How ABR Stock Managed to Go Up 11% in 2023
Rising interest rates and stubbornly high inflation can curb economic growth, tip the economy into a recession, and lead to increased household debt. At the same time, those economic headwinds are what make real estate investment trusts (REITs) like Arbor Realty Trust Inc (NYSE:ABR) such a great investment opportunity right now.
REITs are an easy way for people to own a piece of the real estate industry without having to invest a lot of money. There’s a wide range of equity REITs; they can own industrial properties, hotels, casinos, offices, health-care facilities, retail properties, and/or residential real estate.
Equity REITs are probably what most people think of when it comes to investing in REITs, but there’s also another type worth looking at: mortgage REITs (mREITs). These firms invest in mortgages instead of real estate. They provide financing for income-generating real estate by purchasing or originating mortgages and mortgage-backed securities. Then they earn income from the interest on those investments.
Many investors love REIT stocks because REITs legally have to return at least 90% of their taxable income to shareholders in the form of dividends. Better still, REITs tend to perform well in high-interest-rate/high-inflation environments—like the one we’re in right now.
One outstanding mREIT that has been rewarding buy-and-hold shareholders with reliably growing dividends is the aforementioned Arbor Realty Trust Inc.
The company invests in structured finance assets in the multifamily, single-family rental, and commercial real estate markets. It also directly acquires real property and invests in real estate-related notes and certain mortgage-related securities. (Source: “1Q23 Investor Presentation,” Arbor Realty Trust Inc, last accessed June 8, 2023.)
The vast majority (91%) of the mREIT’s structured loan portfolio comprises multifamily, which is followed by single-family rental (seven percent), land (one percent), and office (one percent).
Arbor Realty Trust Inc’s real estate is mostly (55%) in the southern U.S.: Florida, Georgia, North Carolina, and Texas.
The investments primarily (97%) consist of bridge loans, including junior participating interests in first mortgages, preferred and direct equity loans, single-family rental portfolio financing, government-sponsored enterprise (GSE) and U.S. Department of
Housing and Urban Development (HUD) agency lending, and private-label financing.
Arbor Realty Trust Inc’s investment portfolio is currently worth $13.6 billion, with an average loan amount of $19.1 million. The company’s portfolio has many diverse income streams that generate significant, prepayment-protected revenues. As of March 31, it included the following:
- About $28.9 billion in a portfolio earning about $117.0 million per year
- About $2.8 billion in cash and escrow balances earning about $110.0 million per year (at a rate of about four percent)
- About $227.0 million, or about $1.15 per share, combined
Arbor Realty Trust Inc’s portfolio has an average remaining life of nine years.
The mREIT is well capitalized, with about $785.0 million of cash and liquidity on hand and about $560.0 million of deployable cash in its collateralized loan obligations.
Arbor Realty Trust Inc’s Q1 Earnings Climbed 31%
As one would hope, Arbor Realty Trust generates a high amount of earnings.
For the first quarter of 2023, the company reported net income of $84.3 million, or $0.46 per share. That was up by 31% from $64.1 million, or $0.40 per share, in the same period last year. (Source: “Arbor Realty Trust Reports First Quarter 2023 Results and Increases Dividend by $0.02 to $0.42 per Share,” Arbor Realty Trust Inc, May 5, 2023.)
The mREIT’s distributable earnings in the first quarter of 2023 were $122.2 million, or $0.62 per share, up by 31.5% from $92.9 million, or $0.55 per share, in the first quarter of 2022.
As of March 31, Arbor Realty Trust Inc’s loan and investment portfolio’s unpaid principal balance—excluding loan loss reserves—was $13.6 billion (with a weighted average current interest pay rate of 8.6%), compared to $14.6 billion (with a weighted average current interest pay rate of 8.2%) as of December 31, 2022.
The average balance of the company’s loan and investment portfolio during the first quarter of this year (excluding loan loss reserves) was $14.2 billion (with a weighted average yield of 8.9%), compared to $14.8 billion (with a weighted average yield of 8.1%) in the fourth quarter of last year.
Management Increases Quarterly Dividend to $0.42 Per Share
Arbor Realty Trust Inc has raised its dividend annually for the last 11 years. In early May, management announced a dividend of $0.42 per share, up from $0.40 in the previous quarter. This works out to a current yield for Arbor Realty Trust stock of about 13.7% (as of this writing).
In addition to benefiting from rising dividends, ABR stockholders have been enjoying solid share-price gains. As of this writing, the stock is up by 19.5% over the last month and 12.6% year-to-date. Even though Arbor Realty stock is down by 4.5% year-over-year, its outlook is bullish.
Analysts have provided a 12-month share-price target for Arbor Realty Trust Inc in the range of $15.50 to $17.50. This points to potential gains from ABR stock in the range of about 15% to 30%.
Chart courtesy of StockCharts.com
The Lowdown on Arbor Realty Trust Inc
Arbor Realty Trust stock is an excellent mREIT stock for both income and growth. The company continues to report tremendous quarterly results, and it has increased its dividends for 11 years, including in 11 of the last 13 quarters.
By all accounts, that growth should continue. Arbor Realty Trust Inc’s distributable first-quarter earnings of $0.62 per share are well in excess of its current dividend and represent a 68% payout ratio. This is the lowest payout ratio in the company’s industry, which bodes well for the safety of ABR stock.