2023-05-21 05:04:27 ET
Summary
- As ABR’s ex-date for 1Q 2023 dividend of $0.42 per share passed, the stock’s price decreased by 4%.
- As the real estate housing market continues to struggle in 2023, some might argue that ABR’s financial results may impair in the upcoming quarters, causing dividend cuts.
- Yes! ABR’s 2Q 2023 results may be weaker than in 1Q 2023. However, the company’s distributable earnings can be high enough to cover quarterly dividends of between $0.40 to $0.42.
- At prices below $13, even with a quarterly dividend of $0.40 in the upcoming three quarters, ABR’s 1-year forward dividend yield is 12.5%.
- The stock is a buy.
Arbor Realty Trust ( ABR ) increased its dividend to $0.42 per share in 1Q 2023, from $0.38 per share in 1Q 2022 and $0.40 per share in 4Q 2022. In the past year, ABR’s stock price decreased by more than 20%, while the company increased its quarterly dividend from $0.38 per share in 1Q 2022 to $0.40 per share in 4Q 2022, and to $0.42 per share in 1Q 2023. As a result, ABR’s dividend yield has increased to about 13%, which is very attractive. Despite the challenges that many REITs faced due to the hiked interest rates in the past few quarters, ABR was able to improve its financial results.
Higher interest rates in the first quarter of 2023 caused ABR’s provision for loan losses to jump. On 3 May 2023, the Fed raised rates by 0.25% for the tenth consecutive time to the range of 5.0% to 5.25%. Jerome Powell, the Fed’s chair said that the central bank may stop increasing the rates further. Inflation rates decreased significantly in the past few months, and higher interest rates can cause serious financial instability in the United States. Thus, higher interest rates are not likely. However, we cannot expect the rates to decrease soon. I think interest rate cuts might start in the first half of 2024. However, if inflation rates decrease faster than expected in the following months, the Fed might consider slight interest rate decreases in the last quarter of 2023.
Overall, ABR’s provision for loan losses may increase further in the upcoming quarters. Besides, the weighted average interest (including fees) of the debt that finances ABR’s loan and investments portfolio increased from 6.50% (on $13.28 billion of debt) on 31 December to 6.97% (on $12.65 billion of debt) on 31 March 2023. It is worth noting that in the first quarter of 2023, the company issued $95.0 million of 7.75% senior notes, received proceeds of $93.4 million, and used $70.8 million of it to repurchase its 8.00% senior notes, which was a strategic action to improve the company’s debt position. Overall, ABR’s financial results in 2Q 2023 may not be as strong as in 1Q 2023. However, as long as the company can pay quarterly dividends of between $0.40 to $0.42, and the stock’s price is below $13 per share, the stock is a buy.
Financial results
In its 1Q 2023 financial results, Arbor Realty Trust reported a net interest income of $109 million, compared with $84 million in 1Q 2022. In the first quarter of 2023, the company’s interest income increased by 96% YoY to $328 million, and its interest expense increased by 164% YoY to $219 million. ABR’s other revenue increased from $59 million in 1Q 2022 to $73 million in 1Q 2023, driven by higher gains on sales (including fee-based services) and increased servicing revenue. Also, its other expenses increased by 41% YoY to $86 million in 1Q 2023, as ABR’s provision for credit losses increased to $23 million in 1Q 2023 from $2 million in 1Q 2022.
In the first quarter of 2023, ABR’s net income attributable to common stockholders increased by 31% YoY to $84 million. Also, the company’s diluted earnings per common share increased from $0.40 in 1Q 2022 to $0.46 in 1Q 2023. The Board of Directors declared a quarterly dividend per share of $0.42 in 1Q 2023, compared with $0.37 in 1Q 2022.
It is important to know that ABR’s distributable earnings of $0.62 per share in the first quarter of 2023, was significantly higher than its declared dividend, meaning that ABR’s Board of Directors can increase the dividend in the upcoming quarters (the current payout ratio of ABR is 68%). Figure 1 shows ABR’s dividend. We can see that overall, the company’s quarterly dividend increased continuously in the past 10 years. The stock’s 1-year forward dividend yield is 13%, while the sector’s median 1-year forward dividend yield is 4% (see Figure 2).
Figure 1 – ABR’s dividend history
Figure 2 – ABR’s dividend yield grade
But, you should know that ABR's 2Q 2023 financial results may not be as strong as in 1Q 2023. ABR’s Agency Business total originations decreased from $1.55 billion in 4Q 2022 to $1.09 billion in 1Q 2023, driven by lower Fannie Mae, lower Freddie Mac, and lower SFR-fixed rate originations, partially offset by higher FHA and higher private label originations. Also, the company’s total loan sales decreased from $1.74 billion in 4Q 2022 to $0.93 billion in 1Q 2023. Thus, ABR’s Agency Business generated revenues decreased from $95.9 million in 4Q 2022 to $80.4 million in 1Q 2023. It is important to know that as of 31 March 2023, ABR’s loans held-for-sale was $470 million. As the interest rates increased in the second quarter, and the outlook for the real estate housing market is still weak, ABR's Agency Business results can impair.
Furthermore, as ABR’s multifamily loans, which account for nearly 90% of ABR’s bridge, decreased from $12.83 billion in 4Q 2022 to $12.03 billion in 1Q 2023, the company’s Structured Business total portfolio decreased from $14.46 billion on 31 December 2022 to $13.64 billion on 31 March 2023 (see Figure 3). However, as a result of higher interest rates in the first quarter of 2023, the weighted average yield of ABR’s loan and investment portfolio (excluding loan loss reserves) increased from 8.12% in 4Q 2022 to 8.94% in 1Q 2023. The negative effect of lower loans and higher loan loss provisions on ABR's Structured Business results can be higher than the positive effect of higher yields. Thus, in the second quarter of 2023, the contribution of the Structured Business to ABR's earnings may decrease. But, even with the current real estate housing market outlook, the current interest rates, and the current debt and asset portfolio, ABR's quarterly dividend can remain higher than $0.40 per share. Although, there are some risks that should be considered.
Figure 3 – ABR’s Structured Business portfolio
Risks
Federal Reserve increased interest rates to combat inflation and the inflation rates seem to be tamed. However, to reach the inflation rate target of 2%, the interest rates must remain high and we cannot expect the Fed to reduce interest rates soon. However, the current interest rates may cause some instabilities in the financial markets. Financial instabilities may result in an economic downtrend, decreasing real estate values. Lower real estate values mean ABR’s new mortgage loan originations can be limited and the likelihood of incurring losses on defaulted loans can increase significantly. According to Figure 4 , the U.S. housing market may continue to struggle in 2023, meaning lower new and existing home sales volumes, and a low number of available homes on the market. Thus, ABR’s potential to maintain its earnings levels may decrease in the following months, putting the Board of Directors in a position to cut the dividends.
Furthermore, as a result of higher interest, high inflation rates, and low economic growth, ABR’s credit quality of loans and investment portfolio has been negatively affected. Thus, the company’s loan loss provisions increased. Financial instabilities and economic headwinds can increase ABR’s loan loss reserves, defaulted loans, and cause other asset impairment charges.
Figure 4 – Real estate housing market predictions for 2023
Summary
ABR’s 2Q 2023 net income and distributable earnings may be lower than in 1Q 2023. However, I expect the company’s 2Q, 3Q, and 4Q 2023 financial results to be strong enough so the Board of Directors could continue declaring quarterly dividends of between $0.40 to $0.42 without putting the company at serious risk. At its current price, ABR is a buy.
For further details see:
Arbor Realty Trust: Low Price, High Dividend Yield, And Risks