A commercial mortgage REIT that earns 9%
Earlier this year, I wrote an article on Forbes.com on Commercial Mortgage REITs and explained that “the risk with balance sheet lenders is relatively straightforward – the risk that loans don’t work as expected”.
Unlike more volatile residential mortgage REITs, pure play balance sheet lenders are not exposed to the volatility and disruption of securitization, making them more attractive and less likely to reduce their dividends.
In my newsletter, Forbes Real Estate InvestorI’m focusing on a variety of US REITs and becoming more bullish on the “pure play” balance sheet lender platform. There are a number of mortgage REITs that I include in the research lab, including Blackstone Mortgage (BXMT), Starwood Property (STWD), Capital Scale (LADR), TPG Real Estate (TRTX), and KKR Real Estate (KREF).
Many investors own mortgage REITs because they typically offer a higher yield than traditional equity REITs. It is therefore important to take a close look at the fundamentals to determine if the return is safe and the earnings reliable.
KKR Real Estate
Even if Kohlberg, Kravis Roberts & Co. LP (KKR) is known for its private equity platform, with over $ 190 billion in assets under management today, there is a smaller version of the company known as KKR Real Estate Finance (KREF ).
In May 2017, KREF successfully closed an IPO, raising around $ 226 million in net proceeds and the externally managed pure play balance sheet lender (by KKR) has since become a higher yielding alternative that now has a dividend yield of 9%. .
Although external management is not the most ideal structure in the REIT industry (mainly due to conflicts of interest) there are also advantages to having a “big brother” relationship, KREF is managed externally by a subsidiary of KKR, a leading global investment firm. with a history of over 40 years and a diverse mix of investments across multiple asset classes.
In an interview with Forbes, the KREF management team explained, “We cannot stress enough the value of the “K” in KREF. Our affiliation with KKR, one of the world’s largest asset managers with more than $ 176 billion in assets under management as of March 31, 2018, offers us several competitive advantages.
More recently, what caught my attention was the KREF share offering of 4.5 million shares leading to a pullback of $ 20.63 per share to a recent close of $ 19.50 per share. action. This recent move suggests that the market is still trying to find a foundation for KREF, and of course, that leads me to the current dividend yield.
Like I said, mortgage REITs are yield-based alternatives and I include them in my portfolio for a sort of anchor and buoy strategy. Most of my REIT picks are equity REITs, but tend to spice up portfolio performance by including a number of reliable mortgage REITs.
Looking back, KREF is now reporting 9.02%, one of the highest in the commercial mortgage REIT peer group. Although KREF is not the most productive of the mix, as KREF is primarily (99%) a first rank guaranteed pure play (first mortgage) lender, the income is much more reliable.
KREF targets senior secured loans of $ 50 million to $ 400 million with capital allocations spread across the top 30 US markets. KREF believes it has “created a defensively positioned portfolio” and the company “will continue to target the highest quality opportunities, trading additional yield against credit quality”.
As stated, I am now a shareholder of KREF, and I was impressed with the performance, the loan portfolio is performing 100% with no delinquent or impaired loans.
More recently, Texas Teachers exited its stake in KREF, managed by KKR, but this was not indicative of the insider ownership maintained by KKR and the four decades of investment experience that form the cornerstone of the Advantage. total in the commercial real estate credit sector. I maintain a Buy on KREF shares.
For more updates and research on all REITs in my smart REIT lab.
I own stocks in BXMT, LADR, TRTX and KREF.