For investors who are seeking growth in the short term, REIT stocks could promise positive upward movement due to the continued low federal funds rate at which money is borrowed and the rate at which REITs lend funds to new home owners via their various mortgage products.
One such REIT to pay particular attention to is CYS Investments (CYS). In this article, I will discuss why CYS has been given a rating of Outperform and how it is set to reward it investors over the next several quarters.
I feel that CYS is currently one of the stronger players in the REIT sector. Sitting close to its 52-week high of just under $14 per share, CYS offers a dividend of $0.50, with a yield in excess of 15%. The company has a P/E ratio of over 19, which is higher than the average P/E ratio of 3.9 for the real estate industry as a whole.
CYS also stands to benefit from the Federal Reserve's decision to keep the federal funds rate at a historical low of near 0% through the end of 2014. What this means is that REIT investors will likely profit at the very least through the next 1-2 years.
In addition, Wells Fargo has given CYS a rating of Outperform based on a number of factors including the company's seasoned and strong management team, the strong risk management that is practiced, and the fact that CYS has its management and investor interests closely aligned. Earnings per share estimates for 2012 and 2013 stand at $2.23 and $2.21 respectively.
In the near term, Kevin Grant, CYS's CEO, is slated to present at the May 23 Wells Fargo Securities 2012 Specialty Finance Symposium. Here he is expected to announce additional plans that the company has for further increasing its profitability given the current market conditions.
Ahead of the Competition
Even though the REIT sector overall has a number of positives, I feel that CYS is a better buy than several of its competitors. Annaly (NLY), for instance, is beginning to lose some of its credibility due in large part to the enormous $35 million salary of its CEO Mike Farrell - making his pay more than the combined pay of the six largest U.S. banks' CEOs. Many of the company's stockholders feel that this amount is completely unjustified - especially given that the earnings per share of the company's shares is only $0.49 with a dividend of $0.50 per share - down from $0.55 in the third quarter of 2011 and $0.60 in the second quarter of 2011.
One other REIT that may look good at first glance is Chimera (CIM). But investors need to be careful with this one. Roughly 75% of Chimera's portfolio consists of non-agency backed securities - which are essentially considered to be "junk bond" quality and possess a high rate of default risk.
On top of this, due to the replacement of Chimera's auditor, investors still have not seen the company's 2011 year-end results. Unfortunately for this REIT, guessing is not a relevant strategy for potential investors.
American Capital Agency (AGNC) is another of CYS's competitors that keeps a majority of non-agency backed securities in its portfolio - thus making it much more risky than some of the other REIT choices for investors who are seeking both growth and income. Although American Capital showed a first quarter 2012 income of over $640 million, I feel that the risks still outweigh the potential rewards here.
One somewhat overlooked segment of the REIT arena is that of companies that specialize in apartment complexes. However, today, with continued unemployment and record foreclosures, the rental housing segment is booming. With this in mind, UDR (UDR) has some strong fundamentals that may make it a nice complement to the shares of CYS.
One such positive is the fact that UDR's properties boast an average occupancy rate in excess of 95%. This has helped the company to amass close to $800 million in available cash and credit. The only drawback that investors may need to be wary of at the present time is the recent announcement of the company CFO David Messenger's resignation.
Those who seek higher dividend returns may want to take a look at ARMOUR Residential REIT (ARR). Both its future growth prospects and its dividend yield could make it a good choice. Early this year the company reported a second quarter monthly cash dividend on its common shares of $0.10 per share, providing investors with an annual dividend yield of over 17% and a 52-week yield of over 19%. The firm also announced in March that it had priced an underwritten public offering of 30 million additional common shares. Given this stock's high dividend yield, I would recommend this one in conjunction with CYS for some REIT share variety.
The Bottom Line
Overall, I feel that CYS is a great buy. Given that the entire REIT sector should benefit from the current - and near future - low interest rate environment, I feel that the strong companies in this area like CYS will shine even more.
I certainly agree with the company's Outperform rating and even at its current price so close to the 52-week high, these shares could offer a real reward to investors in the area of both continued share price increase along with a nice strong dividend along the way.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.