The year-end reports have come in from a cadre of lenders who hold loans on some of the more troubled kinds of commercial real estate.
The December quarter wasn’t easy for mortgage real estate investment trusts like
and
Earnings calls among the dozen or so members of this small-cap group detailed their loss reserves, downgrades, and foreclosures on office buildings and apartments.
In all but a few cases, however, cash flows covered their dividends. Shares of sector leader Starwood rose 2.5% Thursday, to $19.93, after it reported surprisingly good year-end results, with cash earnings of 58 cents that beat the consensus forecast for 48 cents. Even the heavily-shorted
showed better-than-expected interest income in its Feb. 16 report, with improved levels of delinquent loans.
The mortgage REIT stocks are sensitive gauges of anxiety about interest rates. The shares flourished in the easy-money era of ultralow interest rates, then struggled as rising vacancies and borrowing costs afflicted their customers over the past couple of years. The mREITs bounced 30% in the last months of 2023, when Treasury yields retreated from 5%. The stocks have sunk again amid uncertainty over when the Federal Reserve will cut the fed-funds rate.
That leaves the
group trading at about 83% of book value, and at an average yield of 11%. That is 7 percentage points above a 10-year Treasury, notes BTIG analyst Sarah Barcomb. She has Buy ratings on the Starwood and Blackstone mREITs.
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“If the market is given sufficient reason to believe the Fed has motivation to pivot around midyear,” she wrote in a note this week, “we think the current 0.83x multiple could represent an attractive entry point.”
One concern about mREITs are the floating-rate loans that borrowers took when rates were low. The REITs require their borrowers to also purchase derivatives or guarantees that effectively cap the floating rates on the loans. There are loan vintages maturing this year at some REITs whose rate caps might have to be replaced at a cost that hard-pressed borrowers couldn’t bear.
The threat of those rate resets have moved some investors to sell short mREITs like Blackstone Mortgage, on a bet that the lenders will have to cut their dividends. But with its Feb. 14 report on the December quarter. Blackstone said that its cash “distributable” earnings of 69 cents a share were 111% of its dividend. Most borrowers were able to replace their expiring rate caps, the mREIT told investors.
Not every mREIT has been able to maintain its dividend. Another December earnings report on Thursday came from
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Commercial Real Estate. The lender’s distributable earnings declined to 20 cents a share from 25 cents in the September quarter, so Ares cut its quarterly dividend by 25%, to 25 cents a share. The stock fell 6.6% to $7.65 on the news.
But even though shares of
are down 25% this year, management told investors that it sees strong opportunities to expand lending, as it works through the problems in its portfolio and banks remain on the sidelines as lenders.
Write to Bill Alpert at william.alpert@barrons.com
