6 Commercial Mortgage REITs With Huge Dividends Can Benefit From Rising Interest Rates

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One main reason that Americans are suffering from the worst inflation rate in 40 years is that the Federal Reserve waited way too long to finally start raising interest rates from what was effectively zero. That mistake, which Treasury Secretary Janet Yellen finally admitted recently, combined with massive, and in many cases wasteful, government spending has beleaguered consumers struggling to fill gas tanks and pay for groceries.
One industry that may benefit from the rising interest rates is the commercial real estate (CRE) mortgage real estate investment trusts (REITs). Until recently, the specter of rising rates was a negative, after years of lower pandemic-driven rates. The analysts at Raymond James think the tide has turned for the group, and noted this in a recent research report:

Over the past two years, the CRE REIT companies’ earnings have benefited from in-the-money LIBOR floors in pre-COVID vintage loans. As a result, rate increases year-to-date have largely been a headwind for portfolio returns. However, we believe the second quarter is the inflection point. Given portfolio characteristics at March 31 and quarter-to-date rate increases, we believe higher rates are now a tailwind for the majority of these companies, and we expect higher rates to be a tailwind for all ten companies in our coverage before year-end given the current interest rate outlook.

We screened the 10 companies in the firm’s coverage universe that were either Strong Buy or Outperform rated, searching for those paying the highest dividends. We found six that look like solid ideas for growth and income investors searching for reasonably safe total return. It is important to remember, though, that no single analyst report should be used as a sole basis for any buying or selling decision.

ARES Commercial Real Estate

Investors can acquire shares of this top company before its next payment date. ARES Commercial Real Estate (NYSE: ACRE) is a specialty finance company originating and investing in CRE loans and related investments in the United States. It provides a range of financing solutions for the owners, operators and sponsors of CRE properties.

The company originates senior mortgage loans, subordinate debt products, real estate preferred equity investments, mezzanine loans and other CRE investments, including commercial mortgage-backed securities (CMBS).

Raymond James report said, “Given benefits of higher rates, we expect ARES Commercial Real Estate to continue paying the quarterly supplemental dividend for the foreseeable future.”

Investors receive a 9.00% distribution. The $16.50 Raymond James price target is the same as the Wall Street consensus figure. The stock closed on Thursday at $14.66.

BrightSpire Capital

BrightSpire Capital Inc. (NYSE: BRSP) operates as a CRE credit REIT in the United States, and it offers a very solid dividend. The company focuses on originating, acquiring, financing and managing a portfolio of CRE senior mortgage loans, mezzanine loans, preferred equity, debt securities and net leased properties.
The company qualifies as a REIT for federal income tax purposes. The company generally would not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its stockholders. The company was formerly known as Colony Credit Real Estate.

The Raymond James analyst noted, “We expect BrightSpire Capital earnings to increase going forward due to the benefits of higher rates as well as higher portfolio leverage.”

Investors receive an 8.44% dividend. Raymond James has a $12.50 price target, while the consensus target is $11.20. The stock ended Thursday’s trading session at $9.01.

Granite Point Mortgage Trust

This stock recently bounced smartly off its 52-week low and looks to have solid upside potential. Granite Point Mortgage Trust Inc. (NYSE: GPMT) is a REIT that originates, invests in and manages senior floating-rate commercial mortgage loans and other debt and debt-like commercial real estate investments in the United States.

The company provides intermediate-term bridge or transitional financing for various purposes, including acquisitions, recapitalizations and refinancing, as well as a range of business plans, including lease-up, renovation, repositioning and repurposing of the commercial property. As of December 31, 2021, its investment portfolio includes 105 commercial real estate loan investments.

The analysts said this about positive developments at the company:

While we expect Granite Point Mortgage Trusts’ rate sensitivity to hit an inflection point in the third quarter, we expect distributable earnings to trough in the second quarter. Higher rates should become a tailwind later this year, but we expect recent actions to have a more immediate benefit. In April, the company closed or was in process of closing ~$200 million of new investments, repaid the remaining $100 million of the higher-cost senior secured term loan, and refinanced legacy funding vehicles. These actions are expected to add ~$0.12 per share to NII annually. Additionally, deployment of excess liquidity created from these recent actions could generate an additional ~$0.08–$0.12 per share annually.

