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Arbor Realty stock has outperformed recently. Surprised?
Investors in multifamily mREIT Arbor Realty Trust, Inc. (NYSE:ABR) are probably looking forward to the next one FOMC Rate Decision on the afternoon of June 12. Fed Chairman Jerome Powell to welcome the press conference and communicate the highly anticipated summary of the Fed’s economic projections, also known as the dot plot. Investors want to know the Fed’s updated assessment of how close we are to a potential first-order Fed cut. Despite this, I I improved my grade on ABR in my previous article from March 2024. I assessed ABR’s bullish bias, which has remained resilient, supported by a relatively attractive valuation. ABR outperformed the S&P 500 (SP500) on a total return basis since my update, justifying my optimism.
Financial sector stocks reacted negatively over the last few weeks. Even though the S&P 500 has recovered and hit a new high this month, the Financial Select Sector SPDR ETF (XLF) is still slightly above the lows last seen in early May 2024. As a result, financial stocks have been hit hard, with previous investors likely taking profits and reducing their exposure. Therefore, I believe a more defensive posture is appropriate, as financial sector investors await more clarity from Powell before deciding their next step.
Arbor Realty Investors Are Already Cautiously Positioned
ABR faces interest rate headwinds as a constituent of the financial sector. Arbor Realty First Quarter Results Released early May 2024 highlighted challenges attributed to the Fed’s hawkish positioning. Concerns about a possible increase in delinquencies have also deepened. Short seller Viceroy Research has also stepped up his allegations against Arbor Realty. As a reminder, ABR responded to negative publicity in early May, denouncing what he considered to be “opinions based on selective data.” However, I believe that Arbor Realty did not respond directly to Viceroy’s allegations, which could have brought more clarity to the market. Despite this caution, Arbor Realty emphasized its confidence in its “strong performance demonstrated in its public disclosures and audited financial statements.”
Arbor Realty First Quarter Results Released said the packages remained resilient, helping ABR beat Wall Street’s distributable earnings estimates. Additionally, management highlighted that it executed $1.9 billion in loan modifications, including requirements for borrowers to infuse new capital. Furthermore, Arbor Realty performed admirably in its agency business, which accounted for 40% of its net revenue in the first quarter. Additionally, Arbor Realty experienced strong growth in the single-family rental sector, raising $172 million in financing and $412 million in commitments. ABR also tapped into growing opportunities in construction loans, which could generate “unlevered returns of 10% to 12% initially, then mid-to-high returns” with leverage.
Attractive 13% ABR dividend yield
Therefore, ABR appears well positioned to meet near-term challenges from the Fed and the Viceroy, supported by ABR’s very attractive dividend yield by almost 13%. Arbor Realty’s commitment to defending its stock with share repurchases below its book value should reassure investors of ABR’s confidence in its liquidity profile. ABR said it had “adequate liquidity” to thrive in the current environment. Additionally, its dividend payout ratio of approximately 90% in the first quarter should reassure investors of ABR’s commitment to providing a sustainable payout.
Arbor Realty’s Distributable Profit vs. dividend estimates (TIKR)
Despite Arbor Realty’s confidence, Wall Street estimates suggest a more challenging environment for ABR to replicate its distributable earnings profile over the past two years. Additionally, ABR warned investors of potentially higher delinquencies in the future, which would require setting aside higher reserve levels. As a result, I believe Wall Street’s caution is warranted, suggesting that a possible dividend cut cannot be ruled out.
However, ABR is valued at a forward dividend yield of 12.8%, well above its 10-year average of 9.8%. Therefore, the market has likely reflected these concerns, thereby mitigating the potential for significant downside volatility risks.
Is ABR stock a buy, sell or hold?
ABR Price Chart (Weekly, Medium Term, Dividend Adjusted) (TradingView)
The price action of ABR (dividend-adjusted) indicates that investors have held their positions resiliently. Over the past year, ABR has managed to make higher lows, corroborating its medium-term bullish bias.
ABR’s short-term interest rate of almost 40% could also attract more intense short covering if the market anticipates a more positive response to the Fed press conference.
As a result, I have not evaluated the red flags regarding ABR’s price action, which suggests substantial concerns regarding Viceroy’s claims. I believe the market likely reflected significant pessimism, as evidenced by ABR’s relatively attractive dividend yield. Management’s ability to beat Wall Street estimates also helped improve buyer confidence in Arbor Realty. ABR price action is aligned with robust buying sentiment at crucial support levels, corroborating confidence to buy into ABR dips.
Recent profit-taking seen at ABR and its financial sector peers has helped dampen some optimism in the sector. Therefore, I believe that a potentially more dovish stance from Powell and his FOMC colleagues could help ABR continue its recovery.
Note: Maintain purchase.
Important Note: Investors are reminded to exercise due diligence and not rely on the information provided as financial advice. Consider this article as completing your required research. Please always apply independent thinking. Note that notation is not intended to time any specific entry/exit at the time of writing unless otherwise noted.
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