This CEO Just Went Off on His Stock’s Value – and He’s Right

Income Investing

When markets are disrupted, good companies get taken down along with the ones that are facing problems.

The banking sector “crisis” pulled down the share prices of companies across the financial sector. Finance REITs were included, and this group faces continued challenges due to potential commercial mortgage challenges.

Recently the CEO of a favorite finance REIT made it clear that shares of his company are significantly undervalued…

Arbor Realty Trust (ABR) is a commercial finance REIT. The company focuses on financing solutions for multi-family and single-family rental properties. During the bank/financial stock selloff that started in March, the Arbor Realty Trust share price declined by one-third.

On May 5, Arbor released its 2023 first-quarter results. During the management conference call with Wall Street analysts, Arbor CEO Ivan Kaufman explained why he thinks the market is wrong about the ABR stock price. Here are some of the high points, quoted from the earnings call transcript:

After coming off our best year as a public company in 2022, we’ve had a tremendous start to 2023 with another exemplary quarter as our diverse business model continues to offer many significant advantages over everyone else in our peer group, with a premium operating platform with multiple products that generate many countercyclical income streams, allowing us to consistently produce earnings that are well in excess our dividend. This has allowed us to increase our dividend another 5% or $0.02 a share to $0.43, reflecting our 11th increase in the last 13 quarters, or 40% growth over that time period, all while maintaining the lowest payout ratio in the industry, which was 68% for the first quarter.…

Additionally, and very significantly, we’ve grown book value per share by 45% over the last three years from just under $9.00 a share to almost $13.00 a share, even with 11 dividend increases during that period.…Yet we still trade at similar dividend yields and price-to-book values as the rest of the space despite our unquestionable outperformance, which is why we strongly believe we are completely undervalued and there has never been a better time to make a significant investment.

ABR shares currently trade at about $12.20. That number is down 30% from the 52-week high of $17.43. Over the last year, the company increased the dividend from $0.37 to $0.42, including a two-cent raise announced with the earnings release. ABR currently yields almost 14%.

Historically, this well-run, strong-growth finance REIT has been priced to yield around 8%. To return to that yield, the share price would need to climb to $21. That’s assuming no further dividend increases, which is highly unlikely.

When a sector or the whole market gets hammered by the investing public, stock market disruptions take down the share prices of good companies along with those that trigger a selloff. If you understand that great companies will take advantage and thrive, you can back up the truck and load up on shares. Arbor Realty Trust is arguably the best of the commercial finance REITs, and I expect the company to take advantage of the current commercial mortgage stresses and be able to accelerate its growth.

I agree with CEO Kaufman. Back up the truck for ABR.