The Q3 earnings have gotten off to a good start, with approximately three-quarters of reporting companies beating their forecasts. This development follows the Q3 GDP report, which indicated an annualized economic expansion of 4.9% for the period.
One class of stocks likely to sees gains on this strength is the REIT segment, the real estate investment trust. As consumers start feeling the benefits of economic growth, particularly if interest rates are brought down next year, demand for real estate will likely see a solid boost.
REITs are also known as champion dividend payers, as they’re required to distribute up to 90% of their taxable income to shareholders – and dividends make a convenient mode of compliance.
Against this backdrop, Raymond James’ Stephen Laws, a 5-star analyst rated in the top 2% of the Street’s stock pros, has tagged two undervalued REITs featuring high-yielding dividends – 9% or better – as the right shares to buy.
According to TipRanks database, both of these stocks are also rated as ‘Strong Buys’ by the analyst consensus. Let’s see why they are drawing plaudits across the board.
Ladder Capital Corporation (LADR)
Ladder Capital, which holds a portfolio worth $5.5 billion, has built its business on a differentiated set of investments. Ladder primarily engages in senior first mortgage and floating-rate loan origination collateralized by commercial real estate assets.
The company also includes ownership and operation of commercial real estate in its activities, in addition to investments in investment-grade securities backed by first-mortgage loans on commercial real estate. Ladder Capital has been in business since 2008 and has securitized or sold $17.3 billion in loans since its inception.
As for financial results, Ladder recently reported its 3Q23 numbers – and it beat expectations. The company had $79.8 million at the top line, a figure that was up 14% year-over-year and $13.1 million above the forecast. The firm’s distributable earnings came to $39 million, or 31 cents per common share. This beat the forecast by a penny – and it fully covered the 23-cent common share dividend payment.
Ladder declared that payment on September 15 and sent it out on October 16; the annualized rate of 92 cents per common share gives a yield of 9%, more than enough to ensure a return even in today’s environment. The company has paid out a dividend every quarter since 2015.
Stephen Laws chimes in from Raymond James, and he likes what he sees here: “LADR reported solid 3Q results, as distributable earnings were in-line with our estimate while GAAP earnings beat our estimate. NII was largely in line with our expectations, with gains on sale of real estate driving the earnings beat… LADR’s balance sheet remains a strength with >$1 billion of liquidity, 81% non-mark-to-market financing, and $3 billion of unencumbered assets. Given the strong liquidity position, we expect LADR to continue selectively making new investments in coming quarters, including opportunistic repurchases of stock and/or debt.”
Looking ahead, Laws rates LADR shares as Outperform (i.e. Buy), and gives them a price target of $12.50, implying a one-year gain of ~20%. (To watch Laws’ track record, click here)
Overall, Ladder Capital’s stock gets its Strong Buy consensus rating from 4 recent analyst reviews, that break down 3 to 1 favoring Buys over Holds. The shares are trading for $10.46 and their $11.56 average target price points toward a one-year upside of 10.5%.
Franklin BSP Realty Trust (FBRT)
Sticking with the commercial REIT field, let’s now take a look at Franklin BSP. The company has originated or acquired a portfolio of commercial real estate debt instruments, mainly first mortgage loans. For the most part, these debt investments are secured by real commercial properties located in the US. The company has worked to maintain a diversified portfolio, based on varying property types and geographic locations. The portfolio also includes subordinate loans, mezzanine loans, and securities.
Franklin takes a flexible approach to its loan origination activities but adheres to a set of criteria. The company’s first mortgage loans typically fall within the $10 million to $250 million range and are made up to 80% of the property value. Terms are typically 3 to 5 years for transitional loans or 10 years for stabilized loans. The company will originate loans on any type of commercial property.
This strategy has proven successful. At the end of last month, Franklin reported a top-line income of $62.4 million, up 24% year-over-year, a solid increase that exceeded expectations by nearly $2 million. Franklin’s EPS came in at 43 cents per diluted share, by non-GAAP measures, a figure that was 2 cents ahead of the forecast. The company had $1.8 billion in liquidity on the books, including $411 million in cash and cash equivalents.
There is even better news for dividend investors. Franklin declared a 35.5 cent quarterly payout for common shareholders, which was last paid out on Oct 10. The annualized rate comes to $1.42 per common share, providing a substantial yield of 11%.
In top analyst Stephen Laws’ eyes, this adds up to a sound investment. He writes of Franklin, “FBRT reported solid 3Q results, as strong NII and lower than expected reserve expenses contributed to distributable and GAAP earnings beats. During 3Q, new originations were in line with our expectations, as FBRT continues to selectively originate new investments, while repayments were higher than we anticipated.”
These comments backed up Laws’ Outperform (i.e. Buy) rating, and his $15 price target suggests a one-year gain of 16%.
This is another stock with a Strong Buy consensus rating, based on 4 analyst reviews – and, like LADR above, those reviews include 3 Buys and 1 Hold. The average target price here is $15, matching Laws’, and the current trading price is $12.94.
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.