2023-10-12 04:38:50 ET
Summary
- Arbor Realty Trust is a well-managed mortgage trust with a focus on multi-family investments.
- The trust offers a high dividend yield that is supported by strong dividend coverage and potential for growth.
- ABR stock is trading at a compelling valuation, making it a buying opportunity for passive income investors.
Arbor Realty Trust, Inc. ( ABR ) is an internally managed real estate investment trust with a multi-family-focused origination platform.
The mortgage trust is well managed, generates consistent dividend growth for the benefit of passive income investors, and I think it delivers a dividend that is much safer than the high 12% dividend yield implies.
The mortgage trust's stock is also trading at a much more compelling valuation after the most recent weakness in stock prices, particularly in high yield, and I think the drop is a buying opportunity for passive income investors who look for both a high yield as well as growth potential.
My Rating History
More than a year ago, I delivered a write-up , in which I highlighted the trust's multi-family investments and potential for origination growth. The present valuation, dividend coverage trend, and potential for dividend growth are reasons why I doubled down on ABR this week.
Arbor Realty Trust's Portfolio
Arbor Realty Trust stands out to me as a quality mREIT and this is saying something as I tend to have quite reserved opinions on leveraged mREITs including Annaly Capital Management, Inc. ( NLY ) and AGNC Investment Corp. ( AGNC ) , both of which have been serial dividend cutters and have posted long periods of declining book values.
However, there are exceptions, such as Arbor Realty Trust, which covers its dividend with distributable earnings and offers, in my view, passive income investors stronger total return potential.
Arbor Realty Trust is a direct lender and provides loan originations and servicing primarily for commercial real estate assets. The trust operates a Structured Loan Origination and an Agency business.
In the first one, Structured Loans, Arbor Realty Trust invests in structured finance assets, mostly bridge loans in the commercial real estate market. These assets primarily include multi-family assets but also single-family rentals.
In the Agency business, Arbor Realty Trust originates, sells, and services multi-family finance products through Fannie Mae or Freddie Mac.
Multi-family investments make up the majority of the mortgage trust's investment portfolio: 90% of assets were made in the multi-family category, while the remaining 10% were split up over a number of single-family, land, and office investments.
Investment Portfolio By Asset Class (Arbor Realty Trust)
Loan originations have slowed lately primarily due to an unfavorable interest rate climate. Arbor Realty Trust saw structured loan originations of $209.0 million in 2Q-23 which was down from $500.5 million at the end of 2022. Arbor Realty Trust's total structured portfolio had a total value of $13.5 billion at the end of the second quarter.
Totaled Structured Portfolio (Arbor Realty Trust)
The quality of Arbor Realty Trust's assets is high since the trust primarily invests in mortgage securities that are backed by the full faith and credit of the U.S. government. The default risk is therefore very low. In the second quarter, Arbor Realty Trust's new originations consisted primarily of Fannie Mae loans, which totaled $1.1 billion.
There is still solid demand for Fannie Mae originations and the trust saw a 36% QoQ increase in originations in the second quarter. Fannie Mae's originations in the second quarter totaled 76% of the trust's 2Q-23 gross originations.
Loan Origination Platform (Arbor Realty Trust)
Arbor Realty Trust also offers passive income investors a more diversified business model than other mortgage trusts that are exclusively focused on agency mortgage-backed securities.
Because Arbor Realty Trust has a more diversified business model than other mREITs, which also include multi-family investments and a single-family rental platform, the trust's distributable earnings are less risky, in my view.
Furthermore, Arbor Realty's robust dividend coverage explains the trust's premium valuation, while other, less diversified mREITs presently trade at discounts to book value. Other mREITs, like Annaly Capital or AGNC Investment has been serial dividend cutter, while Arbor Realty Trust has managed to increase its payout to shareholders.
Comfortable Dividend Coverage
Arbor Realty Trust earned $2.35 per share in distributable earnings in the last four quarters and paid out a total of $1.65, leading to an impressively low payout ratio of 70%.
The trust's payout ratio also consistently remained in the range of 67-75%, reflecting resilient distributable earnings from the mortgage trust's origination platform.
Taking into account that Arbor Realty Trust also grew its dividend 10% in the last year to a present rate of $0.43 per share per quarter, I think that the trust offers a much safer dividend than the high 12.4% dividend yield indicates.
From a dividend coverage perspective, I would put Arbor Realty Trust into the same category as Rithm Capital Corporation (RITM) .
Dividend (Author Created Table Using Trust Information)
Arbor Realty Trust Is A Steal
Whether or not a mREIT is overvalued or not primarily depends on the degree of dividend coverage that the high-yielding mREIT provides passive income investors with.
Arbor Realty Trust is presently trading at a marginal 6% premium to book value, which I find surprising considering how low the dividend payout ratio is. Since the dividend is so well-covered, I can see ABR trade at a 15% or 20% premium to book value.
Mortgage trusts like Annaly Capital Management and AGNC Investment are trading at discounts to book value of ~14%, and I think that the valuation proposition with ABR is much stronger. Annaly Capital Management, for instance, as opposed to ABR, is a serial dividend cutter and has a 2Q-23 payout ratio of 90% .
Why Arbor Realty Trust Could See Valuation Upside Or Downside
Arbor Realty Trust has concentrated exposure in the commercial real estate market, particularly the multi-family sub-category, which exposes the mREIT to certain distributable earnings risks if this market segment underperforms moving forward.
From a coverage perspective, I am not concerned about a potential dividend cut and think that ABR has low to moderate dividend risks only.
My Conclusion
Arbor Realty Trust offers passive income investors a 12.4% dividend yield that has consistently been covered by distributable earnings in the last year, and the mREIT is actively growing its dividend, in addition to paying a double-digit yield.
Arbor Realty Trust's second most attractive feature is the mortgage trust's attractive price after the valuation recently slid. Arbor Realty Trust sells for just 1.06x book value, which is a steal considering that the dividend is growing.
As a consequence, I think that Arbor Realty Trust's 12.4% dividend yield not only has room to grow moving forward but the yield is much safer than passive income investors might assume. Strong Buy.
For further details see:
Arbor Realty Trust: This Covered 12.4% Yield Is A Steal