Real estate investors need funding to acquire, develop, and renovate multifamily properties. While traditional banks provide commercial multifamily loans, they don't always have the right financing solutions to meet a real estate investor's specific needs. That has opened the door for non-bank financial companies to provide financing to the sector.
One of the leaders in making loans to the multifamily industry is Arbor Realty Trust (NYSE: ABR). Here's a closer look at the real estate investment trust (REIT).
Arbor Realty Trust profile
Arbor Realty Trust is a mortgage REIT that finances commercial real estate. While it focuses on multifamily properties, the REIT also funds loans backed by student housing, land, healthcare facilities, offices, hotels, single-family rentals (SFR), and other real estate types. The REIT's business model consists of three platforms:
- Balance-sheet loan origination: The REIT underwrites loans that it holds on its balance sheet. It earns strong returns and can sell them to a GSE/Agency once eligible.
- Government-Sponsored Enterprise (GSE)/Agency loan origination: It focuses on originating small-balance loans ($1 million to $8 billion) for Fannie Mae, Freddie Mac, FHA, and other entities.
- Servicing: It provides loan servicing to a roughly $25 billion multifamily loan portfolio. GSE's hold most of these loans.
This diversified business model provides Arbor Realty Trust with multiple income streams, including recurring long-dated cash flow from servicing fees, escrow revenue, and net interest income, and one-time origination fees. That sets it apart from many other mortgage REITs, which primarily buy loans and make money on the spread between the loan's interest rate and where they can borrow money.
As of the end of 2020's third quarter, 80% of the company's balance sheet portfolio was in multifamily housing, with the other 20% spread across the following property types:
- Land: 5% (of its structured loan portfolio)
- Healthcare: 4%
- Student housing: 3%
- Office: 3%
- Hotel: 3%
- SFR: 1%
- Other: 1%
Most of the loans Arbor Realty Trust provides are bridge financing, which is shorter-term loan options until a borrower can secure more permanent funding. Those loans made up 91% of its portfolio. It also provides mezzanine financing (4%), preferred equity (4%), and other funding types (1%).
While multifamily loans are its bread-and-butter business, Arbor Realty Trust has expanded to other loan opportunities to drive growth. It has a proprietary single-family residential platform that provides bridge, permanent, and build-to-rent lending products. The REIT also has a residential banking joint venture that provides it with additional income diversity.
The mortgage REIT focuses on financing properties in the following geographic locations:
- New York: 16% of its loan portfolio.
- Texas: 12%.
- Georgia: 9%.
- Florida: 8%.
- Illinois: 6%.
- Pennsylvania: 5%.
- Alabama: 5%.
- North Carolina: 5%.
- Connecticut: 5%.
- California: 4%.
- All others: 25% (mainly the South and Midwest regions at 12% and 7%, respectively, with no other state making up more than 4% of its loan portfolio).
As that geographical breakdown shows, the company has a heavy concentration in the Sun Belt area, a red-hot market for multifamily property growth in recent years.
Arbor Realty Trust is part of the Arbor family of companies founded by Ivan Kaufman in 1983. He's the CEO and a major shareholder of the mortgage REIT. The group also includes Arbor Commercial Mortgage, Arbor Residential Mortgage, Arbor Management Acquisition Company, real estate crowdfunding platform ArborCrowd, and other investment ventures, mostly in the real estate sector.
Arbor Realty Trust news
Arbor Realty Trust delivered strong results in 2020 despite headwinds from the pandemic. The company originated a record $9.15 billion of loans in 2020. That enabled it to grow its structured portfolio (balance sheet) by 28% and its agency serving portfolio by 23%, significantly increasing its long-dated recurring cash flows.
The commercial mortgage REIT also successfully raised capital to expand its capacity and reduce costs. It issued $93 million of common stock and $275 million of 4.5% senior notes, injecting new equity into its business and allowing it to replace higher-cost debt. The company also improved its funding sources. It increased its warehouse capacity (a line of credit given to a loan originator), added a new CLO vehicle (collateralized loan obligation, which is a single security backed by a pool of debt), and completed its first private-label securitization (securitized mortgages that don't conform to GSE criteria).
Arbor Realty Trust stock price
Arbor Realty Trust's differentiated mortgage REIT business model has paid big dividends for its shareholders over the years: