Mortgage-focused real estate investment trusts (REITs) are known for their eye-popping dividend yields. Many companies in the sector currently offer payouts above 10%. However, those higher yields come with more risk. Several mortgage REITs have had to slash or suspend their dividends in the past, while many more have struggled to consistently increase their payouts.
The mortgage REIT sector's checkered past makes Arbor Realty Trust (ABR 1.12%) stand out. The relatively unknown REIT has defied the odds by steadily increasing its high-yield dividend over the last several years.
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An impressive streak
Arbor Realty Trust hit a milestone earlier this year. The REIT delivered its 10th straight year of dividend growth -- impressive considering that many of its rivals have reduced their dividends in recent years. That's due to the impact of changing interest rates on their financing strategies.
In addition to that excellent annual dividend growth streak, Arbor has strung together a nice series of quarterly increases. It recently delivered its eighth straight quarterly increase. Overall, it has boosted its dividend by 27% during those two years. This growth has helped push its dividend yield to an eye-catching 9.2%.
The secret to Arbor Realty's success
Arbor Realty has a differentiated business model compared to its peers. Most mortgage REITs buy long-duration debt that they finance with short-term borrowings to take advantage of the spread between long- and short-term interest rates. However, this net interest margin can contract during periods of volatility, causing many mortgage REITs to suspend or reduce their dividends.
Arbor takes a different funding approach. Its balance-sheet strategy focuses on using long-term debt to fund loans it originates. Because of that, changes in interest rates don't have as big an impact on its net interest margin.
Another key aspect of Arbor's strategy is its focus on funding the multifamily sector. These properties are historically very recession-resistant, which reduces the default rate. Because of that, loans Arbor holds tend to remain current.
Furthermore, the REIT focuses on originating loans instead of buying them from other lenders. That enables it to earn high-margin loan origination fees, especially on loans it sells to government agencies. Another aspect of its business is servicing loans it holds and those it sells to agencies. This servicing business generates recurring income streams. Arbor's diversified business model provides lots of steady income to support its dividend.
Arbor can then build off that stable foundation and grow its business by originating more loans to hold and sell. That helps increase its recurring income streams from loan servicing and interest income. For example, Arbor originated $2.83 billion of loans during the first quarter, growing its portfolio by 17%. It now directly holds $14.2 billion of debt, yielding 4.38%, up from $12.2 billion of debt yielding 4.26% since the start of the year. In addition, the REIT has a fee-based servicing portfolio approaching $27 billion that supplies recurring income.
Given the continued strong demand for housing in the country, Arbor should be able to keep growing its loan portfolio. Developers and real estate investors will need financing to build and renovate apartment communities and build more single-family rental homes, another area of focus for Arbor.
This high-yielding REIT is worth considering
Most mortgage REITs are too risky for income-seeking investors because of their fluctuating payouts. However, Arbor's business model has proved successful in this volatile industry, enabling it to steadily increase its payout over the past decade. With demand for housing still strong, it stands out as a compelling option for yield-seeking investors.
