I’ve recently discussed the slow-but-steady improvement in commercial real estate and how it will drive solid returns for commercial finance REITs.
While commercial real estate faces some headwinds from a sluggish economy and somewhat weak job market, we’re still seeing signs of continued improvement and growth across much of the segment.
This represents an enormous opportunity for investors in commercial finance REITs — a particular segment of the REIT arena that can throw off extremely high dividend yields.
In addition to financing new projects there is more than $1 trillion in commercial loans that need to be refinanced over the next several years, and as a result, commercial finance REITs will see a lot of high-quality lending opportunities as a result.
So not only do you have the opportunity to grab some dividend yields north of 7% … but these REITs also have significant potential for asset appreciation over time.
High-Yielding REITs: Arbor Realty Trust (ABR)
ABR Dividend Yield: 8.6%
Arbor Realty Trust (ABR) is a longtime consumer finance REIT of mine. I have owned it for some time, and I hope to own it for many years to come.
Arbor Realty invests in multifamily and commercial real estate-related bridge and mezzanine loans, but it also makes preferred and direct equity investments in commercial real estate projects.
Arbor has been focusing on decreasing its debt costs and seeking out the most attractive deals in a market awash in liquidity right now.
ABR stock is trading at less than 80% of book value, and the company just increased its quarterly payout by 15.4% to 15 cents per share. At current prices, that translates to a yield of 8.6%!
High-Yielding REITs: Ares Commercial Real Estate (ACRE)
ACRE Dividend Yield: 8.8%
Ares Commercial Real Estate (ACRE) is a direct originator and servicer of loans for commercial real estate owners and operators that is externally managed by a subsidiary of Ares Management (ARES), a leading global alternative asset manager.
ACRE also has a mortgage banking division that originates and services multifamily residential mortgage loans, senior housing and healthcare facilities loans.
CEO Todd Schuster seems to be very confident his firm is on the right track, as he was a buyer of Ares Commercial shares last month — and if there’s one thing I love, it’s a vote of confidence from a corporate insider.
The stock is trading at 81% of net asset value and offers a fantastic 8.8% dividend yield at current prices.
High-Yielding REITs: Blackstone Mortgage Trust (BXMT)
BXMT Dividend Yield: 7.1%
Blackstone Mortgage Trust (BXMT) originates and purchases senior loans collateralized by properties in North America and Europe. The REIT is managed by Blackstone (BX), the alternative asset manager that is one of the largest real estate investors in the world, boasting $134 billion of owned real estate and another $93 billion of real estate-related debt in its portfolio.
BXMT looks to make or acquire loans on all types of commercial real estate in the $50 million to $500 million range, with a loan value of between 60% and 80%. Typically the loans are adjustable, charging Libor plus 3.5% or higher depending on the risk level of asset. The average loan length is fairly short, with a term between three and five years.
In April, Blackstone announced that it would be taking advantage of General Electric’s (GE) exit from the lending business by purchasing a $4.6 billion portfolio of senior loans from GE.
While BXMT trades at 1.2 times book value, I think that’s offset by the high-quality, fairly low-risk nature of the loan portfolio.
At current prices, BXMT has a dividend yield of just more than 7%.
As of this writing, Tim Melvin was long 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.