2023-06-22 07:30:00 ET
Summary
- Arbor Realty Trust's shares have risen 40% since spring 2023, and the company has recently been included in the S&P 600 small-cap index.
- The company has a strong dividend growth track record, with a current dividend yield of around 12% and a recent 5% increase in its dividend.
- Despite not being as cheap as it was a few months ago, Arbor Realty remains an attractive investment for long-term investors due to its high dividend yield and discount compared to its historical average valuation.
Article Thesis
Arbor Realty Trust, Inc. ( ABR ) has recovered nicely from the lows that the stock hit earlier this year. Recent results were pretty good and indicated that fears were overblown. This week, Arbor Realty Trust saw its shares jump on the news that the company would be included in the S&P 600 small-cap index ( IJS ). Thanks to a still-high yield and a still-low valuation, Arbor Realty Trust remains attractive, although not as outstandingly cheap compared to a couple of months ago.
What Happened?
Arbor Realty Trust, a mortgage real estate investment trust, will be included in the S&P small cap index in the future. This news item sent ABR's shares higher, which is not surprising -- ETFs that replicate the index will add shares of ABR in the future, which should result in an improved demand picture for the company's shares. This, in turn, could drive share price upside. On top of that, the news about the index inclusion is seen as a show of confidence (by those that manage the index) by some, which is helpful for ABR's share price following the short report that hurt the company's stock not too long ago.
Arbor Realty: Recovering From Its Selloff
Today, Arbor Realty Trust trades at a little more than $14 per share. That's still not expensive, as we will see later on, relative to the profits the company generates and the dividends that Arbor Realty pays out to its owners. Nevertheless, shares have risen nicely over the last couple of months -- in spring 2023, ABR traded at as low as $10.10. Shares have thus climbed by a hefty 40% from the lows, and have generated a total return of more than 30% since we last covered ABR this spring.
To some extent, this recovery was driven by a reversal of the overdone sell-off that ABR had experienced -- shares had fallen from around $17 at the highs in 2022 to just above $10, which represented a hefty share price decline.
But Arbor Realty Trust's shares also benefitted from the strong earnings that the company has released since its shares hit their 2023 lows. In May, Arbor Realty reported its Q1 results , which easily beat expectations, as we can see in the following screencap:
We see that the company easily outperformed what Wall Street analysts had forecasted, for both the top-line and the bottom-line numbers. Earnings per share estimates were beaten by a hefty 35%. When a company performs this much better compared to what analysts and/or investors were expecting, that oftentimes results in a boost to the company's share price, and Arbor Realty experienced exactly that following the release of its strong results for its fiscal first quarter.
Arbor Realty's Dividend Growth Track Record Continues
Another major positive that has occurred over the last couple of weeks and since our last article on Arbor Realty Trust is the company's most recent dividend increase. Arbor Realty has had a track record of increasing its payout regularly and at an attractive pace, especially considering the already pretty high dividend yield -- for a high-yielder even a slow dividend growth rate is attractive, I believe.
The most recent dividend announcement included a 5.0% lift to the company's dividend, which now stands at $0.42 per share per quarter, or $1.68 annualized. This makes for a dividend yield of around 12% at current prices. The dividend is now 11% higher than it was one year ago, which is a highly attractive dividend growth rate, I believe. Based on forecasted profits for the current year, the dividend payout ratio is a little north of 100%. But considering that Arbor Realty Trust has massively beaten earnings estimates for the first quarter, it would not be too surprising, I believe, if it turns out that earnings per share estimates for the current fiscal year are significantly too low. If Arbor Realty were to generate profits comparable to the Q1 pace during Q2 to Q4, its full-year net profits would come in at $2.48 per share -- this would cover the dividend at a very solid 1.48x rate. In other words, if the remainder of the year is as good as the beginning of the year, then the dividend payout ratio is just 68%, which would be far from high for a (mortgage) REIT. Of course, there is no guarantee that Arbor Realty's results will be equally compelling in the coming quarters, relative to what the company has achieved during the first quarter. But even if results weaken towards the end of the year, I believe that there is a good chance that Arbor Realty will outperform analysts' expectations. The recent dividend increase can be seen as a "vote of confidence" -- if the company was seeing major troubles on the horizon, it would likely have foregone raising its dividend.
In a similar way, recent insider activity can also be seen as a "vote of confidence":
We see that the number of shares owned by insiders has risen substantially so far this year -- not surprisingly, insiders added when the valuation was very low this spring. Insider purchases do not guarantee strong total returns, of course, but it makes no sense for management to buy shares when they believe that the company will be struggling in the foreseeable future. Instead, adding shares only makes sense when insiders believe that the company is undervalued and that future returns will be compelling. Insiders can be wrong, of course, but the fact that those that know the company best see it as an attractive investment is nevertheless a positive sign for outside shareholders.
Looking at Arbor Realty's underlying performance in the recent past, it looks like the company is executing pretty well in the current environment. Some mortgage REITs are under pressure due to the interest rate movements we have seen over the last one and a half years, but Arbor Realty is doing pretty well.
The company's agency loan originations totaled a little more than $1 billion during the first quarter, which is equal to more than 3% of the current portfolio size. Annualized, the origination pace was just above 15%. That indicates that demand for loans remains strong, despite the increased borrowing cost for the entities Arbor Realty is lending to due to the increase in interest rates we have seen over the last couple of quarters. Due to strong originations, Arbor Realty's servicing portfolio continued to expand, which should be positive for future profits, all else equal.
The structured loan origination pace was lower than the agency loan origination pace, but was still solid, at around 8% annualized, relative to the current portfolio size.
With a potential recession being a risk factor for the coming quarters, Arbor Realty Trust's portfolio risks are important as well. Arbor Realty has been conservative, adding substantially to its credit loss provisions during the recent past. In the first quarter, provisions totaled $23 million -- almost 10x the provisions from the previous year's quarter. This makes sense, as macro risks have increased over the last year. At the same time, the substantially increased provisioning offers some protection, as an increase in credit losses is now already accounted for. At least for now, realized credit losses are pretty low in absolute terms and relative to ABR's credit loss provisions, thus even when the situation worsens, the company's provisions could be appropriate and it is far from guaranteed that profits decline. Of course, if the macro picture worsens a lot more than expected, there could be negative surprises when it comes to ABR's credit losses.
ABR: Still Attractive, But Not An Ultra-Bargain Any Longer
Arbor Realty's recent operational performance was compelling, the dividend keeps growing, the yield remains deep in the double-digits, and insiders have recently added shares. Overall, Arbor Realty Trust thus has many things going in its favor.
That being said, I do believe that shares aren't as attractive as they were a couple of months ago, and the following chart shows why:
While Arbor Realty still trades at a meaningful discount compared to its historic average valuation -- around 20% -- the discount is a lot smaller than it was in spring 2023.
With a high dividend yield and a discount compared to the historical valuation average, Arbor Realty could still deliver highly compelling returns going forward. But it is unlikely that we will experience gains similar to what we have seen over the last couple of months during the remainder of the year -- a 30%-40% return in a short period of time is hard to come by. Overall, for long-term investors, Arbor Realty remains attractive, however.
For further details see:
Arbor Realty: Soaring On Good News