In Part II, we examined five REITs with yields as high as 18%. Today we are going to take a look at five additional REITs. All the REITs examined today have relatively short dividend histories and so in general these plays carry a slightly higher degree of risk. Some of them do sport good metrics and could turn out to be winners. Investors would do well to get a handle on some of the following key ratios; they could prove to be very useful during the selection process.

**Levered free cash** flow is the amount of cash available to stockholders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

**Operating cash flow** is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

**The payout ratio** tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders then it is making. This situation cannot last forever. In general, if the company has a high operating cash flow and access to capital markets, it can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever. If your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest 5 Plays With Healthy Dividends As High As 8.7%

**Debt to Equity Ratio** is found by dividing the company's total amount of long-term debt (debts with interest rates that have a maturity longer than one year) by the total amount of equity. A debt to equity ratio of 0.5 tells us that the company is using 50 cents of liabilities in addition to each $1 dollar of shareholders equity in the business. There is no fixed ideal number as it depends on the industry the company is in. However, in general a ratio under 1 is acceptable and ideally it should be in the 0.5-0.6 ranges.

**Current Ratio** is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing their future earnings. Ideally the company should have a ratio of 1 or higher.

**Interest coverage** is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa.

**Quick ratio or acid -test** is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities. Additional key metrics are addressed in this article 5 Interesting Stocks With Yields As High As 15%

Two Harbors Investment Corp (AMEX: TWO) is our favorite play on this list and we like it for the following reasons:

It has increased dividends from day 1

Net income is on course to rise for 3 years in a row

Total cash flow from operating activities is also on course to rise for 3 years in a row

It has a very healthy interest coverage ratio of 13.3

It also sports very strong quarterly earnings growth and revenue growth rates.

Total return for the last 3 years is in excess of 42%

It has a free cash flow of $109 million

100K invested in TWO for 3 years would have grown to 129,825, 60

**Important facts investors should be aware in regards to investing and REITS**

Payout ratios are not that important when it comes to REITs as they are required by law to pay a majority of their cash flow as dividends. Payout ratios are calculated by dividing the dividend rate by the net income per share, and this is why the payout ratio for REITs is often higher than 100%. The more important ratio to focus on is the cash flow per share. If one focuses on the cash flow, one will see that in most cases, it exceeds the dividend declared per share.

Stock |
Dividend Yield (%) |
Market Cap |
Forward PE |
EBITDA |
Quarterly Revenue Growth |
Beta |
Revenue |
Operating Cash flow |

STWD |
8.90 |
1.83B |
11.09 |
124M |
122.40% |
0.64 |
148.63M |
-42.92M |

TWO |
16.10 |
1.39B |
N/A |
106M |
530.40% |
0.20 |
131.73M |
98.70M |

CXS |
12.40 |
852.01M |
N/A |
74.9M |
983.30% |
0.46 |
81.56M |
28.20M |

DX |
12.20 |
369.88M |
N/A |
53.7M |
66.90% |
0.48 |
50.20M |
63.11M |

ARI |
10.40 |
314.99M |
9.23 |
33.56M |
86.10% |
0.49 |
34.83M |
29.84M |

**Starwood Property Trust Inc. (NYSE: STWD)**

Industry: REITs

Free Cash Flow is $-42.9 million.

Net income

2010 = $57.05 million

2011= it stands at $78 million and could top the $93 million mark.

Total cash flow from operating activities

2010 = $-99.68 million

2011= It stands at $70 million and could come in as high as $240 million.

Key Ratios

P/E Ratio = 15.2

P/E High - Last 5 Yrs = N.A.

P/E Low - Last 5 Yrs = N.A.

Price to Sales = 10.51

Price to Book = 1.04

Price to Tangible Book = 1.04

Price to Cash Flow = 19.1

Price to Free Cash Flow = -10.8

Quick Ratio = N.A.

Current Ratio = N.A.

LT Debt to Equity = 0.34

Total Debt to Equity = 0.34

Interest Coverage = 4.4

Inventory Turnover = N.A.

