2023-10-30 02:41:53 ET
Summary
- Arbor Realty has been affected by the brutal investment conditions for REIT investors, leading to a 30% drop in its stock.
- The Fed's hawkish message and volatile economic environment have contributed to the sell-off of REITs.
- Arbor's earnings and book value have remained strong, but a dividend hike is unlikely until a dovish pivot from the Fed.
These are some of the most brutal investment conditions for REIT investors since the 2008 financial crisis and Arbor Realty ( ABR ) has not been spared from the carnage despite reporting dual beats for its fiscal 2023 third-quarter earnings. The mortgage REIT kept its dividend unchanged at $0.43 per share for what works out to be a 13.7% annualized dividend yield. Arbor has been pulled down by around 30% from its recent highs, mirroring a broader REIT dip sped up by the Fed's higher for longer rhetoric. The September Federal Open Market Committee meeting saw rates unchanged and is likely to be followed up by another pause at the November meeting, but investors have sought to radically reprice REITs lower.
The hawkish message from the Fed has aggregated with an economic environment that remains highly dynamic and with material levels of volatility. US 10-year Treasury yields momentarily breached 5% for the first time since 2007 as the US economy stares at what JPMorgan's ( JPM ) Jamie Dimon described as the most dangerous period faced by the world in decades with two ongoing wars that could reignite inflationary pressure across core commodities. The market is currently pricing in a 99.9% chance that the Fed will keep rates unchanged at its upcoming November FOMC meeting in what would be the first consecutive rate pause in one of the most aggressive rate hike cycles in decades. It's crucial to contextualize Arbor's performance against this environment. All REITs are selling off and the bearishness can only be neutered by inflation trending more markedly to the Fed's 2% target in the near-term.
Dual Beats, Distributable EPS, And The Dividend Coverage
Interest income at $336.47 million was ahead of its year-ago comp by 30% to drive net interest income of $107.29 million. This was a growth of 8% and meant a diluted EPS of $0.41 per share, a 5 cents per share increase from the year-ago period. A 98% increase in other revenue and an $18.65 million provision for credit losses, up a huge 720% from the year-ago period, were core drivers of the performance of diluted EPS. It's important to note that both net interest income and EPS beat analyst consensus respectively by $8.95 million and $0.06 per share. The selloff post-earnings makes little sense against dual beats and distributable EPS of $0.55 which covered the dividend by 128%, a roughly 78% payout ratio.
Hence, the mREIT continues to generate earnings well in excess of the quarterly dividends in spite of broader macro headwinds. Critically, book value at the end of the third quarter came in at $12.73 a share , up 2% versus the end of the prior fiscal year with Arbor seeing steady book value growth over the last three years despite it being a period highly defined by disruption and volatility. What point would I concede to the Bears? I don't think we will see another dividend hike until a concrete dovish pivot from the Fed. There are two more FOMC meetings left to close out 2023 and it's likely the Fed will once again keep open the possibility of another rate hike at the December meeting. However, assuming no further inflationary shocks, a full dovish pivot and an end to further rate hikes would help catalyze broad upside with investor sentiment on REITs.
Book Value Strength And A Rare Discount
Arbor has rarely ever traded hands at a discount to book value. The current 13 cents per share discount to book is rare but could of course move deeper as it did during the early 2020 pandemic collapse. The REIT's ability to maintain book value strength against the last three years is terrific. Arbor is one of the few tickers in the mREIT space where book value has trended upwards, partially owing to a history of consistent earnings above its dividend. The mREIT has booked roughly $70 million in CECL reserves across its platform over the last 9 months, a headwind that has still not prevented book value per share growth.
There was around $1.15 billion in agency loan originations during the third quarter, down sequentially from $1.42 billion in the second quarter with Arbor's investment portfolio at $13.1 billion at the end of the third quarter. This had an all-in yield of 9.12%, up 5 basis points from 9.07% at the end of the second quarter. In any other market conditions, the commons would have rallied on the back of these results. The dire macro backdrop will continue to drive the near-term performance with Arbor forming a hold against this.
For further details see:
Arbor Realty Trust: 13.7% Yield, Brutal Market