This has been a year of the have and have-nots for sure. The S&P 500 is up about 12% year to date. However, just five stocks made up 22% of that gain, while the other 495 made up a paltry 5%. Some stay-at-home companies have rocketed to incredible highs while mega-cap energy companies have been hammered and removed from the Dow Jones industrial average. One thing is for sure. The potential for 2021 is huge, and underperforming asset classes could benefit in a big way.

In a new research report, Raymond James takes a long look at the mortgage real estate investment trusts (REITs), an arena that has been battered this year. One reason we took the deep-dive is that they all pay superior income, and if distributions were going to be cut in most cases they would have been by now.

We screened the Raymond James mortgage REIT coverage universe and found five stocks rated at Strong Buy or Outperform. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Ares Commercial Real Estate

Raymond James rates this top stock a Strong Buy, and investors can acquire shares before the next payment date. Ares Commercial Real Estate Corp. (NYSE: ACRE) is a specialty finance company that originates and invests in commercial real estate (CRE) loans and related investments in the United States. It provides a range of financing solutions for the owners, operators and sponsors of CRE properties.

The company originates senior mortgage loans, subordinate debt products, real estate preferred equity investments, mezzanine loans and other CRE investments, including commercial mortgage-backed securities (CMBS).

In late October, the company reported generally accepted accounting principles (GAAP) net income of $14.9 million, or $0.44 per diluted common share, and core earnings of $10.5 million, or $0.31 per diluted common share, for the third quarter of 2020.

Investors receive a massive 11.86% distribution. Raymond James has an $11 price target, and the Wall Street consensus target is $10.40. The last trade on Thursday was reported at $11.13.

Arbor Realty Trust

The analysts have set an Outperform rating on this solid company. Arbor Realty Trust Inc. (NYSE: ABR) invests in a diversified portfolio of structured finance assets in the multifamily, single-family rental and commercial real estate markets.

The company operates in two segments: Structured Business and Agency Business. It primarily invests in real estate-related bridge and mezzanine loans, including junior participating interests in first mortgages, and preferred and direct equity, as well as real estate-related notes and various mortgage-related securities.

Arbor Realty offers bridge financing products to borrowers who seek short-term capital to be used in an acquisition of property; financing by making preferred equity investments in entities that directly or indirectly own real property; mezzanine financing in the form of loans that are subordinate to a conventional first mortgage loan and senior to the borrower’s equity in a transaction; and junior participation financing in the form of a junior participating interest in the senior debt.

In addition, it underwrites, originates, sells and services multifamily mortgage loans through conduit/CMBS programs.

Shareholders receive a 9.23% distribution. The Raymond James price target is $14, while the consensus target is $12.88, and the most recent close was at $13.32.

This one could be a home run for investors if the credit markets can remain stable, and it is Strong Buy rated. Ladder Capital Corp. (NYSE: LADR) is a diversified, fully-integrated commercial lending and investment company, primarily engaged in sourcing, underwriting and origination for commercial loans for its own account and for sale into the secondary market.

Ladder invests opportunistically in commercial mortgage loans, CMBS and commercial real estate, and it provides a full spectrum of asset management services. Ladder is internally managed and completed a REIT conversion in 2015.

Last month, Ladder Capital announced operating results for the quarter ended September 30, 2020. GAAP income before taxes for the three months ended September 30, 2020, was $21.4 million, and diluted earnings per share was $0.14. Core earnings were $19.7 million, or $0.16 of core earnings per share.

The distribution yield is 9.14%. The $11.50 Raymond James price target compares to the $10.30 consensus figures. The shares closed at $8.75 on Thursday.

NextPoint RealEstate Finance

This is another one on which the analysts have set a Strong Buy rating. NextPoint RealEstate Finance Inc. (NYSE: NREF) is focused primarily on originating, structuring and investing in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multifamily CMBS.

The company reported total profit of $11.5 million in its third quarter, which equates to a profit of $0.52 per share. The company posted revenue of $10.5 million in the period. Its adjusted revenue was $4.4 million.

Investors are paid a substantial 11.11% distribution. Raymond James has an $18 price target which compares to the inline $18 consensus goal. Shares ended Wednesday at $15 apiece.

Starwood Property Trust

Rated Outperform by Raymond James, this company is run by real estate legend Barry Sternlicht. Starwood Property Trust, Inc. (NYSE: STWD) operates through the following segments.

The Commercial and Residential Lending segment originates, acquires, finances and manages commercial and residential first mortgages, subordinated mortgages, mezzanine loans, preferred equity, CMBS, residential mortgage-backed securities and other real estate and real estate-related debt investments.

The Infrastructure lending segment originates, acquires, finances and manages infrastructure debt investments. The Property segment acquires and manages equity interests in commercial real estate properties, including multifamily properties.

The Investing and Servicing segment manages and works out problem assets; acquires and manages unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and re-securitization transactions; originates conduit loans for the primary purpose of selling these loans into securitization transactions; and acquires commercial real estate assets, including properties acquired from CMBS trusts.

Investors receive an $11.01 distribution. Raymond James has set a $21 price target. The consensus target is $17.86, and Starwood Property Trust stock closed at $17.44.

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While the price targets are not sky-high, for income and conservative investors, the potential for strong total return is one major reason to own the mortgage REITs. Plus, with most distribution cuts out of the way and the prospect for improvement in 2021, these all make sense for those looking for income and a degree of safety.

It is important to remember that mortgage REITs do not pay taxes at the corporate level. Investors are taxed at their individual tax rate for the ordinary income portion of the dividend. When the shares eventually are sold, the difference between the share price and reduced-tax basis is taxed as a capital gain.

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