Asset Turnover = 0.1

ROE = N/A

Return on Assets = N/A

200 day moving average = 18.47

Current Ratio = 26.9

Total debt = 678.82M

Book value = 18.82

Qtrly Earnings Growth = -36.2%

Dividend yield 5 year average = N/A

Dividend rate = $ 1.74

Payout ratio = 131%

Dividend growth rate 5 year avg = N/A

Consecutive dividend increases = 2 years

Paying dividends since = 2009

Total return last 3 years = N/A

Total return last 5 years = N/A

**Notes**

It's a new player on the block, but net income and total cash flow from operating activities have been rising, which is a good sign. It also sports a strong quarterly revenue growth rate of 122% and a decent interest coverage ratio of 4.4. As of the third quarter of 2011, total cash flow from operating activities was enough to cover dividend payments; prior to that they were not. It has also raised dividends from day 1. As it has a relatively short dividend history, only investors willing to take on a bit of extra risk should consider this play.

**Two Harbors Investment Corp**

Industry: REITs

Free Cash Flow is $109 million

Net income

2009 = $-8.75 million

2010 = $35.76 million

2011= It stands at $76 million and could top the $130 million mark.

Total cash flow from operating activities

2009 = $-11.37 million

2010 = $33.12 million

2011= It stands at $87 million and could top the $132 million mark.

Key Ratios

P/E Ratio = 6.3

P/E High - Last 5 Yrs = N.A.

P/E Low - Last 5 Yrs = N.A.

Price to Sales = 14.03

Price to Book = 1.37

Price to Tangible Book = 1.37

Price to Cash Flow = 19.3

Price to Free Cash Flow = 49.8

Quick Ratio = 1.1

Current Ratio = 1.1

LT Debt to Equity = 0

Total Debt to Equity = 0

Interest Coverage = 13.3

Inventory Turnover = N.A.

Asset Turnover = 0

ROE = 11.94%

Return on Assets = 1.84%

200 day moving average = 9.39

Current Ratio = 0.32

Total debt = 7.35B

Book value = 9.3

Qtrly Earnings Growth = 452.7%

Dividend yield 5 year average = N/A

Dividend rate = $ 1.60

Payout ratio = 102%

Dividend growth rate 3 year avg = N/A

Dividend growth rate 5 year avg = N/A

Consecutive dividend increases = 2 years

Paying dividends since = 2009

Total return last 3 years = 42.29%

Total return last 5 years = N/A

**Notes**

It has a very strong quarterly earnings and revenue growth rate. It also sports a positive levered free cash flow rate of $109 million, has a strong interest coverage ratio of 13.3, and has raised dividends from day 1 on an annual basis. On the negative side, it has a very short dividend history. Another positive is that net income and total cash flow from operating activities have been rising for the past 2 years and are on course to rise for the third year.

**CreXus Investment Corp (NYSE: CXS)**

Industry: REITs

Free Cash Flow is $28 million

Net income

2009 = $-1.01 million

2010 = $11.89 million

2011= It stands at $67 million and could top the $107 million mark.

Total cash flow from operating activities

2009 = $0.77 million

2010 = $8.89 million

2011= It stands at $24 million and could top the $33 million mark.

Key Ratios

P/E Ratio = 8.8

P/E High - Last 5 Yrs = N.A.

P/E Low - Last 5 Yrs = N.A.

Price to Sales = 10.12

Price to Book = 0.95

Price to Tangible Book = 0.95

Price to Cash Flow = 12.2

Price to Free Cash Flow = -396.8

Quick Ratio = N.A.

Current Ratio = N.A.

LT Debt to Equity = 0

Total Debt to Equity = 0

Interest Coverage = 19.4

Inventory Turnover = N.A.

Asset Turnover = 0.1

ROE = N/A

Return on Assets = N/A

200 day moving average = 9.8

Current Ratio = 24.53

Total debt = 0

Book value = 11.96

Qtrly Earnings Growth = 1142.2%

Dividend yield 5 year average = 0%

Dividend rate = $ 1.40

Payout ratio = 78%

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg =

Consecutive dividend increases = 1 years

Paying dividends since = 2010

Total return last 3 years = N/A

Total return last 5 years = N/A

**Notes**

For a new REIT, it's doing a relatively decent job. Net income and total cash flow from operating activities has been rising. Both are set to experience significant jumps in 2011. It has a strong quarterly revenue growth rate, a payout ratio of 78%, and a very good interest coverage ratio of 19.3. On the negative side, it has only been paying dividends since 2010; as a result of this only investors willing to take on a bit of extra risk should consider this play.

