transaction. --- Founder, chairman, and CEO of Arbor Realty

Recent capital raises will enable Arbor Realty to continue building on its momentum in the single-family rental space. Furthermore, Arbor Realty's mortgage servicing business put up strong performance during the second quarter of this year as its fee-based servicing portfolio continues to grow. Arbor Realty has a robust pipeline and well-diversified income streams in the real estate space.

Downside Consideration

We caution that the company’s capital-market dependence represents a major risk to its business model and ability to keep making good on its dividend obligations going forward. Should capital markets freeze up for any reason, that would create enormous headwinds for the REIT and Arbor Realty’s flexibility to handle such a situation would be quite limited given its limited cash on hand. However, we expect Arbor Realty will retain access to capital markets at attractive rates going forward. The upcoming graphic down below highlights Arbor Realty’s prudent approach to the asset management business.

Image Shown: An overview of how Arbor Realty seeks to operate its asset management platform and what its core goals are. Image Source: Arbor Realty – November 2020 IR Presentation

Concluding Thoughts

We view Arbor Realty’s income generation potential quite favorably and its business model appears to have significant competitive advantages along with room for meaningful synergies. The juicy yield on shares of Arbor Realty offers investors a way to generate meaningful income streams in the current low interest rate environment.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.