The REIT sector continues to produce a nice growth opportunity for investors. The federal funds rate is expected to stick to historical lows at or near 0% through at least the end of 2014 - giving both commercial and residential real estate buyers ample opportunity to increase buying, and therefore rewarding investors in the process.
In addition, the recent "Stop Trading on Congressional Knowledge Act," or STOCK, will also likely bring more good news for REIT shares, as it aims to stop Congressional members from trading on insider knowledge. With an anticipated benefit of more public faith in government run agencies like Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), REITs certainly stand to gain.
One of the stronger players in the REIT arena is American Capital Agency (AGNC), showing first quarter 2012 income in excess of $640 million and holding over $100 billion in assets under management.
In this article, I will discuss why I feel that American Capital could provide a great opportunity for investors who seek both income and growth - especially with the positive future outlook for the company.
Analyzing the Fundamentals
American Capital, with its market cap of nearly $10 billion, boasts a P/E ratio of 5.2 - roughly equal to that of the average investment firm in real estate industry as a whole. Year to date, American Capital's shares are up nearly 16%.
Recently, American Capital declared a second quarter 2012 dividend of $0.556 on its 8% Series A preferred shares. With a return on equity of over 21% and earnings per share of over 6, this REIT has some positive momentum.
This firm has strengths in a number of areas, including its nice return on equity, its strong revenue growth, the attractive valuation levels, as well as its expanding profit margins. These key areas, coupled with American Capital's strong stock performance, have led a majority of analysts to rate the shares as a Buy - and I completely agree.
The company currently has a debt-to-equity ratio of 8.4. Gary Kain, President of American Capital, feels that the best approach for the REIT in this current environment is not to reduce borrowing - as this would likely mean buying later and therefore essentially "competing" with the Fed. Kain stated that, "The last thing we want to do is wait until the Fed starts buying."
If the Fed moves forward with QE3, it would likely begin purchasing low coupon fixed rate mortgages - such as the ones that are owned by American Capital. If this turns out to be the case, Kain feels that they would get book value gains - essentially resulting in a higher net worth for the company, as well as more incentive for investors to hop on board purchasing shares.
Certainly, this would lead to increased share price. Presently, American Capital has produced a three year annualized return of 38% and a one year return of 28% - and this can be extremely attractive to investors.
Other Strong REIT Industry Players
Given today's low interest rate environment, there are a number of other potentially good buys in the REIT area. One such company is Newcastle Investment (NCT). Offering investors a dividend yield of approximately 13%, these shares could be a great addition to a REIT portfolio - particularly if they could be picked up for under $6.
Yet another potential REIT that could provide a nice growth opportunity is ARMOUR Residential REIT (ARR). With a monthly dividend of $0.10, investors are receiving an annual dividend yield in excess of 17% - and a 52-week dividend yield of over 19%. The company's future growth prospects - along with a newly underwritten public offering of 30 million additional shares of common stock - make this a nice addition to a REIT portfolio.
CYS Investments (CYS) is also a strong player in the REIT sector. Focusing primarily on a leveraged basis in residential mortgage pass-through certificates where both the principal and the interest payments are guaranteed by a government agency such as Fannie Mae, Freddie Mac, or Ginnie Mae, CYS has been faring quite well.
Currently, investors are receiving a $2 per share annual dividend that produces an annual dividend yield of almost 15%. Estimates for the company's earnings per share are $2.23 and $2.21 for 2012 and 2013 respectively. CYS shares are up roughly 8% year to date. This, too, could offer the potential for strong income and growth in both the short- and the long-term for investors.
Another REIT with good strong numbers is Resource Capital (RSO). With a P/E ratio of approximately $4.20 and a dividend yield in the neighborhood of 15%, investors could receive regular income while they ride up the share price. Recently, Resource Capital announced that the company would be issuing shares of preferred stock with a yield of 8.5%. These shares started trading on June 15th.
The Bottom Line
There are a number of good potential buys in the REIT sector at present. The low federal funds rate - practically locked in for at least two more years - has certainly offered a catalyst for many real estate investment companies.
Yet, it seems like American Capital may have a slight advantage over the rest. Given its 15% annual dividend yield, along with the fact that its shares are up nearly 20% year to date, I feel that this one could very well provide the best of both income and growth worlds.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.