Arbor Realty Goes On Defense As Dividend Hikes Stop
- Arbor Realty's commons are up nearly 15% year-to-date and its recently declared dividend payout still forms a double-digit 10.3% yield.
- Some shareholders were disappointed with the lack of a raise, but this was a prudent move with 2023 promising economic disruption.
- The quarter was strong with dual revenue and earnings beats and with the mREIT's cash and liquidity position moving to its best position ever.
Internally managed real estate lender Arbor Realty (NYSE:ABR) just reported earnings for its fiscal 2022 fourth quarter that supported a quarterly cash dividend payout of $0.40 per share, in line with the prior payout, for a 10.3% annualized yield. Some bulls were expecting a raise, especially after 11 consecutive hikes and against the mREIT's relatively healthy payout ratio of 70% for 2022. This was a ratio that management flagged as the lowest in the industry during their earnings call for the fourth quarter. Whilst the double-digit yield against commons that are down by just 7% over the last 12 months still presents a strong investment proposition, the mREIT did possess the capacity to raise but chose not to.
Management was clear about why during their earnings call, stating that the upside of maintaining a strong cash balance as a "war chest" against the economic discombobulation expected this year trumped the benefits of a raise. Critically, whilst a higher payout would have been welcome the current macroeconomic environment is challenging and the stock market will reward Arbor's strong cash position by attaching less downside volatility to its commons. This sets the backdrop for what could be a blockbuster raise later in the year, perhaps in the summer.
Bulls Cheer The Fiscal 2022 Fourth Quarter Earnings
Arbor's business is straightforward. The mREIT provides loans to multifamily and commercial real estate interests. During the fourth quarter of fiscal 2022, the mREIT originated $500.5 million of new loans for a portfolio of $14.46 billion. This was down sequentially from $15 billion in the prior third quarter as the mREIT defensively positions its balance sheet for the lingering specter of a recession, still rising Fed funds rates and the downturn in real estate that holds the risk of worsening. Arbor allowed $1.1 billion of loans to runoff and only offset this with $500.5 million in new originations that management flagged as higher quality and with superior spreads.
This move allowed the mREIT to recapture $150 million of its invested capital to expand its cash and liquidity position to $685 million as of the end of the fourth quarter, the highest nominal level of liquidity in over a decade. This enormous build-up of cash forms the core story of the earnings report. Its aggregated with the pause on dividend hikes as management positions their balance sheet to seize on any post-downturn opportunities and generate outsized returns on capital.
The mREIT reported revenue of $113.06 million, up by 47.9% over the year-ago quarter and a beat by $21.54 million on consensus estimates. Non-GAAP distributable earnings came in at $0.60 per share, a beat by $0.14 on consensus and sequential growth of 7.14% over the prior third quarter. The declared dividend represented 67% of distributable earnings which highlights the discord expressed by some bulls. Yes, the payout could be higher but the ambition is to position the business to have even higher payouts at some point in the future.
The Series D Preferreds As A Short-Term Play
I've also added a small position in Arbor Realty's 6.375% Series D Cumulative Preferred Stock (NYSE:ABR.PD) to my income portfolio. These sport the highest coupon rate of the three outstanding preferreds that Arbor has trading and come with an attractive investment profile that somewhat compliments a position in the commons.
Firstly, it pays out a $1.59375 annual coupon for a yield on cost of 7.87%. Whilst lower than the double-digit yield available on the commons, the Series D come with less volatility and is currently trading at a 20% discount to their par value. The commons trade at a 25% premium to their tangible book value.
The Series D come with a quarterly distribution and a cumulative clause which helps to diminish the possibility of the coupon being suspended as it would accrue on the balance sheet as a liability to be paid back at a future redemption event. That said, Arbor would likely have to suffer a cataclysmic event to be in the position where a suspension of its distribution to its preferreds holders is being discussed.
As these are essentially a form of fixed-income exposure, their current large discount has been built on the back of current macroeconomic headwinds. The play here is that the price will close its discount to par in the short term as inflation continues to fall and the Fed funds rate hikes come to an end. Critically, the commons constitute the better long-term investment as they provide exposure to future dividend increases. The preferreds currently sport a 47.2% yield to call to form a near-certain return if the company redeems at its June 02, 2026 redemption date. However, my positioning here is for a much shorter-term hold.
Preferreds will almost always offer a lower risk and lower return play but the current macroeconomic backdrop has created an opportunity with the preferreds of the fundamentally sound and coherent mREIT with its highest cash positioning in over a decade. The double-digit discount is outsized and has catalyzed a short-term opportunity to build a small position in a security that will eventually move back to trade at its par value once the current macroeconomic backdrop normalizes. I am bullish on Arbor and intend to hold its commons as a core long-term position within my income portfolio.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ABR, ABR.PD 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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