Arbor Realty: I Can't Ignore The 12% Yield
- Arbor Realty is paying a 12% dividend yield and has grown this by a 10% CAGR over the last 3 years from the last payout.
- The yield is fully covered by distributable EPS as of the end of Arbor's last reported fiscal 2022 third quarter.
- With a recent Bloomberg survey of economists placing the chance of a 2023 recession at 70%, the REIT faces intense macroeconomic risks.
I have taken a sizable position in Arbor Realty's (NYSE:ABR) commons with a view to holding these for core long-term income and as an expansion of a portfolio that includes peer companies Broadmark Realty (BRMK). There is a lot to be excited about here. Firstly, Arbor last paid out a quarterly per share dividend of $0.40, a 2.6% increase from its prior payout for quite a fat annualized yield that currently stands at around 12%. Not only is this in excess of inflation, but it's far greater than the yield available to investors in some high-yield bond ETFs like the SPDR Portfolio High Yield Bond ETF (SPHY) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG).
Secondly, the internally managed real estate lender has now built a dividend payout history that has seen 10 consecutive hikes. The REIT has grown its payout by a 10% 3-year compound annual growth rate. Further, with the recent weakness of its commons, the trailing 12-month yield of 11.3% has moved higher than its near-term historical average which sits around the 8% yield mark.
Current owners are essentially getting a near 50% increase on the historical yield average as the REIT continues to hike its payout even against the broader economic volatility that has discombobulated some of its peers, forced dividend cuts, and disrupted coverage ratios.
I briefly considered Arbor Realty's Series F Cumulative Redeemable Preferred Stock (NYSE:ABR.PF) but the commons ultimately offered a much better return profile. The Series F currently pays out a $1.5625 annual coupon for a yield that stands at 8.63%, below the commons but with a floating rate mechanism.
From October 30, 2026, a few weeks after its call date, the annual coupon will be at a floating rate of the 3-Month SOFR plus 5.442%. The total coupon will also be subject to a 6.125% per annum floor and come with a $25 redemption price. Hence, with the preferreds currently trading at $18.11, the preferred shareholders could realize a capital uplift of 38% if these move back to their redemption value. I think these would make a good pick only a preferreds only portfolio, but most income investors would be better off going with the commons as they come with a far higher yield and with exposure to possible future dividend hikes.
Is The Fat 12% Yield A Trap?
Uniondale, New York-based Arbor provides loan origination and servicing for multifamily, single-family rental portfolios and a range of commercial real estate assets. The REIT last reported earnings for its fiscal 2022 third quarter saw net interest income come in at $99.32 million, an increase of 42% from the year-ago quarter. With a 97% floating rate structured loan book, the company's net interest income benefited considerably from rising Fed fund rates. Expectations are for a further three 25 basis point hikes for rates to peak at between 5% to 5.25% in the first half of 2023.
With a total loan and investment portfolio worth $15 billion as of the end of the third quarter against a weighted average yield of 6.57, up sequentially from $14.63 billion and 5.26% in the prior second quarter, the REIT is set to see even higher net interest income in the coming quarters.
Multifamily Lending In A Period Of Economic Strife
Distributable EPS, the core metric for income investors, at $0.56 was a 19% increase from $0.47 in the year-ago comp. Not only did this top consensus of $0.36, but it was also a 30% sequential increase from distributable EPS of $0.43 in the second quarter. The REIT pays out only around 71% of its distributable EPS as a dividend, amongst the lowest payout ratio in its industry.
Around 92% of Arbor's portfolio consisted of multifamily-linked loans. I expect this part of the housing market to realize a greater level of resilience than single-family rentals due to these properties broadly being owned by seasoned operators and not being subject to the same type of selling dynamics. But recessionary risks will persist. A December survey of 38 economists by Bloomberg put the chance of a US recession at 70% this year, up from 65% in the same survey conducted in November.
This poses a risk to Arbor as the REIT of course has to tap the commercial debt market to finance its own portfolio. Its balance of debt as of the end of its third quarter was $13.94 billion with a weighted average interest rate of 5.33%, up from 4% in the prior second quarter on the back of rising rates. The current spread between the yield on its portfolio and that on its financing could become highly disrupted if the economic situation in the US deteriorates markedly as interest rate hikes come to a crescendo this year. The REIT could see allowance for credit losses rise. This risk is of course salient for most REITs in the space and the current pathway of dividend increases provides confidence in Arbor's execution. I will look to add to my position over the next few months.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ABR, BRMK 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.
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