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

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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