2023-04-19 07:00:00 ET
Summary
- It seems that the trending REIT articles on Seeking Alpha are the ones that are flashing double-digit dividends.
- Let’s add one more name to the list: Arbor Realty Trust - Yielding 15.1%.
- Arbor Realty currently trades at a blended P/E of 4.88x which is a significant discount to their normal P/E of 8.66x.
I just finished an article titled “The Safest Dividend Is The One That’s Just Been Raised” and I explained that ,
“I’ve noticed that more investors are becoming interested in dividend-paying stocks, but in my opinion, many are buying them for the wrong reasons.
It can be tempting to look for the biggest dividends or the highest yields, but many are ignoring the sustainability of the company’s underlying cash flow.”
It’s human nature I suppose - to chase yield - but as I pointed out:
“A REIT that yields 10% or higher almost always means that investors perceive very low growth, or even worse, a potential dividend cut. Long-term investors should be looking at REITs with dividends that are not just safe but also have good growth prospects.”
It seems that the trending REIT articles on Seeking Alpha are the ones that are flashing double-digit dividends:
- Medical Properties ( MPW ) Yielding 14.0%
- Blackstone Mortgage ( BXMT ) Yielding 14.4%
- Starwood Property Trust ( STWD ) Yielding 11.2%
- Annaly Capital ( NLY ) Yielding 13.5%
- Sachem Capital ( SACH ) Yielding 14.5%
- NewLake Capital ( OTCQX:NLCP ): Yielding 12.2%
- Innovative Industrial ( IIPR ): Yielding 10.2%
Let’s add one more name to the list:
- Arbor Realty Trust ( ABR ): Yielding 15.1%
That happens to be the topic for today and as viewed below, shares have taken a beating lately:
Let’s take a closer look…
The Basics
Arbor Realty Trust is an internally managed mortgage real estate investment trust (“mREIT”) that specializes in originating and servicing loans primarily for multifamily, but also for single-family rental and commercial real estate.
ABR’s portfolio of loans primarily consist of bridge loans but they also invest in mezzanine loans and preferred equity. Bridge loans makes up 98% of their portfolio while mezzanine and preferred equity make up 1% each.
By property type, the vast majority of their portfolio is made up of multifamily at 91%, followed by single-family rental at 7%, land at 1% and office at 1%.
Given the current environment in the office sector, ABR’s property mix should put their portfolio in a strong position compared to many of their mortgage REIT peers as they have much less office exposure than many other commercial mREITs.
By geographical location, ABR has its largest concentration in Texas at 22%, followed by Florida at 14%, Georgia at 9% and North Carolina at 6%.
Arbor Realty Trust operates through two business segments - Structured Business and Agency Business:
Structured Business
Within their Structured Business segment ABR invests in a portfolio of structured finance assets, primarily consisting of bridge loans, and to a lesser extent mezzanine loans and preferred equity.
The collateral securing their loans includes multifamily, single-family rental, and office properties. They also participate in joint ventures that acquires property and invests in real estate-related notes and mortgage-related securities.
Types of Loans
- Bridge Loans are issued to borrowers that are seeking short-term capital to acquire a property. Investors in real estate will typically use this type of loan as a “bridge” until they can find long-term financing. Borrowers will often find this type of financing advantageous because it provides the borrower time to acquire a property and make improvements to enhance the property’s value before encumbering it with restrictive long-term debt that may not provide ideal leverage for a property that is not yet stabilized. Once the borrower obtains long-term financing they typically use the proceeds to repay the bridge loan. Plus, the majority of ABR’s bridge loans are secured by a first mortgage lien. In addition to the interest income provided from bridge loans, ABR’s Structured Business has additional streams of revenue that may include origination fees and participating equity interest which enables ABR to receive a percentage of the property’s operating income. Bridge loans makes up the vast majority of ABR’s portfolio.
- Single-family loans provides borrowers capital to acquire single-family homes which are typically held for the long-term with permanent financing. Additionally, single-family loans are used to purchase single-family housing in development with bridge loans or build-to-rent loans. As previously mentioned, single-family loans makes up 7% of ABR’s loan portfolio.
