The past few months have seen a lot of concern expressed about the commercial real estate markets. Sam Zell, one of the most successful real estate investors of all time, has said that he thinks we are very late in the cycle and has been selling some of his properties in recent months.
Real estate firm CBRE Group said in its 2016 outlook that “Global commercial real estate investment markets are expected to remain active in 2016, but the pace of growth is anticipated to slow after six years of recovery and price appreciation.”
It may well be the case that commercial real estate growth slows but no one is calling for a price collapse or severe downturn. We just may see prices rise slower or even flatten somewhat.
Under that scenario, those real estate investment trusts that engage in commercial real estate lending should do very well providing high yields and the potential for capital appreciation as the valuation gap closes.
CRE Lenders to Buy: Apollo Commercial Real Est. Finance Inc (ARI)
Dividend yield: 11.4%
Apollo Commercial Real Est. Finance Inc (NYSE:ARI) remains my favorite pick in this space. The firm is associated with the giant alternative investment and private equity manager Apollo Global Management LLC (NYSE:APO).
It’s a REIT that originates, acquires, invests in, and manages commercial first mortgage loans, subordinate financings, commercial mortgage-backed securities and other commercial real estate-related debt investments in the United States.
Earlier this year, ARI announced it would buy Apollo’s mortgage REIT, Apollo Residential Mortgage Inc (NYSE:AMTG), and sell the mortgage-related assets to deploy those funds into commercial real estate loans.
CFO Megan Gaul discussed the dividend on the most recent conference call saying:
“Given the strength of our results to date and our previously stated goals to establish a consistent quarterly dividend that is covered earnings and meets the REIT distribution requirements, we are confident in ARI’s ability to earn the quarterly dividend in 2016.”
The shares are trading at just 80% of book value and are yielding 11.4%.
CRE Lenders to Buy: Ares Commercial Real Estate Corp (ACRE)
Dividend yield: 8.2%
Ares Commercial Real Estate Corp (NYSE:ACRE) originates, manages and services a portfolio of commercial real estate debt-related investments. Like Apollo, it is affiliated with a large private equity and alternative asset management firm; in this case, it’s Ares Management LP (NYSE:ARES).
The relationship with Ares means that it has access to 55 corporate credit analysts to help evaluate potential loans and investment opportunities. This REIT focuses on the office and multi-family and it has not had any delinquencies, defaults or impairments since opening its doors in 2011.
The stock is trading at 86% of book value and currently yields 8.52%. Management apparently thinks the shares are cheap, as they repurchased 130,000 shares in the first quarter of the year.
CRE Lenders to Buy: Arbor Realty Trust Inc (ABR)
Dividend yield: 8.3%
I have owned shares of Arbor Realty Trust Inc (NYSE:ABR) for years and I anticipate that I will own it for many more years.
Arbor invests in a diversified portfolio of multifamily and commercial real estate-related bridge and mezzanine loans, preferred equity investments, mortgage related securities and other real estate related assets. Arbor recently announced that it would acquire the agency platform from its manager, Arbor Commercial Mortgage, LLC for $250 million.
CEO Ivan Kaufman told investor on the most recent conference call that the firm expects this transaction to generate significant benefits, including “immediate accretion to our earnings and dividends, significant diversification and greater predictability to our earnings.”
ABR stock is currently trading at just 77% of book value and yields 8.3%.
As of this writing, Tim Melvin was long ARI and ABR. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.
