The commercial real estate scene is changing as we head into the last quarter of 2024, thanks to the Federal Reserve's recent interest rate cuts. On Sept. 18, the Fed lowered the federal funds rate by half a percentage point to 4.75% to 5.0%. This move is timely, with about $1 trillion in commercial real estate debt due in 2025, including nearly 8% tied to struggling office spaces. 

The office market is dealing with high vacancy rates, which hit 13.8% in the second quarter of 2024. Despite these hurdles, REITs have been surprisingly resilient, outperforming other sectors since early June when rate cut expectations began to ramp back up. 

Investors are now eyeing high-yield opportunities in commercial real estate. Two REITs worth noting are Starwood Property Trust (STWD) and Ladder Capital (LADR). Both are consensus “buy”-rated, trading below Wall Street's average price targets, and offer yields over 7%. 

They might benefit from lower interest rates, easing some pressure on commercial real estate borrowers and lenders. Let's examine these two REITs to see what they bring to the table in this changing market.

#1. Starwood Property Trust (STWD)

Starwood Property Trust (STWD) is a major CRE player specializing in real estate and infrastructure. As one of the largest commercial mortgage REITs in the U.S., STWD focuses on originating, acquiring, financing, and managing commercial mortgage loans and other commercial real estate debt investments.

STWD stock has notched a 7.50% gain over the past 52 weeks. However, the year-to-date performance has been negative, with a pullback of 5.4%.

With a market capitalization of $6.29 billion, STWD trades at a forward P/E ratio of 10.96  compared to the sector median of 11.94, suggesting it might be undervalued. The company is committed to its shareholders, offering an attractive dividend yield of 9.23%,  with a quarterly dividend of $0.48 per share.

STWD's financial results for the second quarter of 2024 were strong, with GAAP net income of $77.9 million and distributable earnings of $157.8 million. The earnings per share of $0.48 met expectations, and the company maintained a solid liquidity position of $1.2 billion, with $4.5 billion in unencumbered assets. 

This performance highlights STWD's diversified investment strategy, with over 40% of its assets now outside the commercial lending book. This diversification has helped STWD perform well despite the challenges in the real estate market. Looking ahead, the company's embedded gains of over $4.00 per share in its owned property portfolio offer potential upside for investors.

Recently, STWD made a significant investment in Echelon Data Centres, committing about $850 million for a 50% stake. This deal values Echelon at €2.5 billion and positions STWD to capitalize on the growing data center market. Additionally, the launch of Starwood Digital Ventures shows the company's commitment to expanding its global data center investment strategy, with $8 billion in assets already under management in this sector.

Analysts are generally positive about STWD, with a consensus "moderate buy" rating. Out of 9 analysts, 5 recommend a “strong buy,” 1 suggests a “moderate buy,” and 3 advise a “hold.” The mean target price of $22.56 suggests a 13.6% upside potential from the current price.

#2. Ladder Capital (LADR)

Ladder Capital Corp (LADR) is a top player in the commercial REIT space. They focus on originating and investing in various commercial real estate and related assets. The company is divided into three main segments: loans, securities, and real estate, offering flexible financing for properties that are being transformed or repositioned.

LADR stock is up 15.8% over the past 52 weeks, though the shares have pulled back about 2% year to date. 

With a market capitalization of $1.43 billion, LADR trades at a lower forward P/E ratio of 9.69 compared to the sector median, suggesting it might be undervalued. The company is committed to its shareholders, offering a dividend yield of 7.74% with a quarterly payout of $0.23 per share.

LADR reported strong financial results for the second quarter of 2024, with GAAP income before taxes of $31 million and earnings per share of $0.26. Distributable earnings were $40.4 million, or $0.31 per share, beating analysts' expectations. The company's solid performance, low debt, and significant cash reserves position it well for future growth.

Recently, LADR successfully issued a $500 million unsecured corporate bond, which led to positive ratings from all three major rating agencies. This move brings LADR closer to achieving an investment-grade credit rating, potentially lowering borrowing costs and improving financial flexibility. 

CEO Brian Harris is pleased with the quarter's results and the company's strengthened balance sheet, highlighting LADR's readiness to seize new investment opportunities.

Analysts are very positive about LADR, with a consensus "strong buy" rating. Out of 7 analysts, 4 recommend a “strong buy,” 2 suggest a “moderate buy,” and 1 advises a "hold." The mean target price of $13.36 suggests an 18.5% upside potential from the current price.

Conclusion

In conclusion, both Starwood Property Trust (STWD) and Ladder Capital (LADR) are looking like solid bets for investors seeking high-yield REITs in anticipation of continued Fed rate cuts. These companies have shown resilience in a challenging market, boasting attractive dividend yields and strategic positioning in the commercial real estate sector. With STWD's expansion into data centers and LADR's improved credit rating outlook, both REITs seem well-equipped to capitalize on future opportunities.