2 Brand New REITs That Have Strong Dividend Potential

| About: Silver Bay (SBY)

I recently wrote this article pertaining to the new mortgage lending rules established by the CFPB. While the rules will help Bank of America (NYSE:BAC) re-grow their mortgage business with much less risk, there will be "fallout" on the consumer side.

BAC could certainly grow and reward shareholders, but there will be many potential home-buyers that will simply not qualify for a mortgage. With a 43% debt-to-income ratio, elimination of "no-doc" loans, and intensified financial scrutiny, many mortgage applications will be turned down. Banks will want to have less risk, better returns, and very few potential foreclosure problems.

This scenario, along with the enormous supply of foreclosed homes on the market now, and sitting on bank balance sheets, has spawned a new REIT sector for renting homes to consumers. In the last 60 days, 2 new REITs have gone public, and offer investors a "ground floor" opportunity to profit from this business sector: Silver Bay Realty Trust (NYSE:SBY) and Altisource Residential (NYSE:RESI).

The New Rental REIT

These REITs have been established to focus on buying distressed (foreclosed) homes, and/or participate in the purchase of short-sales from the banking sector. With so much "shadow inventory" on the banks balance sheets, they have been actively seeking bulk buyers to sell this inventory to. In that way, a bank like BAC can move the inventory off of their balance sheet without having to place them on the market.

This obviously helps the banks move forward as well as keeping the flood of foreclosed homes out of the mainstream "for sale" market.

The companies in this new business will buy these homes at a deep discount compared to actual construction costs. In many cases, a 40% discount is common. The actual numbers might look like this:

Original Home Price: $200k: Mortgage Balance: $175k: Bulk Purchase Price: $105,000

Using the numbers I have estimated, not only is there the potential for these homes to increase in value over time, but the home rental potential becomes VERY lucrative.

With the REITs borrowing money at current interest rates, (let's assume a 3.5% 30-year fixed rate for now) the payment on a $105k mortgage would be about $800 per month including a 2% property tax cost. Based on the size of the home and its location would determine the fair rental price. Across the nation, rental prices are up over 5.4% in just the last year (the 5th year in a row of increased prices) while home prices have either been stagnant or declining (until quite recently).

As the mortgage requirements get stiffer, demand for rental homes will continue to increase. A quick look at Zillow shows an average rental price for a 3 bedroom, 2 bath home (not an apartment) to be approximately $1,600/month depending on location. That would mean a profit margin of 50% based on selling price ($800/month), or a 100% mark-up. As you can see, this can be quite profitable on a large scale.

The new REITs are still too new to have an established dividend yield, but based on the IRS guidelines, both companies will be required to pay at least 90% of net income as dividends to shareholders. Since the profit potential is quite high, and the risks are relatively low (remember the REITs will already own the homes and have a potential to profit from their sale as well as rental rates vs. turnover), these 2 stocks are very interesting investments. As far as I am concerned, they could potentially become dividend winning "opportunities."

The Initial Facts

Since both of these 2 new companies have gone public, there is not much information on them aside from their initial filings. Silver Bay Realty filings can be found here and Altisource Residential can be found here.

Both companies are spin-offs of already existing companies. SBY is a spin-off of Two Harbors (NYSE:TWO) and RESI is a spin-off of Altisource Portfolio Solutions (NASDAQ:ASPS). Having the management teams of two established and successful public companies is a wonderful positive for potential investors.

The 2 websites for these companies are: Altisource Residential and Silver Bay Realty Trust.

Both companies went public in mid-December 2012 and I would consider them as unproven risk stocks right now. Both of the companies share prices have risen above their IPO prices, and have recently been rated as neutral by a few of the first analysts to initiate coverage on each of them.

Citigroup (NYSE:C), Bank of America and Wells Fargo (NYSE:WFC) have already begun lending to these companies, and an anticipated dividend yield of between 5-7% returned to shareholders is being conservative in my opinion.

My Opinion

For income-seeking investors looking for new opportunities in business segments that appear to be largely untapped, both SBY and RESI warrant some consideration for investors.

Since this is a new business with very little documentation of success, I would not put more than 2-3% allocation of funds into either of these stocks until some results are in. That being said, they do seem like attractive opportunities to me.

Please do your own research prior to making any decisions about these stocks, or any stocks, and do not rely on my own opinions articulated here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.