Looking for dividend growth income vehicles in the MREIT space? Maybe you should take a look at Arbor Realty (NYSE:ABR).
Company Profile:
ABR is an internally-managed major US real estate lender, classified as a mortgage REIT. However, it has a versatile multifamily-centric operating platform and a unique business model, consisting of three primary business platforms which produce predictable cash flow: Balance sheet loan origination, GSE/Agency loan origination, and Mortgage Servicing.
It has a $15B investment portfolio, and a $27B Agency servicing portfolio, with a prepayment protected annual income stream of ~$115M with a nine-year average remaining life. The servicing portfolio has grown 6% in the last year, is mostly prepayment-protected and generates approximately $120M/year in recurring cash flow.
ABR’s Agency originations have a CAGR of 11% since 2017, while its Agency servicing portfolio has a 15% CAGR:
While Multifamily forms 92% of the assets, management also has built a growing single-family rental, SFR, platform with a $1B-plus pipeline, that forms 6% of assets. ABR’s biggest regional exposure is in Texas, at 21% each, followed by Florida, at 13%, Georgia, at 8%, NY, at 6%, with other states comprising 52%. Management ramped up exposure to Texas by 900 basis points in Q2-3 ’22:
Earnings:
Q3 1011: Arbor reported Q3 ’22 net income of $62.7M, or $0.36/diluted common share, compared to net income of $72.8 million, or $0.51 per diluted common share for Q3 ’21. Distributable earnings for the quarter was $105.1M, or $0.56/ diluted common share, vs. $75.7M, or $0.47/diluted common share for Q3 ’21.
The per share amounts were lower due to a 28% rise in the share count over the past year.
Total loan originations were down -12% in Q3 ’22, while loan sales rose 4%, and total loan Commitments rose 24% in Q3 ’22.
“In the third quarter, we successfully refinanced around 25% of our balance sheet runoff into new agency loans that produce strong gain on sale margins and long-dated servicing income. And again, our strategy is to preserve and build on a strong liquidity position to allow us to remain offensive and garner premium yields on our capital. In our GSE/Agency business, we originated another $1.1B of loans in the third quarter. October’s originations came in the $250 million range.” (Q3 call)
ABR’s fee-based servicing portfolio totaled $27.07 billion at 9/30/22 and excludes $127.1 million of private label loans originated that were not yet sold or securitized. Servicing revenue net was $22.7M in Q3 ’22, and consisted of servicing revenue of $37.5M, net of amortization of mortgage servicing rights totaling $14.8 million.
While 2022 has seen growth in most categories, the pace of that growth has slowed in some categories compared to 2021, which was a big bounce from 2020. Total revenue is up 3.7%, and Net Income is flattish, but, Net Interest Income is up over 56%, and Distributable Earnings are up ~33% again so far in 2022, as it was in 2021.
Management has continued to grow the dividends – they’re up by ~12%, similar to 2021’s growth rate. The Dividend Payout ratio has held steady, at ~70% in 2022, in spite of a big jump in the share count, and the 12% dividend growth.
Dividends:
ABR has a strong five-year dividend growth rate of ~17%, with 10 straight years of dividend growth and 10 consecutive quarters of dividend hikes, a 33% increase, with the lowest payout ratio in the industry, and an annualized current dividend of $1.60.
ABR generated distributable earnings of $0.56/share in Q3 ’22, which is $0.16 in excess of its current $.40 dividend, representing a payout ratio of 71%.
At its 12/13/22 closing price of $14.08, ABR yields 11.36%.
Profitability and Leverage:
Q3 ’22 ROA and ROE were roughly in line with Q1 ’22 figures, and were both much higher than industry averages. Debt/Equity moved higher in Q3 ’22, as management continues to build up the portfolio.
With the growth in ABR’s portfolio, Interest Income has nearly doubled in Q1-3 ’22, to $628M, vs $321M in 2021. Q3 ’22 had $260M in interest income, more than 2X the Q3 ’21 total. With the big rise in interest income has come higher Interest expense, hence the lower EBIT/Interest coverage.
Debt and Liquidity:
As of 10/31/22, ABR had ~$500M in cash available, and an additional ~$375M of deployable cash in its CLO vehicles.
15% of ABR’s total debt is due in 2024, with 24% due in 2024.
However, ABR has good access to the capital markets, and management has continued to strengthen its funding sources in Q1-3 ’22: They closed three securitizations totaling $3.6B, increased its warehouse revolver capacity by $1.7B, and raised ~$400M through equity/debt offerings.
Performance:
ABR has outperformed the M-REIT industry over the past quarter, year, and year to date, but has trailed the S&P over the past month, quarter, year, and year to date. However, it has outperformed the M-REIT industry, the broad Real Estate sector, and the S&P on a total return basis over the past year.
Analysts’ Targets:
At $14.08, ABR is 6% below the street’s lowest price target of $15.00, and 15% the average $16.00 price target.
Valuations:
ABR’s trailing P/E is much lower than M-REIT averages, whereas its forward P/E is in line and its P/Book is a bit higher than average. As an industry leader, ABR often tends to get premium valuations vs. its peers.
Parting Thoughts:
ABR’s “overall spot net interest spreads were up to 1.86% at September 30th vs. 1.82% at June 30th, mostly due to positive effects of rising rates on our floating rate loan book.”
“97% of our balance sheet loan book is floating rate, while 88% of our debt contains variable rates, further enhancing the positive effect that interest income spreads as rates increase. In fact, all things remaining equal, a 1% increase in rates would produce approximately $0.10 a share and additional annual earnings.” (Q3 earnings call)
ABR has a long, positive history, having outperformed the NAREIT and M-REIT’s index since 2016. Additionally, insider ownership was 12% as of 9/30/22 – it’s good to see management with skin in the game.
We rate ABR a BUY.
All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.
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