Should You Buy Arbor Realty Stock as Mortgage Rates Fall?

Arbor Realty Trust ABR —  a multi-family mREIT company —  is in the limelight with the recent decline in mortgage rates. Mortgage rates fell to their lowest level in over a year, a positive development for the housing market. 

With a market capitalization of $2.54 billion, ABR is trading below its 50-day simple moving average and above its 200-day SMA. In June 2024, a bullish ‘Golden Cross' formed as the 50-day moving average crossed above the 200-day moving average.

50-Day & 200-day Moving Average

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In the past six months, the stock has gained 9.7% compared with the industry's growth of 0.8%.

Image Source: Zacks Investment Research

ABR consistently attracts investors looking for high-yield companies. However, concerns related to market volatility might be a concern. 

Currently, the stock is down 17.4% from its 52-week high of $16.35. Is now the right time to invest? To answer this, it's essential to delve into the details and evaluate various factors at play.

Arbor Realty: High-Income REIT Stock

This New York-headquartered REIT primarily focuses on originating and servicing loans for multi-family, single-family, and other commercial real estate assets. Mortgage REITs tend to be more volatile than equity REITs because they are tied to interest rates, but the high yields make them appealing to watchful investors. 

Income-seeking investors have a large appetite for REIT stocks, as U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends. As for ABR, the company has a record of paying monthly dividends.

The company has a track record of paying a quarterly dividend of 43 cents. ABR's current dividend yield is 12.86%. This is impressive compared with the industry's average of 11.6% and attracts investors as it represents a steady income stream.

ABR is not the only dividend-paying stock among Zacks Industry – REIT and Equity Trust. Stocks like Annaly Capital Management NLY and Ellington Credit Company EARN are also providing investors with solid dividend options.

NLY has an annual dividend yield of 13.2%, while EARN has a dividend yield of 14.3%.

Mortgage Rate Decline: A Positive Development

Long-term bond yields have declined due to expectations that the Federal Reserve will cut interest rates in September. This resulted in a decline in mortgage rates. The average rate on the 30-year fixed-rate mortgage dropped to 6.47% as of August 8 from 6.73% a week ago. A year ago, the metric averaged 6.96%.

Housing affordability challenges are expected to decline with lower mortgage rates. With rates trending lower and balanced supply/affordability playing out in the mortgage market, demand is set to increase in the coming days. With this turnaround, mortgage originations will likely witness a positive trend. This will reduce operational and financial challenges for mREITs like Arbor Realty and increase the gain on sale margin and new investment activity.

Also, rate cuts beginning in September will likely increase net interest spreads. This will ease earnings pressure for the ABR as it is facing rising funding costs. This will help the company to increase its dividend payout, which might look attractive to investors.

Q2 Result Not Impressive

ABR's financial results were subdued in second-quarter 2024. The company reported quarterly earnings of 45 cents per share, lower than 57 cents in the year-ago quarter. It posted revenues of $297.19 million in the second quarter, down 11.5% year over year.

Estimates Trend

Analysts' estimates have likely reflected these headwinds, with Arbor Realty's distributable earnings per share expected to decline 21.3% in 2024 and 1.9% in 2025, intimidating the sustainability of its dividends. 

In the past month, the Zacks Consensus Estimate for 2024 has moved marginally upward, while 2025 earnings have moved downward, reflecting analysts' mixed sentiments.

Estimate Revision Trend

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Near-term Concerns

ABR's credit risk has increased rapidly of late. As of Jun 30, 2014, the company reported a credit loss allowance of $238.9 million compared with $169 million reported in the same period of last year.

The company is also witnessing a rise in non-performing loans. As of Jun 30, 2024, it had 24 non-performing loans with an unpaid principal balance (UPB) of $676.2 million before related loan loss reserves of $28.1 million. This compared with 21 loans with a UPB of $464.8 million, before loan loss reserves of $32.9 million as of Mar 31, 2024.

Lofty Valuation

From a valuation standpoint, ABR Investment appears expensive relative to the industry. The company is currently trading at a stretched valuation with a forward 12-month P/TB multiple of 1.13X, above the industry average of 0.92X.

Price-to-Book TTM

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The stock is also trading at a premium compared with its peers. NLY and EARN have current forward 12-month P/E of 1.02X and 0.96X, respectively.

Consider Waiting for a Better Entry Point

The ultra-high dividend yield and high payout look eye-catching for most investors watching for high-income funds. Also, interest rate cuts will turn out to be favorable for ABR over the long term.

Yet, any volatility in the mortgage market, unfavorable change in the shape of the yield curve and deterioration of the generic financial conditions may affect the performance of the company's investments. Also, Its credit risk trajectory raises concerns with rapid growth in credit loss allowance and delinquent loans.

Also, the company's stretched valuation looks pricey compared with industry and peers.

Considering the pros and cons, we can conclude that investors should refrain from rushing to buy ABR right now, just banking on its lucrative dividend. Instead, they should analyze the upcoming interest rate changes and the mortgage market closely for a more appropriate entry point. The stock's Zacks Rank #3 (Hold) supports our thesis.

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