Grab These 4 Cheap Diversified REITs Before Earnings This Week

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Includes: ABR, ARI, CYS, IYR, MFA, VNQ
by: David Deuchar

Summary

Diversified REITs remain one of my "hot-spot" recommendations of the year as the strong U.S. property market especially in prime rental spaces continues to grow.

These 4 high-yield REITs trade at cheap multiples and maintain high payout ratios and high levels of institutional ownership.

Apollo Commercial appears the most attractive based on expected forward earnings growth.

Overview

This week, many companies will release their quarterly earnings reports, including a number of attractive diversified REITs (real estate investment trusts).

Company Earnings Date
Apollo Commercial Real Estate Finance 02-09-2016 (post-market)
CYS Investments

02-10-2016 (post-market)

MFA Financial 02-11-2016 (pre-market)
Arbor Realty Trust 02-12-2016 (pre-market)
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As mentioned above, the REIT sector is one of my "hot-spot" recommendations of the year; the strong U.S. property market especially in prime rental continues to grow and recent labor reports only further bolster that recommendation. Richard Barkham, global chief economist of the CBRE group, writes:

"The current environment of variable but generally improving growth in the developed world, alongside low interest rates and low inflation, is very supportive of consumers and commercial real estate markets. There are some risks for sure, including weakening sentiment due to volatile stock markets, rising interest rates in the U.S. and the U.K., financial stress in emerging markets and the slowdown of the Chinese economy. However, because consumers in the U.S., Europe and even China are in good shape, we think the global economy is strong enough to withstand these challenges and that the real estate and economic reality will be better than expected in most places in 2016."

Despite all of the doom-and-gloom in the energy and resources sectors and recent global equity market routs, the labor market continues to strengthen, with U.S. unemployment rate now at 4.9%. This has translated into fundamental indicators of continued growth in the global property market, such as price appreciation in the residential retail space (2.7%) and higher retail sales (6.6%).

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"The current environment of variable but generally improving growth in the developed world, alongside low interest rates and low inflation, is very supportive of consumers and commercial real estate markets," said Richard Barkham, CBRE's global chief economist. "There are some risks for sure, including weakening sentiment due to volatile stock markets, rising interest rates in the U.S. and the U.K., financial stress in emerging markets and the slowdown of the Chinese economy. However, because consumers in the U.S., Europe and even China are in good shape, we think the global economy is strong enough to withstand these challenges and that the real estate and economic reality will be better than expected in most places in 2016." - See more here

"The current environment of variable but generally improving growth in the developed world, alongside low interest rates and low inflation, is very supportive of consumers and commercial real estate markets," said Richard Barkham, CBRE's global chief economist. "There are some risks for sure, including weakening sentiment due to volatile stock markets, rising interest rates in the U.S. and the U.K., financial stress in emerging markets and the slowdown of the Chinese economy. However, because consumers in the U.S., Europe and even China are in good shape, we think the global economy is strong enough to withstand these challenges and that the real estate and economic reality will be better than expected in most places in 2016." - See more here

(Source: Knight Frank Global Prime Property Research)

These four REIT companies have the most attractive current and forward fundamentals:

  • Arbor Realty Trust (NYSE:ABR)
  • Apollo Commercial Real Estate Finance (NYSE:ARI)
  • MFA Financial (NYSE:MFA)
  • CYS Investments (NYSE:CYS)

Valuation Metrics

Dividend Yield/Payout Ratio

One of the most attractive factors of the REIT sector is its high-yield/income-investing model. All of these companies have managed great dividend yields at a threshold of more than 7% over the past year. Arbor and Apollo likely have the most sustainable payout ratios, however; as you can see, CYS Investments currently runs a payout ratio greater than one hundred percent which means it is paying out more in dividends than it makes in net income, which is a significant signal for a future dividend cut.

Dividend Yield Payout Ratio
ABR 9.42% 61.50%
ARI 11.79% 84.30%
MFA 12.56% 98.80%
CYS 14.50% 137.70%
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FFO per Share

Funds from Operations (Net Income + Amortization + Depreciation - Gain on Sale of Assets) is the premier valuation metric for REITs for its usefulness in providing an accurate representation of performance without the possible accounting distortions inherent in basic earnings reports. Again, Arbor and Apollo outperform the other REITs on a per share basis. CYS Investments has the largest income of the group yet maintains the lowest FFO on a per share basis.

Funds from Operations FFO per Share
ABR $59.19M $1.81
ARI $97.64M $1.17
MFA $105.14M $0.86
CYS $320.28M $0.67
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Forward EPS Growth Estimates

On an earnings per share growth basis, Arbor and CYS Investments have tremendously outperformed this year. This is consistent with most REITs outperforming market averages (e.g. the S&P 500 Index) and even the real estate sector as a whole since 2008. As far as future estimates, it appears that Apollo is currently the most favored by analysts, with 9.10% expected average annual growth over the next 5 years, while CYS Investments is expected to contract slightly.

EPS Growth This Year EPS Estimate Next 5 Years
ABR 335.90% -
ARI 37.90% 9.10%
MFA 3.80% 1.89%
CYS 186.60% -3.82%
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Institutional Ownership

All of these REIT companies maintain high levels of institutional ownership, even in the face of recent global equity routs. Apollo and Arbor have seen the greatest increase in institutional ownership, at an increase of 1.89% and 1.19% over the past three months respectively. Insider ownership (i.e. management, etc.) also remains high for these REITs, however, an interesting development should be noted for CYS Investments. Over the past six months, CYS management has sold over six percent of their previous ownership stake, which is not quite a positive sign for future performance. In contrast, Apollo's management have continued to buy more stake in the company.

Insider Ownership Insider Transactions Institutional Ownership Institutional Transactions
ABR 11.78% 0.00% 43.70% +1.19%
ARI 1.00% +7.50% 75.80% +1.89%
MFA 0.70% +1.57% 67.20% +0.10%
CYS 1.10% -6.65% 85.10% +0.27%
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Conclusion

All in all, on a valuation metric basis, most of these REITs remain very attractive; for an income investor, they are practically a must-have. High dividend yields, high earnings growth, and strong balance sheets should drive these companies higher in 2016. Of course, rather than picking individual companies, one can maintain REIT exposure through an exchange-traded fund such as Vanguard REIT ETF (NYSEARCA:VNQ) or iShares U.S. Real Estate ETF (NYSEARCA:IYR), with expense ratios of 0.12% and 0.43% respectively.

Disclosure: I am/we are long VNQ.

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.