- Mezzanine Financing is a form of financing that is subordinate to first mortgage loans but senior to the borrowers equity. Mezzanine loans may be secured by pledges of ownership interest in the operators that control the property or secured by a second mortgage lien. Additionally, they may require personal guarantees and collateral unrelated to the property to secure the loan.
- Preferred Equity Financing provides capital to borrowers through preferred equity investments where ABR typically becomes a member of the property-owning entity. Preferred Equity is structured as an equity investment instead of a loan which allows borrowers to access capital in cases where the terms of a first mortgage prohibits additional liens.
Agency Business
Arbor Realty Trust originates, sells, and services multiple types loans for multifamily properties through government-sponsored enterprises (“GSE”) such as Fannie Mae and Freddie Mac. Arbor Realty retains the servicing rights on almost all of their agency loans, which provides them with an additional source of revenue.
ABR also originates and services private label loans which are pooled together and securitized as commercial mortgage-backed securities (“CMBS”) and sold to third-party investors. It’s important to note that ABR retains the highest risk bottom tranche of these securities, so they have “skin in the game” when originating the loans.
Arbor Realty is one of the 25 approved lenders under Fannie Mae’s delegated underwriting and servicing (“DUS”) program and one of the 22 lenders approved as a Freddie Mac multifamily lender that issues loans for multifamily, manufactured and student housing, and senior housing properties. Additionally, through their Agency Business they originate single-family rental fixed rate loans that are sold to third-party investors while ABR retains the servicing rights.
ABR - Form 10-K (in thousands)
As seen above, ABR derives the majority of their interest income and interest expense from their Structured Business segment. Net interest income from their Structured Business segment made up approximately 93% of their total net interest income in 2022.
While ABR’s Structured Business contributes the most to net interest income, their Agency Business derives the majority of its revenue from fee-based services, mortgage servicing rights and servicing revenue.
ABR - Form 10-K (in thousands)
After taking all expenses into account, ABR’s Structured Business contributed $216.6 million to net income attributable to common stockholders while their Agency Business contributed $96.2 million.
ABR - Form 10-K (in thousands)
Short Report by NINGI
Before going into Arbor Realty’s fundamentals, I’d like to take a moment to address a recent short report by NINGI, which describes itself as a “research” company.
Before going into details on the allegations made by NINGI, let’s find out more about this supposed research company. I’m not going to provide a link, but you can easily find the site if you google NINGI. If you go to their site, the first thing you will see is a pop-up disclaimer. Each time you go to a different page on the site the same disclaimer comes up.
NINGI
I’ve highlighted some of the statements in the disclaimer below:
“You should assume that, as of the date of our publications, we (possibly along with or through our members, partners, affiliates, and/or employees) have a direct or indirect short position in any security (including equity securities, options, swaps, other derivative securities, debt securities and/or CFD) covered herein and therefore stand to realize monetary gains in the event that the price of stock moves.”
“Every document, information, data, analysis, and statement on this website and/or our report is expressed for educational purposes only and is expressed as an opinion, not a statement of fact.”
So, in summary, they have a short position with ABR, stand to realize monetary gains if it goes down, and all details on their website and report are identified as an opinion and not a statement of fact. For the full disclaimer you will have to go to their website.
Okay, so who are these guys?
Now, I’m no fan of Jim Chanos, but I’ve read his reports, I’ve seen his interviews, and I know his background, credentials, and record of success. So who is NINGI, who supplied the research attacking Arbor?
Are they CFA or CPA credentialed? Do they have a successful track record? I decided to go to their About Us page to find out more and here is the information they provide:
NINGI - About Us
So, they were founded about a year ago and…… what’s their address? What country do they operate in? And most importantly, who wrote the report? I emailed team@ningiresearch but have yet to receive a response.
I downloaded the report and there is no mention of the author or researchers involved. I also noticed a whistle blower email where I guess anyone can send in information.
