Arbor Realty: Fairly Valued With High Dividends, Well-Placed For The Future

Summary

• Arbor Realty recently reported record earnings for FY 2022, continuing a history of growth.
• Forward dividend yield of 10.6%; low payout ratio.
• ABR stock is fairly valued.

Phiwath Jittamas

Introduction

I have written about Arbor Realty Trust (NYSE:ABR) for several years now, since 2018. If you have read my previous articles on the company, you will know that I have been a firm believer in the company throughout this time, even during the pandemic. This is a view shared by many others, with a quick glance at the company's page on Seeking Alpha showing that the vast majority of authors rate the stock either a "buy" or a "strong buy".

My last article on the company came in November last year, after the company released its Q3 2022 earnings report. With the release of its Q4 2022 and FY 2022 earnings last month, this is an opportunity for me to evaluate the company and determine if I should change my position in the company.

Business Model

Arbor Realty Trust is an internally managed REIT, with management owning approximately 12% of shares. Similar to other mortgage REITs, the company earns from the spread between the interest income earned on its loans and the cost of financing these loans (Structured Business Segment). However, unlike other mortgage REITs, the company also derives additional revenue by originating, selling and servicing multifamily loans (Agency Business Segment). In this way, the company is able to derive revenue not just in the form of interest income, but also throughout the life of the loan.

The company focuses mainly on multifamily loans, with 91% of its $14.5 billion loan portfolio coming from this particular asset class. The next largest asset class is single-family rental at 7%. Apart from a focus on the multifamily asset class, the vast majority of these loans (98%) are bridge loans, which are mainly short-term loans. These loans are generally secured by first mortgage liens on the properties, giving the company priority over all other liens or claims in the event of a default.

FY 2022 Earnings

The company reported distributable earnings of $0.60/share for Q4 2022, and $2.23/share for FY 2022. This was a record year for the company and continued the company's year on year increase in earnings. Part of this increase has to do with how the company structures its loans, with 97% of its loan portfolio being floating rate loans, which means the company stands to see a $0.05/share increase for every 50 basis point increase. With interest rates expected to continue rising in the near future, the company stands to benefit from further increases in its earnings per share.

ABR Q4 2022 Investor Presentation

Of course, this is not to take any credit away from the company's management. While net interest income still makes up the bulk of the company's profit, the company has done well to diversify its income through its Agency Business Segment. Additionally, the 2 different business segments are actually complementary, with the company placing a focus on converting its bridge loans under the Structured Business Segment into loans under its Agency Business Segment. In this way, the company is able to capture additional revenue. For instance, the company was able to capture over $500 million of its balance sheet runoff under the Structure Business Segment into new originations under its Agency Business Segment.

ABR Q4 2022 Investor Presentation

Dividends

The company announced a quarterly dividend of $0.40/share, payable later this month, maintaining its dividend for the previous quarter. This halted a run of 10 consecutive increases in the company's dividend, stretching all the way back to 2020, which came during a time when other REITs were either cutting their dividends or even halting it completely.

Based on the current share price of approximately $15, the company has a forward dividend yield of 10.6%. While this is certainly a high dividend yield, the company is more than able to cover it, removing any potential concern one might have over whether the company is able to sustain it. In 2022, the company paid out $1.54/share in dividends compared to $2.23/share in distributable earnings, giving it a 69% dividend payout ratio, one of the lowest, if not the lowest in the industry. This low payout ratio also gives the company ample buffer to react to any adverse circumstances.

Some of you reading may be wondering - with such a low payout ratio, why did the company not increase its dividends? In fact, this was addressed during the earnings call by both the CEO and CFO. The main reason is that the company is continuing to accumulate a war chest in anticipation of a recession in the near future. This war chest will ensure the company is well-placed to take advantage of any potential opportunities in the market. In fact, the company is in a great position liquidity-wise, with close to $700 million in cash and liquidity on hand, and over $3.2 billion of availability in its structured warehouse lines.

And we have been -- as Ivan said in his prepared remarks, we have been strategically looking over the last 18 months of what we think would be a challenging recession. We think our assets in our portfolio are in great shape. We are in the right asset class. We have a lot of structure. We do a lot of deals that repeat borrowers. Having said that, when you come into challenging environments, cash and liquidity is crucial. And we've been -- we've done a great job of accumulating, really stockpiling a war chest of cash. And at this point, we just don't see a lot of value in increasing that dividend today, and that may change. We may see where our earnings go, and we'll continue to evaluate it with the Board on a quarterly basis. But again, raising it 3 times this year 10 of the last 11 quarters, and when I look at the peer group is I think only one peer group that actually -- one person out here that actually raised their dividend and it was nominal over the last three years. So, we just feel like the credit isn't there at this point. And we'll continue to evaluate it.

Valuation

The Seeking Alpha page shows that the company's price-to-book ratio (P/B Ratio) is currently at 1.16, a premium to book value. YCharts has a similar figure. In comparison, most of its other peers are trading at a discount to book value. For instance, Starwood Property Trust (NYSE: STWD), Blackstone Mortgage Trust (NYSE: BXMT) and Ladder Capital Corp (NYSE: LADR) all have a P/B Ratio of around 0.8 - 0.9.

Looking purely at price alone, the company is definitely more expensive than its peers. However, there are many factors to consider, such as the strength of the company's balance sheet, the expertise of the company's management, the safety of its dividends etc. In this regard, I believe a small premium is certainly justified as this is a safe, stable company with expert management.

Conclusion

I have been a proud owner of the company's shares for some time now. I held the shares throughout the pandemic, collecting my dividends each quarter and adding to my position every once in a while. I believe the company is fairly valued at its current price, and what excites me is that the company is well-placed to benefit from any potential downturn in the economy in the near future.

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.