The current market conditions have presented challenges for REIT (Real Estate Investment Trust) investors, reminiscent of the 2008 financial crisis. Arbor Realty (NYSE:ABR) is among the companies affected, despite reporting positive fiscal 2023 third-quarter earnings. Despite the market downturn, Arbor has maintained its dividend at $0.43 per share, resulting in an attractive 13.7% annualized dividend yield. However, Arbor has seen a decline of approximately 30% from recent highs, reflecting a broader dip in the REIT sector, influenced by the Federal Reserve’s recent rhetoric of sustained low interest rates. While the Fed has not indicated an interest rate hike at the upcoming November meeting, investors have been adjusting their expectations and repricing REITs accordingly.
The hawkish stance of the Federal Reserve, combined with an uncertain economic environment characterized by high volatility, has led to US 10-year Treasury yields briefly surpassing 5% for the first time since 2007. JPMorgan’s Jamie Dimon has described the current period as one of the most perilous in decades, with potential inflationary pressures arising from ongoing geopolitical tensions. The market is currently pricing in a 99.9% chance that the Fed will maintain rates at the November FOMC meeting. However, the future performance of REITs hinges on inflation moving more significantly towards the Fed’s 2% target.
Dual Beats, Distributable EPS, And The Dividend Coverage
Arbor Realty’s third-quarter performance showcased impressive growth. Interest income reached $336.47 million, a 30% increase from the previous year, resulting in a net interest income of $107.29 million, an 8% growth. This performance translated to diluted earnings per share (EPS) of $0.41, a $0.05 increase from the same period last year. Notably, Arbor surpassed analyst consensus estimates for both net interest income and EPS, exceeding expectations by $8.95 million and $0.06 per share, respectively. Despite recent market volatility, Arbor’s distributable EPS of $0.55 covered the dividend by 128% with a payout ratio of approximately 78%.
Arbor continues to generate earnings that exceed quarterly dividends, showcasing its ability to navigate macro headwinds successfully. The REIT also saw steady growth in its book value, reaching $12.73 per share at the end of the third quarter, a 2% increase compared to the previous fiscal year. The strength of Arbor’s book value over the past three years, despite market disruptions and volatility, demonstrates its resilience. Despite this, investors may not see another dividend hike until the Fed adopts a more dovish stance. This uncertainty remains as the Fed has yet to announce its plans for the remaining FOMC meetings in 2023, but a dovish pivot and an end to further rate hikes could potentially drive optimism and upside for REITs.
Book Value Strength And A Rare Discount
Arbor Realty’s ability to maintain book value strength sets it apart from other companies in the mREIT space. Historically, Arbor has rarely traded at a discount to book value. Although the current 13-cent discount to book value is considered rare, further downward movement is possible, as seen during the early stages of the 2020 pandemic. Despite headwinds, such as $70 million in CECL reserves across its platform over the past nine months, Arbor has continued to experience growth in book value per share.
During the third quarter, Arbor saw agency loan originations of approximately $1.15 billion, a decrease from the previous quarter’s $1.42 billion. The company’s investment portfolio stood at $13.1 billion at the end of the third quarter, with an all-in yield of 9.12%, a slight increase from the previous quarter. Despite the positive results, the current macroeconomic backdrop will continue to impact near-term performance, and Arbor remains cautious in this climate.
Overall, Arbor Realty Trust presents an intriguing opportunity for investors in the current market environment. Despite recent market volatility, the company has showcased strong earnings growth and book value resilience. While uncertainties remain, a pivot towards a more accommodative Federal Reserve stance has the potential to drive positive sentiment and performance for REITs in the future.