Maybe that’s where the research is coming from, or maybe it’s some 40-year-old living in their parents basement? I’m not making accusations, but how are we to know if they don’t disclose who the author is?
And how can we access the validity of the information if we don’t know the credentials, past history or anything else about whoever wrote this “report”. The report itself is 34 pages and makes so many allegations (that are not statement of fact according to NINGI) that it would take a book to detail and rebuke. I’ll highlight a couple of the allegations below:
NINGI allegation : Arbor has been hiding a toxic real estate portfolio of mobile homes with a complex web of real and fake holding companies for more than a decade.
NINGI allegation details : In our opinion , Arbor is hiding a mobile home portfolio and the related $600 million debt; the company secretly invested in maintenance , most of its $170 million in net profits from that real estate portfolio is missing, Arbor's management is secretly selling the properties, sales profits are missing, Arbor's shareholders will have to fund any arising costs and take the losses.
Okay so where have they been hiding the toxic portfolio?
If Arbor is hiding the portfolio how did NINGI find it?
What do they mean by “secretly investing in maintenance”, where are they getting this information from?
If Arbor’s management is secretly selling properties, how does NINGI know that; it must not be that secret if it’s even true. And most importantly, how has NINGI been able to uncover what the auditor and SEC never figured out over the last decade?
Maybe NINGI has amazing analytical skills, but then I would think that amazing researcher’s name might be on the report.
Unlike NINGI, whoever that is, Arbor’s auditor, Ernest & Young, is one of the “big four” accounting firms and can get into a lot of trouble if they allowed Abor to mischaracterize their financial performance.
So can Arbor. If NINGI’s allegations are true it could result in possible jail time – that and it would destroy the value of the company. Personally, I find it hard to believe that management, with approximately a 12% ownership stake, would destroy the value of their company and possibly face jail time to boost their earnings.
I also find it hard to believe that Ernest & Young would ruin their reputation by turning a blind eye to all this “secret” activity.
ABR - Investor Presentation
Fortunately, Arbor was quick to address the matter in a press release on March 14. ABR announced that it was in receipt of this purported “research”, that the report lacks merit and contains numerous inaccuracies, misstatements, and misleading allegations. They go on to say that NINGI’s report is a transparent effort to mislead the public so they can profit from their short positions.
I painstakingly went through NINGI’s report and noticed a lot of provocative, fear inducing words or phrases like hiding, disguises, insolvent, cash is missing, secretly, fake, cannot be trusted, immediate dividend cut, suspension of dividends, and my favorite – “will lead to a rude awakening in the near future.”
I just grabbed some of the words or phrases that stood out to me, but for the full context you will need to read the report (have fun!).
In my opinion, the report is littered with words intended to provoke an emotional response. It reminds me of an infomercial that says, “time is running out” or “limited supply available” or “act now before it's too late!”
There’s a lot of scary words coming from an unknown researcher that supposedly discovered 10 years’ worth of improper activity that the rest of the investment community, auditors, regulators, and other short firms didn’t see. There are very few, if any, emotions more powerful than fear, and unfortunately in this case it seems to have worked as ABR has fallen over 10% since the report came out. I’m sure NINGI made out nicely…?
Earnings
Arbor Realty’s adjusted operating earnings have been choppy over the last decade but have an overall upward trajectory. They had several years of earning declines including 2016 when earnings fell by -8%, and 2019 when they fell by -15%, but they also had many years with positive earnings growth including 2017 when earnings increased by 35% and the following year when they increase 34%. In total they have averaged a 10.19% operating earnings growth rate since 2013.
FAST Graphs (compiled by iREIT)
Dividend
Unlike ABR’s earnings, their dividend has not been choppy as it has increased each year since 2012. Their average growth rate over the last 10 years is 20.41% but the increases have come in chunks with the dividend increasing 75.44% in 2013 and 59.15% in 2018. In 2022 the dividend was increased 11.59%.
