I am doing my usual early morning reading & research looking for good investment ideas and possible article topics. I couldn't help but notice that two of my favorite high-yield plays under $10 a share are moving up today on positive news.
I still find both plays selling at attractive valuations. I am also allocating more into my income portfolio as we head into 2014. After this year's stellar returns in the market, I believe 2014 will bring much more tepid results for myriad reasons. Therefore I think dividend payments will be a bigger part of overall portfolio performance in the coming year. These two large dividend payers should be considered by income investors looking to implement a similar strategy.
RAIT Financial Trust (RAS) is a multi-strategy commercial real estate company incorporated as a real estate investment trust. The company operates in three core areas. It originates commercial real estate loans, purchases commercial real estate properties and invests in commercial mortgage backed securities. It is different than most mortgage REITs as it owns and operates properties. This provides it with management fees as well as greater earnings stability and less volatility.
The News: The company is commencing an offering of 20-year convertible notes. The proceeds will be used to pay off a capped call transaction. The move is expected to reduce common share dilution upon the potential conversion of the notes. The stock is up more than 2% in early trading on the announcement.
Valuation: One of the most attractive parts of RAIT's investment thesis is the 7.3% annual dividend yield at current prices. After surviving a near-death experience during the financial crisis, the company has raised its dividend payout some 150% since 2012.
In addition last month the company reported solid quarterly results that saw FFO (Funds from Operations) increase some 10% Y/Y and revenue also easily beat expectations.
Analysts expect earnings to rise ~20% in FY2014 and RAS is cheap at under 6x forward FFO. This is a deep discount to its five-year average (13.5). The two analysts that have price targets on RAS see it worth $10 a share, ~20% above its current price of $8.30 a share.
Education Realty Trust (EDR) is one of America's largest owners, developers and managers of collegiate housing. The REIT owns or manages 67 communities in 24 states with more than 37,000 beds.
The News: Forbes published a quick piece yesterday that listed EDR as a REIT where several insiders have made recent purchases.
Valuation: The shares yield 5% and Education Realty Trust has more than doubled its dividend payouts since 2010. Wunderlich initiated the sparsely covered shares as a "Buy" in October. The median price target by the 8 analysts that cover the shares is $11 a share, substantially above the current $8.85 a share level taking into the consideration the large dividend yield.
Education Realty has more than doubled operating cash flow since the end of FY2011. In September the company noted that fall 2013 same-community its pre-leasing occupancy rate was 93.6%, a 290-basis point improvement over the prior year. It also noted it is seeing 3% to 5% rent increases across the communities it owns and manages. FFO is tracking to a 20% advance this fiscal year and analysts see similar gains in FY2014. This should bode well for future dividend increases.