Real estate investment trusts (REITs) are a go-to option for investors seeking exposure to real estate. With their impressive long-term returns, liquidity, high dividend yields, and ability to boost diversification, REITs have garnered widespread appeal among investors.
However, given that REITs don’t fare as well in a high interest rate environment, the Fed’s fight to tame inflation over the past two years has been a significant headwind for the group. Now, with a cooling inflation trend confirmed by June’s unexpectedly mild Personal Consumption Expenditures (PCE), investors this week are expecting Fed Chair Jerome Powell to provide some strong hints about an upcoming interest rate cut in September.
Rising rate-cut optimism has triggered positive sentiment toward REITs, with the Global REIT iShares ETF (REET) recently climbing into positive territory on a YTD basis. With real estate emerging as the best-performing S&P sector over the past month, here are three stocks investors can scoop up to capitalize on the rising REIT momentum.
REIT #1: Starwood Property Trust
Headquartered in Greenwich, Connecticut, Starwood Property Trust, Inc. (STWD) is a powerhouse in real estate and infrastructure finance. Backed by the global reach of Starwood Capital Group, and valued at a market cap of around $6.3 billion, Starwood Property Trust leverages its elite global network to identify and execute high-return investments across its chosen sectors.
Shares of Starwood Property have dipped 3.5% over the past 52 weeks, but bounced back with a 6.1% return over the past month.
Starwood Property is dedicated to providing investors with attractive and consistent returns, primarily through dividends. On July 24, the company declared a quarterly dividend of $0.48 per share, payable to its shareholders on Oct.15. Its annualized dividend of $1.92 translates to an impressive 9.6% dividend yield.
From a valuation standpoint, the stock is trading at 10.42 times forward earnings, which is lower than its industry peers.
Shares of Starwood Property rallied after the company reported its Q1 earnings results on May 8. Total revenue of $523.1 million in Q1 jumped 6.7% annually, primarily driven by interest income from loans and investment securities. Distributable earnings of $0.59 per share crushed Wall Street’s forecasts by a 26.9% margin.
During the quarter, Starwood Property Trust issued $600 million in senior unsecured sustainability notes due in 2029, marking the industry's first such issuance in over two years. The offering was seven times oversubscribed, which highlights strong interest. The REIT’s liquidity reached a record high of $1.5 billion as of March 31.
Starwood Property is slated to announce its Q2 earnings results before the market opens next Tuesday, Aug. 6.
Overall, STWD stock has a consensus “Moderate Buy” rating. Out of the nine analysts covering the stock, five recommend a “Strong Buy,” and the remaining four have a “Hold” rating.
The average analyst price target of $21.94 indicates a potential upside of 9.2% from the current price levels. The Street-high price target of $24 suggests that STWD could rally as much as 19.5%.
REIT #2: Ladder Capital
Founded in 2008, New York-based Ladder Capital Corp (LADR) has emerged as one of the top players in commercial real estate investment. With a focus on safeguarding shareholder capital while delivering attractive, risk-adjusted returns, Ladder Capital excels in providing flexible capital solutions and underwriting commercial real estate through its sophisticated platform.
Valued at around $1.5 billion by market cap, shares of Ladder Capital have gained roughly 9.2% over the past 52 weeks. Over the past three months, the stock is up 14.8%, outpacing the broader S&P 500 Index’s ($SPX) gain of 7.4% during the same time frame.
LADR currently pays a quarterly dividend of $0.23 per share, and the company’s annualized dividend of $0.92 translates to a 7.58% dividend yield.
In terms of valuation, the stock is trading at 11.19 times forward earnings, lower than the industry median.
On July 25, LADR gained 2.5% as investors reacted to its better-than-expected Q2 earnings results. The REIT reported revenue of $76.7 million, exceeding Wall Street’s expectations by roughly 16%.
Distributable earnings during the quarter stood at $0.31 per share, edging past the $0.29 consensus estimate. As of June 30, the company’s cash and cash equivalents swelled to $1.2 billion, compared to $1 billion recorded in the final quarter of fiscal 2023.
CEO Brian Harris specifically called out “the execution of our seventh unsecured corporate bond issuance and the resulting positive actions received from all three rating agencies, moving Ladder one step closer to an investment grade credit rating.”
Overall, LADR stock has a consensus “Strong Buy” rating. Out of the seven analysts covering the stock, four recommend a “Strong Buy,” two suggest a “Moderate Buy,” and one has a “Hold” rating.
The average analyst price target of $12.86 is nearly flat with LADR’s current price levels. However, the Street-high price target of $13.50 suggests that the stock could rally as much as 10.4%.
Stock #3: Ellington Financial
Connecticut-based Ellington Financial Inc. (EFC), casts a wide net in the investment world, spanning everything from mortgage loans and mortgage-backed securities to collateralized loan obligations and strategic investments. Managed by Ellington Financial Management LLC, an affiliate of Ellington Management Group, this powerhouse specializes in diverse financial assets, offering a dynamic approach to investing.
Valued at a market cap of around $1.1 billion, Ellington’s shares have pulled back 5.1% over the past 52 weeks, but gained 13.4% over the past three months.
On July 8, the company announced a monthly dividend of $0.13 per share, set to be distributed to its shareholders on Aug. 26. Ellington’s annualized dividend of $1.56 translates to a 12.25% dividend yield.
Priced at 8.86 times forward earnings, the stock trades at a discount to its industry peers.
Ellington stock rallied after its Q1 earnings results on May 7, even as the results missed Wall Street’s expectations Total interest income rose 2.9% sequentially to $101.5 million, while adjusted distributable earnings rose slightly year over year to $0.28 per share.
During the quarter, the company’s investment portfolio delivered $43 million in income to common stockholders, with $40.9 million coming from its credit strategy and $2.1 million from the agency strategy. As of March 31, the company held cash and cash equivalents of $187.5 million, alongside approximately $544.5 million in unencumbered assets.
Ellington Financial is scheduled to report its fiscal Q2 earnings results after the market closes on Tuesday, Aug. 6. Analysts are looking for a profit of $0.35 per share on $112.93 million in revenue, on average.
Longer term, analysts tracking EFC predict the company’s profit will climb 2.1% year over year to $1.46 per share in fiscal 2024 and rise another 16.4% annually to $1.70 per share in fiscal 2025.
EFC stock has a consensus “Strong Buy” rating overall. Among the seven analysts offering recommendations for the stock, five suggest a “Strong Buy,” one advises a “Moderate Buy,” and the remaining one gives a “Hold” rating.
The average analyst price target of $13.68 indicates a 5.8% potential upside from the current price levels. The Street-high price target of $14.50 suggests that EFC stock could rally as much as 12.1%.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