FAST Graphs (compiled by iREIT)
As shown below, ABR had an impressive dividend growth history, increasing its quarterly dividend by around $.01 per share. However, in January 2023 and March 2023 ABR has maintained its quarterly dividend of $.40 per share.
Distributable Earnings Payout Ratio
Arbor Realty Trust has the lowest dividend payout ratio in the mortgage REIT industry with a distributable earnings payout ratio of 70.40% for the full year 2022. The payout ratio has been improving over the last several years, coming from 78.20% in 2019 to 70.40% in 2022.
ABR - Investor Presentation (compiled by iREIT)
On a quarterly basis, ABR had a payout ratio of 67% in 4Q-22 and 75% in 2Q-22. They increased the dividend 3 times in 2022 and increased it in 10 of the last 11 quarters.
Valuation
I wanted to look at ABR’s valuation from a couple of different perspectives. The chart below depicts ABR’s dividend yield since 2013. I used the closing price at year end and the annual dividend to arrive at the yield for each year.
This isn’t a perfect representation as the yield fluctuations throughout the year, but I think it gives us a good approximation of ABR’s valuation as it relates to their dividend payout.
All else remaining constant, the yield moves inversely to price so on this count the stock is trading at a lower valuation than at any time since 2013. ABR has increased its dividend each year, but the current yield of 15.60% is due to the price action much more than any increase in the dividend payout.
ABR - Dividend History / Historical Price (compiled by iREIT)
Arbor Realty’s total stockholders equity is reported at $2.9 billion. After subtracting out preferred equity and intangible assets ABR has a tangible book value of $2.2 billion compared to a market capitalization of $1.9 billion for a price to tangible book value of .85x.
In theory this suggests that if ABR were to liquidate all of its assets and pay off all of its debts, the cash it would receive would be approximately 15% more than what the stock is currently trading for.
ABR - Form 10-K (compiled by iREIT)
Arbor Realty currently trades at a blended P/E of 4.88x which is a significant discount to their normal P/E of 8.66x. They pay a 15.07% dividend yield that is very well covered with a 67% payout ratio as of the latest quarter.
The stock has been so beaten down over the past year that at today’s prices you would receive a total annual return of 40.20% assuming that by the end of 2024 the stock reverts to its 5-year normal P/E of 8.4x.
Of course there is no guarantee of that happening, but all the same the stock is cheap right now and this could be a good entry point. The stock is cheap from the perspective of its yield, its price to book ratio, and its current P/E compared to its normal multiple. At iREIT we assign Arbor Realty a Tier 2 Rating.
Latest News
Last week the WSJ reported that “an apartment-building investor lost four Houston complexes to foreclosure last week, the latest sign that surging interest rates are beginning to upend the multitrillion-dollar rental-housing market.
Applesway Investment Group borrowed nearly $230 million to buy the buildings with more than 3,200 units as part of a Texas buying spree during the pandemic.”
In turns out that ABR “foreclosed on the properties after Applesway defaulted on the loans” and “New York-based investment firm Fundamental Partners bought the Houston properties, public records show, for an undisclosed amount.”
“Most of Applesway’s loans originated in the second half of 2021, just before the Federal Reserve began its campaign to raise interest rates. At one property, the interest rate on Applesway’s loan had risen from 3.4% to around 8%, according to loan information obtained from data firm Trepp Inc. At least two of the properties were financed with about 80% debt, which is considered high leverage in commercial real estate.”
It's no surprise to me to see this foreclosure … anyone who bought an apartment complex in 2020 and 2021 and used cheap debt is going to get a similar wake up call. Cap rates have gone from 3.5% to 5.5% very quickly and it seems that Fundamental Partners got a bargain property at close to 100% occupancy.
Also, ABR recently approved a share repurchase program authorizing the company to repurchase up to $50M of its outstanding common stock.
In closing, I plan to attend the Nareit REITWeek conference in a few weeks and I plan to meet with ABR’s management team.
Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
For further details see:
Who's Buying 15.1% Yielding Arbor Realty Trust?