At one point last year, shares of Arbor Realty Trust (NYSE: ABR) lost more than 70% of their value. While the mortgage REIT (real estate investment trust) has since pulled out of its tailspin, such a steep dive likely has investors wondering if the company is in some trouble. Here's a look at what caused its plunge and whether those troubles are now in the rearview mirror.
What drove last year's plunge
The pandemic caused significant disruption to the financial services, real estate, and credit markets during the early part of last year. As a result, commercial mortgage REITs like Arbor Realty Trust faced severe liquidity constraints. They experienced reduced available liquidity and significant margin calls on assets and securities financed through short-term repurchase facilities.
These issues impacted Arbor during the first quarter. It reported $104.5 million, or $0.80 per share, of credit losses on its portfolio. It had to record a loss provision on some loans and derivative instruments associated with loans it hadn't yet sold or securitized. As a result, its book value per share declined from $9.73 at the end of 2019 to $8.68 at the end of the first quarter.
Meanwhile, the company had to take steps to shore up its balance sheet and liquidity. It needed to address $95 million in margin calls early in the year. Arbor also issued senior unsecured notes so that it could repay secured debt. Finally, the REIT improved its funding sources by adding a new collateralized loan obligation vehicle and its first private-label securitization. Those moves got it through the rough patch while providing capital to grow.
An epic recovery
Arbor's moves to bolster its financial position paid big dividends last year. They gave it the financial flexibility to take advantage of improving market conditions later in the year. As a result, it originated a record $9.15 billion of loans, 20% above 2019's total. That enabled the mortgage REIT to increase its dividend by 10%, marking its ninth straight year of dividend growth. Those factors helped Arbor generate an industry-leading 7% total shareholder return for the year. That vastly outperformed all other commercial mortgage REITs, which produced negative returns last year.
According to CEO Ivan Kaufman, Arbor has continued to succeed in 2021, delivering "truly remarkable" first-quarter results. It grew its loan portfolio by 14%, thanks to making $1.09 billion of loan originations, while book value improved by another 5% to $10.86 per share. That allowed it to increase its dividend for the fourth straight quarter and by 13.3% over the past year. Meanwhile, it raised $158 million of additional equity capital in the first quarter, followed by $175 million of debt capital and another $111.9 million of equity in the second quarter. This capital infusion positions Arbor for future growth as it has the flexibility to continue expanding its loan origination capabilities and portfolio.
The troubles have faded away
There's no doubt; Arbor Realty Trust ran into some problems during the early days of the pandemic. However, it was able to meet its margin calls and secure new funding sources. That enabled it to capture growth opportunities that emerged later in the year. Meanwhile, with ample capital, the mortgage REIT has the funds to continue expanding its loan originations, portfolio, and dividend. Adding that to its nearly 8%-yield, this mortgage REIT stands out as an intriguing option for income-seeking investors.