A Wall Street axiom advises investors, “Don’t fight the Fed.”
When it comes to real estate investment trusts (REITs), that’s never been more profound than it was during 2022. Those who practice a buy-and-hold strategy saw some of their REIT investments decline by as much as 50% or more, depending on the subsector and quality of the individual REIT.
One of the hardest-hit groups last year was mortgage REITs (mREITs) because those stocks are extremely interest-rate sensitive. When interest rates increase, the spreads between the money they borrow and lend decline, and that puts a damper upon subsequent profits.
But 2023 has brought renewed hope for a tapering of Federal Reserve rate hikes, and with economic measures like the consumer price index (CPI) trending lower, the yield on the 10-year U.S. Treasury bond has declined and taken mortgage rates down with it. You can see how the monthly CPI has trended lower over the last two months:
It’s no surprise that some mREITs are starting to break out of their long-term downtrends and have been performing better recently. That’s especially good news for income investors because some mREITs tend to have high-yielding dividends. But what good does a high yield do if the stock loses 40% of its value?
Look at three mREITs that have been outperforming peers within the past few days and have also done well for the last month. This burgeoning relative strength could indicate that these issues are about to break out with big gains over the weeks ahead, providing inflation remains tempered.
Sachem Capital Corp. SACH is a Branford, Connecticut-based mREIT that specializes in bridge, new construction, fix and flip and refinance loans.
On April 12, after the March CPI report was released, Sachem Capital gained 1.88% on the day and climbed above its 50-day moving average on the weekly chart. Sachem Capital has also recently formed a golden cross (50-day moving average crossing above the 200-day moving average) on the daily chart. Sachem Capital is up 6.59% over the past four weeks. The 52-week price range is $3.16 to $6.02.
On April 5, Sachem Capital announced a quarterly dividend of $0.13, in line with the previous dividend, payable on April 24 for shareholders of record as of April 17. The annual dividend of $0.52 yields 13.68%.
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Acres Commercial Realty Corp. ACR is a Uniondale, New York-based mREIT that specializes in originating, holding and managing mortgage loans and other debt instruments for commercial real estate (CRE).
Acres gained 2.88% after the CPI report and is up 6.09% over the past four weeks. Many insider buys have occurred since the beginning of January. This week, Eagle Point DIF GP LLC, a 10% owner of Acres Commercial Realty, purchased 1,466 shares at an average price of $20 each.
On March 2, Acres Commercial Realty reported fourth-quarter 2022 earnings per share (EPS) of $0.60, trouncing estimates of $0.46. Revenue of $23.24 million was also far better than the estimate for $18.55 million.
In early March, JMP Securities reiterated its Market Outperform rating and maintained a $14 price target on Acres Commercial Realty. Ten days later, Raymond James maintained an Outperform rating on Acres and raised the price target from $13 to $13.50.
One caveat to note with Acres Commercial Realty is that it suspended its stock dividend after 2019 and has yet to reinstate it. It pays an 8.625% cash dividend on its Series C Cumulative Redeemable Preferred stock.
Chicago Atlantic Real Estate Finance Inc. REFI is a Chicago-based mREIT that specializes in making senior secured loans to state-licensed cannabis operators in limited-license states. Unable by law to procure financing from banks, cannabis operators can only go through private lenders such as Chicago Atlantic to get startup capital.
Chicago Atlantic gained 2.26% after the CPI report and has risen 4.74% over the past four weeks.
On March 15, Chicago Atlantic declared a quarterly dividend of $0.47, payable on April 14 to shareholders of record as of March 31. The annual dividend of $1.88 yields 13.46%, but the payout ratio is now over 100%, so going forward that puts the dividend at higher risk for reduction.
Keep in mind that mortgage REITs can be volatile, so investors are urged to perform their due diligence before making any mREIT purchases and be well diversified in their total portfolio allocations.
Over the past five years, private market real estate investments have outperformed the publicly traded REIT market by about 50%. Check out Benzinga’s Real Estate Offering Screener to discover the latest passive real estate investments.
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