Last week the Federal Reserve hiked its benchmark interest rate by 0.75%. With inflation exploding higher, the Fed has, since February, pushed the rate from effectively zero percent to a current target of 2.25% to 2.50%.
You may have heard or read that these higher rates are a stiff headwind for tech company growth and profits. However, other industries will benefit from higher interest rates.
One CEO’s comments in particular, from a second-quarter earnings report, highlight where we need to look for stocks that benefit from higher interest rates…
Seeking Alpha included this information in its coverage of the Blackstone Mortgage Trust (BXMT) second-quarter earnings call:
“Amidst more challenging market conditions, we produced both earnings and portfolio growth, underpinned by continued credit performance and prudent balance sheet management,” said CEO Katie Keenan. “Given the earnings power of our floating rate portfolio and our strong liquidity position, we are well-positioned for the period ahead.”
Its 99.9% floating rate portfolio is positioned “to create inflation-protected earnings stream positively correlated to rising rates,” the company said. A 100 basis-point increase in base rates from the Q2 average would generate $0.15 per share of incremental earnings annually from the current portfolio.
Blackstone Mortgage Trust is a finance REIT that makes commercial property mortgages and holds the loans in its portfolio. Being a commercial mortgage lender is a crucial point. The companies in this group, typically organized as REITs, almost exclusively make variable rate loans with low loan-to-value metrics. For example, BMXT reported a 64% LTV for the most recent quarter.
Commercial mortgage lenders are the minority in the finance REIT sector, but if you want to invest in an REIT, make sure you look for commercial lenders. Residential mortgage REITs have very different business models that can be devastated by rapidly changing interest rates. Starwood Property Trust (STWD) is another commercial lender that is a recommended stock for my Dividend Hunter subscribers.
Companies in the Business Development Company (BDC) sector also make variable rate loans backed by equity and a legal requirement to keep leverage low. In my Monday, August 1, Market Cap article, I highlighted two BDCs—Ares Capital (ARCC) and Hercules Capital (HTGC)—that just increased their dividend rates. These companies are already seeing growing profits from the higher interest rate environment.
Rising interest rates offer both new challenges and new opportunities for investors. You want to be looking for companies that are lenders with variable rate loans while their financing costs are fixed, and they have locked in the recent low rates on their borrowed capital.
These are all high-yield stocks. Here are the current rates for each:
- BXMT: 7.9%
- STWD: 8.4%
- ARCC: 8.4%
- HTGC: 9.7%
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