As a dividend investor, you want a company that accomplishes two things. One, it should pay out an attractive dividend yield. And two, it should have stable earnings, so that it can consistently make dividend payments you can count on.
Both these qualities are often found in real estate investment trusts (REITs). These are companies that pool together investor capital and use that money to invest in real estate assets. They give ordinary investors an opportunity to invest in real estate and grab a share of the profits, too. Because of their tax structure, REITs tend to pay out more attractive dividend yields than other companies.
One REIT that has caught my eye is Arbor Realty Trust (ABR 1.11%), a provider of real estate loans with a focus on multifamily housing. Arbor Realty posted strong results in 2020 despite a shaky economic backdrop, and it yields an attractive 7.5% dividend at Thursday morning's prices.
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Stability through its business model
Arbor Realty focuses on lending for multifamily housing, which makes up nearly 81% of its loan portfolio. The remainder of its portfolio is in assets like land, single-family rentals, healthcare, hotels, and other real estate types.
It focuses on multifamily loans because of the stability and high barriers to entry in the space. In recent earnings calls, management discussed the outperformance of multifamily loans, noting how these loans remain stable in a variety of market cycles. This is because housing is a critical part of our lives, and unlike retail or office space, demand for it is fairly constant. Not only that, but individuals may be less likely to take out mortgages during a recession, leading to an increased demand for rental units, which gives stability to multifamily lenders.
The company is a provider of bridge loans, which make up 92% of its $5.5 billion loan and investment portfolio. Bridge loans provide short-term financing to borrowers. Arbor Realty focuses on lending to those borrowers who look to buy property and improve its value over a short time period. Its weighted average months to maturity on its current loans is 16 months, much shorter than other loans in its portfolio, which range from 45 months to 75 months.
Steady growth in the business
Arbor Realty posted strong numbers last year amid the pandemic. The company grew interest income by 7.4% to $339 million last year. This, coupled with a reduction in interest expense, helped net interest income grow 31.4% year over year to $170 million. Bottom-line growth was strong too, with net income up 26.4% to $196 million and diluted earnings per share up 11% to $1.41.
These growth rates have remained steady for Arbor Realty in recent years, too. Since 2015, the company has grown net interest income at a compound annual rate of 21%. It has also grown other revenue, such as servicing income and other fees, at 57% compounded during that same time period. This all flowed down to the bottom line, where net income and diluted earnings per share have grown at annualized rates of 29% and 9%, respectively.
The company's stable earnings stem from steady growth of its loan originations and loan portfolio. In 2020, the company originated a record $9.15 billion in loans. This strong performance helped Arbor Realty grow its structured loan portfolio by 28% during the year. This is in line with recent performance, which has seen the portfolio grow at a compound annual rate of 29% since 2015.
A dividend you can trust
Arbor's loan growth has driven revenue and earnings stability -- key factors when it comes to dividend-paying stocks. Another factor dividend investors want to pay attention to is the payout ratio. This is simply the company's dividends per share divided by earnings per share, a helpful metric for showing how affordable its dividend is. A ratio of 100% means a company is paying out everything it earns (which is normally unsustainable).
Arbor Realty has a payout ratio around 70%, which would be high for most companies but is quite good in the REIT space. This solid figure gives investors added confidence in the company's ability to maintain and grow its dividends. In fact, management is quite proud that the company has increased dividends for nine consecutive years, a testament to the stability of the business model.
Arbor Realty is a solid REIT with a strong dividend yield of 7.5%. The company has done a stellar job of growing its loan portfolio in the attractive multifamily industry, which tends to perform well across market environments, making this a reliable dividend stock.
