The end-of-year reports came from executives at lenders that provide financing for some of the more troubled commercial real estate.
The December quarter wasn't an easy one for mortgage real estate investment trusts such as Starwood Property Trust Inc. and Blackstone Mortgage Trust Inc. Earnings reports by about a dozen members of this small-cap group detailed loss reserves, rating downgrades and foreclosures on office buildings and apartments.
But with very few exceptions, cash flow covered the dividend. Shares of industry leader Starwood rose 2.5 percent to $19.93 on Thursday after the company reported unexpectedly strong year-end results, reporting cash earnings of 58 cents a share, beating the consensus estimate of 48 cents. Even Arbor Realty Trust, which has been rife with short selling, showed better-than-expected interest income and improving delinquent loan levels in its Feb. 16 report.
Mortgage REIT stocks are sensitive to interest-rate fears. They thrived during the era of ultra-low, easy monetary policy but have struggled over the past few years as rising vacancies and higher borrowing costs hurt customers. In the final months of 2023, the stocks rose 30% as Treasury yields fell from 5%. Now they're falling again amid uncertainty about when the Federal Reserve will cut the federal funds rate.
As a result, mREIT Group's stocks are trading at about 83% of book value and an average yield of 11%, or 7 percentage points higher than the 10-year Treasury bond, says BTIG analyst Sarah Barcomb, who gives Starwood-Blackstone mREITs a “buy” rating.
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“If the market has good reason to believe the Fed has an incentive to reverse course around mid-year, the current multiple of 0.83 could be an attractive entry point,” she wrote in a note this week.
One concern with mREITs are the floating-rate loans that borrowers took out when interest rates were low. The REITs also require borrowers to buy derivatives or guarantees that effectively limit how variable the interest rates on their loans can be. Some REITs have loans maturing this year that may have to have their interest rate caps changed at a cost that distressed borrowers cannot afford.
The threat of such a reset has prompted some investors to short mREITs like Blackstone Mortgage, believing lenders would be forced to cut their dividends. But in its December-quarter report released Feb. 14, Blackstone said its cash “distributable” earnings of 69 cents a share were 111% of its dividend. The mREIT told investors that most borrowers had been able to replace their expiring interest rate caps.
Not all mREITs have been able to maintain their dividends. The other mREIT that released its December earnings report on Thursday was Ares Commercial Real Estate.
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Commercial real estate. Ares cut its quarterly dividend by 25 percent to 25 cents a share after the lender's distributable earnings fell to 20 cents a share in the September quarter from 25 cents a share. Shares fell 6.6 percent to $7.65 on the news.
But even though Ares Commercial Real Estate's shares are down 25% this year, management has told investors it sees big opportunities to resolve issues within its portfolio and expand lending as banks remain on the sidelines as lenders.
Contact Bill Alpert at william.alpert@barrons.com.