Real Estate Investment Trusts, or REITs, are at the top of the stock market food chain when it comes to dividends. At the top of the REIT dividend chain are mortgage REITs. By utilizing yield spread and leverage, mortgage REITs routinely sport double digit yields. Other REITs own actual real estate and have tremendous annual write offs due to depreciation and amortization. Their earnings are therefore typically not their net profits, but rather their operating earnings or funds from operations [FFOs]. I will look at two mortgage and two non-mortgage REITs.
MFA Financial, Inc. (MFA)
MFA specializes in agency and non-agency mortgage backed securities, which are secured in turn by all types in single family mortgages. Its stock was trading recently at between $7 and $8 per share, midway in its narrow 52 week range of from $8.64 to $6.23. It has a price to earnings ratio of 8.2, and a market capitalization of $2.6 billion. It pays a quarterly dividend of $0.25 per share, for an annual yield of 13.5%. The company's next dividend payment will also include a supplemental 2 cent dividend, in addition to the regular payment.
In the fourth quarter of 2011, MFA posted earnings of $80.1 million, or 22 cents per share, 8% less than the 24 cents expected by analysts. For all of 2011, earnings were $330 million, or $0.97 cents a share.
Like all mortgage REITs, MFA has enjoyed the steep yield curve of late. But that steepness is evaporating, as short term rates cannot continue to fall when they already are close to zero. Flattening of the yield curve, and the prepayments that mortgage holders will undoubtedly do, is the big risk that faces this and all other mortgage REITs.
I do not know that MFA will be able to maintain this level of payout before. Its leverage at year end was very modest (for a mortgage REIT) 3.7 / 1, and I do not sense that management wants to expand that. However given the current yield, a five to ten percent dividend fall would not unduly harm anyone. The double digit payout is safe for the time being.
Vornado Realty Trust (VNO)
Vornado specializes in commercial and retail properties, most of which are in or near New York City or Washington D.C. Its stock was trading recently at between $84 and $85 per share. Its 52 week range is from $98.77 to $68.39, and it has a price to FFO of about 14. It has a market capitalization of $15.6 billion. It pays a quarterly dividend of $0.69 per share, for a yield of 3.3%.
In addition to Vornado's ownership interests in over 300 buildings with some 70 million square feet of space, it also owns a nearly 33% stake in Toys R Us, Inc. That retailer generally makes about 80% of its money in the 4th quarter of the year, which Vornado books as its share of in its first quarter of the following year. This accounts for seasonality to Vornado's earnings and funds from operations.
Looking over Vornado's recent performance, something is clearly amiss in its portfolio in Washington D.C. Occupancy in that market has fallen some 400 basis points in the past 12 months, to just over 90%. Otherwise, lease rates and occupancy in its New York market have recovered nicely from the recession.
I just do not see any real upside to Vornado. Its dividend is below average for the REIT group, and its stock price valuation fully incorporates any earnings and FFO benefits over the next two years. I think you can do better elsewhere.
Ventas, Inc. (VTR)
Ventas focuses on health care and senior living facilities. It was trading recently at nearly $56 per share, near the high end of its 52 week range from $59.05 to $43.25. Its price to FFO ratio is 16.8, and it has a market capitalization of $16.1 billion. It pays an annual dividend of $2.30 per share, for an annual yield of 4.1%.
Ventas substantially remade itself into one of the nation's largest REITs of any kind by three large acquisitions in the past 12 months: a $3.1 billion purchase of Altria Senior Living, a $7.4 billion purchase of Nationwide Healthcare Partners, and most recently a $770 million purchase of Codgill, Spencer. Combined these purchases led to Ventas 2011 reported to tremendous growth in all aspects of Ventas' reporting. For all of 2011, it reported FFO of $825 million, or $3.57 per share. This compares with 2010's $422 million, or $2.67 per share.
The aging population and retirement of baby boomers auger well for Ventas long term future. Yet, the stock trades already for a premium of 65% over book value, and absent more acquisition, the company has some consolidating to do. FFO growth will slow to the mid single digits the next couple years.
Ventas pays an average REIT yield, and there is room for dividend growth. I recommend Ventas for income seekers.
Annaly Capital Management, Inc. (NLY)
Annaly is a well known mortgage REIT, specializing in agency based mortgage instruments. Annaly stock was trading recently at between $16 and $17 per share, near the middle of its 52 week range of from $18.79 to $14.05. It has a price to earnings ratio of $16.1 billion. Its most recent quarterly dividend payment was for $0.57, for an annual yield of 13.7. That dividend yield will almost certainly be falling.
Annaly is suffering, as all mortgage REITs, from a narrowing in the yield curve. It is still steep in mathematical terms, as short term rates are near zero. But for all the considerable expertise of Annaly's transactions, the firm relies upon the yield spread, to be specific, and leverage to generate the profits that allow for this issue's generous dividend. Falling long term mortgage rates, along with Annaly management taking conservative measures to reduce its debt and leverage, led to fourth quarter earnings of $0.54 per share. This was its worst quarter of the year, and two cents, or 4% below analysts' expectations for the quarter.
I do not see any relief to the narrowing of Annaly's margins. And the company's actions of lowering leverage from 6.7 at the end of 2010 to 5.4 at the end of 2011 seems a conscious decision to batten down the hatches. I see dividends and earnings this year falling to about $1.80 per share. Funny thing about that, is that the yield would still be 11%.
Dividend seekers should not be afraid to invest in Annaly. For those looking for a little bit of growth, look elsewhere.