Today I want to go over some of the other real estate securities I like right now. I have a preference at the moment for commercial real estate, as the recovery here has lagged the residential price rebound. The economic recovery has been a slow grind and commercial has not seen the type of investor buying that has occurred in single-family homes or demand increase we have seen in multifamily housing. It is much better than it was back in 2009, but there's room for improvement.
Rating and research service Moody's points out on its website that commercial real estate prices are closely correlated with employment, and as I have mentioned, the employment recovery may have numbers and trend moving in the right direction, but stagnant wage growth indicates we are still far from a robust recovery.
As was the case with residential mortgages, one of my favorite commercial real estate investments is related to global private equity giant Apollo Global Management (APO). Apollo Commercial Real Estate Finance (ARI) is a REIT that originates and invests in commercial real estate-related mortgages and debt. As is the case with the residential mortgage REIT, the relationship with the alternative investment giant Apollo Commercial sees deals that competitors will never see and this gives them an edge, in my opinion. The commercial loan portfolio has a loan to value of less than 62%, so there is a huge margin of safety in the loan portfolio right now. In addition, almost 60% of the portfolio has adjustable interest rates, which reduces negative exposure to rising rates in the future. The shares trade right around net asset value and yield 10.29%.
I have owned shares of Arbor Realty Trust (ABR) since 2010 and have done pretty well with the stock over that time. Arbor is a REIT focused on multifamily and commercial real estate loans, preferred issues and direct equity investments. Book value has doubled during the time I have owned this REIT, and it is still about at 80% of book value. Management has taken steps to protect against rising rates and 70% of the loan portfolio is floating rate right now. The current yield on the shares is 7.44%, so it would fit very nicely into a growth and income portfolio. The folks at EJF Capital are some of the best real estate-related securities investors around and they own almost 10% of Arbor Realty, so we have pretty good company as fellow investors.
Ares Commercial Real Estate (ACRE) is a specialty finance company primarily engaged in principal lending and mortgage banking of commercial real estate investments. It finances several market segments including office, multifamily, industrial and retail properties. Ares describes itself as a long-term value-oriented investor and places a great deal of consideration to downside risk of each loan before including it in the portfolio.
Management sees a huge opportunity in the wave of refinancing that is starting now and will run through the end of 2017. As direct originators, they should be able to cherry-pick deals and add quality loans to the portfolio with very favorable pricing. Shares of the REIT trade at just 78% of asset value and yield 9%. It should provide high rates of return for patient investors as commercial real estate markets continue a long, slow recovery.
Stratus Properties (STRS) is a real estate development and management company whose properties are in Austin, Texas. The own the luxury hotel W in downtown Austin as well as Austin City Limits Live at the Moody's Center and Parkside Village, a 90,184-square-foot retail project in southwest Austin.
Stratus just adopted a five-year plan to create value for stockholders by developing certain existing assets and actively marketing other assets, including the W Austin Hotel and Residences project, for possible sale at appropriate values. Under the plan, any future new projects will be complementary to existing operations and will be projected to be developed and sold within a five-year time frame. At just 80% of book value, this has the potential to be a home-run real estate investment.
Real estate-related securities have been good to me over the years. I expect that these commercial real estate-related securities will help that profitable trend continue well into the future.
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