Dynex Capital, Inc. (NYSE: DX)

Industry: REITs

Free Cash Flow $63.1 million

Net income for the past three years

2008 = $15.13 million

2009 = $17.59 million

2010 = $29.48 million

2011= It stands at $25 million and could top the $27 million mark.

Total cash flow from operating activities

2008 = $6.8 million

2009 = $19.64 million

2010 = $30.08 million

2011= It stands at $54 million and could come in as high as $74 million.

Key Ratios

P/E Ratio = 8.4

P/E High - Last 5 Yrs = 107

P/E Low - Last 5 Yrs = 6.1

Price to Sales = 5.09

Price to Book = 1

Price to Tangible Book = 1

Price to Cash Flow = 10.6

Price to Free Cash Flow = 13.5

Quick Ratio = N.A.

Current Ratio = N.A.

LT Debt to Equity = 0.23

Total Debt to Equity = 0.23

Interest Coverage = 2.7

Inventory Turnover = N.A.

Asset Turnover = 0

ROE = 11.78%

Return on Assets = 1.88%

200 day moving average = 8.88

Current Ratio = 0.07

Total debt = 2.19B

Book value = 9.15

Qtrly Earnings Growth = -78.2%

Dividend yield 5 year average = 0%

Dividend rate = $ 1.12

Payout ratio = 98%

Dividend growth rate 3 year avg = 15.77%

Dividend growth rate 5 year avg =

Consecutive dividend increases = 3 years

Paying dividends since = 2008

Total return last 3 years = 70.11%

Total return last 5 years = 74.19%

**Notes**

Total cash flow from operating activates is rising and has been enough to cover the dividend payment for the past 3 years (the count begins from 2011). On the negative side, it has an erratic dividend history, a weak quarterly earnings growth rate of -78%, and sports a very moderate interest coverage ratio of 2.7. On the positive side, it has a 3 year total return of 70%, a strong quarterly revenue growth of 66% and has increased dividends for 3 years in a row.

**Apollo Commercial Real Estate (NYSE: ARI**)

Industry: REITs

Free cash flow is $29.8 million

Net income

2009 = $-2.18 million

2010 = $11 million

2011= It stands at $17 million and could top the $22 million mark.

Total cash flow from operating activities

2009 = $-1.3 million

2010 = $16.6 million

2011= It stands at $24.5 million and could top the $33 million mark.

**Key Ratios**

P/E Ratio = 13.1

P/E High - Last 5 Yrs = N.A.

P/E Low - Last 5 Yrs = N.A.

Price to Sales = 7.22

Price to Book = 0.94

Price to Tangible Book = 0.94

Price to Cash Flow = 14.9

Price to Free Cash Flow = 193.2

Quick Ratio = N.A.

Current Ratio = N.A.

LT Debt to Equity = 0.79

Total Debt to Equity = 0.79

Interest Coverage = 2.5

Inventory Turnover = N.A.

Asset Turnover = 0.1

ROE = N/A

Return on Assets = N/A

200 day moving average = 14.13

Current Ratio = 0.95

Total debt = 561.81M

Book value = 16.34

Qtrly Earnings Growth = 134%

Dividend yield 5 year average = 0%

Dividend rate = $ 1.60

Payout ratio = 137%

Dividend growth rate 3 year avg = N/A

Consecutive dividend increases = 1 years

Paying dividends since 2010

Total return last 3 years = N/A

Total return last 5 years = N/A

**Notes**

Net income and total cash flow from operating activities are increasing. The total cash flow from operating activities was enough to cover the dividend payments for 2010 and for second and third quarter of 2011 but not the first quarter of 2011. On the positive side, it has a very strong quarterly earnings growth rate of 134% and a quarterly revenue growth rate of 86%. It has a mediocre interest rate coverage ratio of 2.5.

**Conclusion**

Long term investors should consider waiting for a pullback before deploying new funds into this market. The markets are now rather overbought and in general it does not pay to open up a position when a market is trading at new highs.

*All charts sourced from dividata.com*

**Disclosure: **I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

**Disclaimer:** This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details, do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies- let the buyer beware.