REITs tend to deliver predictable and stable earnings. Their earnings come from the spread between the yield on their assets and cost of borrowing. With the Fed holding off on tightening monetary policy for now, REITs are a worthwhile play on the current low interest environment. Intelligent investors should note that should short term interest rates rise, earnings will be affected and hurt sentiment towards these stocks.
Listed below are 6 REITs worth considering:
Armour Residential REIT (ARR)
Armour Residential is focused on investing in mortgage backed securities guaranteed by US Government chartered entities such as Fannie Mae (OTCQB:FNMA), Freddie Mac (OTCQB:FMCC) and Ginnie Mae. Armour Residential had a great 1st quarter in 2011. Net Revenues were $10 million vs $592,112 for Q1 2010. Net Income was $8.6 million vs $305,833. A highlight is its balance sheet, which is free of long term debt.
Current dividend yield is 19.5%. On June 15th, the board of Directors announced 3rd quarter monthly dividend payments of $0.12 per share payable on 28th July, 30th August and 29th September. This payout policy surely must appeal to income investors. This is the only stock in this list that pays monthly dividends. The stock is currently trading within its 52 week high/low range and has exhibited little volatility over the last 12 months. Its trailing 12 month P/E ratio is 6.1 which is discounted against its peers.
In summary, ARR is financially stable, pays monthly dividends and is fairly valued. Investors would be wise in considering this issue.
American Capital Agency Corporation (AGNC)
American Capital invests in residential pass through mortgage securities and collateralized mortgage obligations. These investments consist of securities whose regular payments are guaranteed by the US Government.
Net Income for the 1st quarter was $133,543 million vs $53,150 for the same period last year. A very satisfying 251% increase. Due to a nearly 4 fold increase in outstanding shares, dividends for Q1 2011 and Q1 2010 were the same, $1.40 per share. Recent quarterly earnings of $1.36 were in-line with analyst estimates. A dividend of $1.40 per share was declared, the same as Q2 2010. The current dividend yield is 19.3%, highest amongst its peers. This will be enticing to income investors. It’s currently trading within its 52 day high/low range. Compared to the overall mortgage REIT sub-sector, the current valuation is at a discount based on trailing and forward P/E ratios.
Over the 12 months up to July the price has been relatively stable, though from May 2011 the price has been on a downward path. Investors may want to consider this as suitable buying opportunity. American Capital also offers a direct stock purchase plan.
Annaly Capital Management (NLY)
Annaly Capital Management's primary business is to own and manage a portfolio of mortgage related assets. It has been stocking up on its holdings in U.S. agency mortgage securities. This year, it has issued over 180 million common shares to raise capital for asset purchases. Additionally, Annaly operates a REIT subsidiary, FIDAC, which is focused on managing fixed income securities. FIDAC receives annual advisory fees that are related to the amount of gross assets it manages. These fees are significant. In 2010, FIDAC earned roughly $58.1 million by holding $20.1 billion worth of assets.
Going forward, FIDAC will be a key earnings driver. The balance sheet is healthy, its debt/equity ratio is well within that of its peers. Management tries to maintain the ratio between 8:1 and 12:1. For 2010, the ratio was around 6.7. The stock has steadily edged upwards during the May and June, when the broader market declined. It’s been trading within its 52 day high/low range throughout 2011, making it hardly volatile. Annaly’s dividend yield is 15.1% with 2nd quarter payout of $0.65 per share.
Overall, this stock/company offers price stability, an exceptional dividend yield, a diversified earnings base and a healthy balance sheet. The company also offers a direct stock purchase program which we consider another feather in its cap.
Hospitality Properties Trust (HPT)
Hospitality Property Trust owns over 280 hotels and 185 travel centers in 44 US states, Puerto Rico and Canada. Major hotel tenants are Travel Centers of America, Marriot and InterContinental Hotels Group.
First quarter revenue was $282 million, an 11% increase for the same period last year. Their management recently concluded a rent re-structuring agreement with Marriot (MAR). Under the terms of this agreement, Marriot guarantees 90% of the rent through to 2017. This guarantee assures Hospitality that it will get no less than 10% under its minimum rentals. Similar agreements are in the pipeline with InterContinental (IHG) and Travel Centers of America (TA). Its balance sheet is one of the strongest in its industry with a debt/equity ratio of 0.74. On the contrary, the cyclical nature of the industry is a concern worth noting. This stock’s current yield is 7.2%. It has declared a dividend of $0.45 per share for the 2nd quarter, same as last year.
This stock has steadily edged up over the past 12 months exhibiting little volatility. With regards to valuation, the trailing P/E of 20.8 is at a 24% premium to its 5 year average of 16.8, whilst, its forward P/E is at a 6 % discount to its 5 year average. Investors should look to the current market weakness for a good entry point.
Omega Healthcare Investors Inc. (OHI)
Omega Healthcare invests in and provides financing for long term care facilities in the US. Major tenants include Sun Healthcare Group (SUNH) and Communicare Health Services.
Whilst revenues increased 20% year over year, $75 million vs $58.7 million, Omega incurred a net loss of $5.9 million vs net income of $21 million in 2010. No doubt, this was due to a 140% increase in operating expenses, $55.7 million as opposed to $23.2 million in 2010. This increase was due to costs associated with the CapitalSource acquisition and a $25 million provision for impairment on real estate assets for 2011. This current issue's dividend yield is 7.8%. A dividend of $0.40 per share was declared on July 15th.
Investors should bear the following in mind:
- An increase in the number people from the baby boomer generation retiring. Undoubtedly, they are Omega’s major tenant’s primary customers.
- Omega’s funding model is safe from short term interest rate fluctuations as opposed to REIT’s that invest in mortgage backed securities.
The stock is currently trading within its 52 day high/low range, displaying little volatility. However, since April 28th the stock has been on a downward trend. To some investors, this presents a good entry point.
Colony Financial Incorporated (CLNY)
Colony Financial focuses on acquiring and managing commercial mortgage loans, REO properties and commercial mortgage backed securities.
The first two quarters of 2011 have been splendid for Colony. Net Income for the 1st quarter was up 352%, $7.4 million vs $2.1 million for the same period last year. A 1st quarter dividend of $0.32 was declared, a 100% increase on Q1 2010. A financial highlight, the balance sheet shows no long term debt.
Colony declared a 2nd quarter dividend of $0.32 per share vs $0.21 per share in 2010, a 52% increase. With 2nd quarter earnings report due shortly, the results will be no doubt be pleasing to read. Its current dividend yield is 7.2%.
The stock’s current price is within its 52 day high/low range. However, since March, the price has been on a downward trend. This could be viewed as a suitable buying opportunity for an enterprising investor.
Check out our other article on REITs here.