Investors receive a 9.04% dividend. The Raymond James target price is $15. The consensus target is $13.75, and the stock closed at $11.06 on Thursday.

KKR Real Estate Finance Trust

This is a very well-known name across Wall Street, and it has outstanding upside potential and very deep pockets. KKR Real Estate Finance Trust (NASDAQ: KREF), a mortgage REIT, focuses primarily on originating and acquiring senior loans secured by CRE assets.
The company engages in the origination and purchase of credit investments related to CRE, including leveraged and unleveraged commercial mortgage loans and CMBS. The company has elected to be taxed as a REIT and would not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its stockholders.

The research report said, “We expect gradually increasing distributable earnings as KKR Real Estate Finance Trust benefits from higher rates and slightly higher portfolio leverage.”

Shareholders pocket an 8.34% distribution. Raymond James has set a $25 target price. That compares with the $23.25 consensus target and Friday’s close at $20.63.

Ladder Capital

This could be a home run for investors if the credit markets can remain stable. Ladder Capital Corp. (NYSE: LADR) is a diversified, fully integrated commercial lending and investment company, primarily engaged in sourcing, underwriting and origination for commercial loans for its own account and for sale into the secondary market.

Ladder invests opportunistically in commercial mortgage loans, CMBS and CRE, and it provides a full spectrum of asset management services. Ladder is internally managed and completed a REIT conversion in 2015.

Raymond James had this to say:

We believe LADR’s portfolio is more positively correlated to higher rates than peers, largely due to low pre-COVID loan exposure and benefits of ~$1.6 billion of fixed-rate unsecured debt. We also expect distributable earnings excluding gains to increase in 2022 and 2023 as portfolio returns benefit from increasing rates and higher leverage.

The current distribution is 6.93%. The price target at Raymond James is $14, which is higher than the consensus target. The shares closed on Thursday at $11.55.

TPG RE Finance Trust

This stock has been punished and has made a strong sideways move since late 2020. TPG RE Finance Trust Inc. (NYSE: TRTX) is a CRE finance company that originates, acquires and manages commercial mortgage loans and other CRE-related debt instruments in the United States.
The company invests in commercial mortgage loans; subordinate mortgage interests, mezzanine loans, secured real estate securities, note financing, preferred equity and miscellaneous debt instruments; and CRE collateralized loan obligations and CMBS secured by properties primarily in the office, multifamily, life science, mixed-use, hospitality, industrial and retail real estate sectors.

TPG RE Finance Trust qualifies as a REIT for federal income tax purposes. It generally would not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its stockholders.

The analysts had this to say:

We expect the company’s distributable earnings to trough in the second and third quarter before increasing in the fourth quarter and 2023. Near-term benefits of refinancing higher cost capital is being offset by some margin compression on loans with in-the-money LIBOR floors. Given the current interest rate outlook, we expect the company to cross the inflection point in the third quarter with higher rates being a tailwind by year-end. As more pre-COVID vintage loans repay, we expect future interest rate sensitivity disclosures to show an increasingly positive correlation to higher rates.

TPG RE Finance Trust expects to record a gain of $0.16 per share in 2Q related to the April sale of the lone REO asset on March 31. We exclude this gain from our distributable earnings estimate.

Investors receive a 9.07% distribution. Raymond James’s $16 target price is well above the $13.70 consensus target and the most recent close at $10.59.

These six market leaders in the commercial real estate arena have all been hit hard this year and are offering the best entry points in some time. It is important to note that these are not residential REITs, which many feel are close to, if not already in, bubble territory. Their total return potential is heightened by the strong distributions, which pay investors to wait while the market improves. Also note that distributions from REITs may contain return of capital.

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