Mark Dhruv Goldstein
After the subprime meltdown, REITs have suffered not only in terms of depreciating asset values but also deteriorating asset quality and rent values. In this environment, five REITs are still outperforming most investor expectation and continue to be on the hit-list of several major institutional investors for their continued run of positive returns and excellent management of assets under management. Because of the possibility of long-tail risks in REITs, however, I suggest that you do your own due diligence.
Annaly Capital Management, Inc. (NYSE:NLY) is America’s largest publicly traded mortgage real estate investment trust. When the Federal Reserve announced its intention of keeping short-term interest rates on capital low for the next two to three years, NLY saw an opportunity to take advantage of high interest rates of mortgages against the low cost of capital. Annaly is trading close to the $16 mark in a narrow range of $14-$18.
Annaly pays a handsome dividend both in terms of numbers ($2.40) and percentage amounts (14%), which makes it an investment to consider for future dividend income. As others note, Annaly is taking advantage of the current interest rate environment by issuing additional stock and purchasing more real estate, which in 2010 was valued at over $81 billion as compared with $65 billion in the previous year. Although investors don’t really like to see Operation Twist in their mortgage REITs, it is not likely to have a more than minimal impact on the yield. Annaly appears unfairly discounted on the surface. However, this is a great candidate for further research.
Chimera Investment Corporation (NYSE:CIM) is a residential mortgage-based REIT that provides commercial and residential loans. Although this company is still in the red following the 2008 financial crisis, there appears to be light at the end of the tunnel for CIM, which has an interest income of $177 million for Q1 2011, and which few know is externally managed by the Fixed Income Discount Advisory Company, a wholly owned subsidiary of Annaly Capital Management, Inc.
Trading at levels near $3, which is almost a dollar less than its book value and a discounted price earnings multiple of about 3 times, Chimera offers a high dividend yield of almost 20%, compared with REITs such as Capstead Mortgage (NYSE:CMO), which provides 14%. With the news of the Federal Reserve maintaining low rates for another few years, stocks such as Chimera are likely to benefit from the weakness in interest rates. Chimera also has a low leverage position with less borrowed funds, as it is not backed by any government agency. Chimera could be a hidden bargain that warrants further investigation.
Hospitality Properties Trust (NYSE:HPT) is a real estate investment trust that primarily invests in hotels. It owns more than 300 hotels and 150 travel centers including some big names such as Staybridge Suites, Courtyard and Residence Inn. Hospitality Properties Trust has entered into a rent agreement with Marriot (NYSE:MAR) hotels, which is expected to help Hospitality Properties Trust expand significantly on its fixed revenue for several years in the future. In addition, it has made some ripples in the mergers and acquisition market with the purchase of Sonesta International Hotels Corp. (NASDAQ:SNSTA), through its affiliate SAC, for $174 million, in an all- cash deal, expected to be completed by the first quarter of 2012.
Hospitality Properties Trust, which has real estate property valued at more than $6 billion as of 2010, is currently trading at $22, nearly 15% off its 52-week high of about $26. Though the stock has lost around 2% in the last six months alone, it is worth $28 per share on a discounted cash-flow basis using a 10% cost of equity. This name warrants further research.
CYS Investments Inc. (NYSE:CYS) was named among the top 10 Real estate investment trust by ‘Dividend Channel’ in a report released in October 2011. CYS, a mortgage base REIT, since 2009 has provided an annualized rate of return of more than 12% to its investors, and a dividend yield of just under 18%. As with every other agency backed REIT, CYS also took a beating during the financial crisis, however, it has managed to climb back up to par with its book value, currently trading near the $13 mark.
Featured among the glitterati of REITs, which offer a dividend of 15% or more, CYS has paid off a one-time charge of $5 million at the end of Q3 2011 for investing in restricted stocks, which led to a reduction in its operating earnings. CYS earned an income of $64 million for the quarter ended September 2011, compared with a meager $16 million the previous year, alongside an increase of $54 million in net assets in the same period, contributed by robust appreciation in its investments. CYS' valuation warrants further research.
With the entire mortgage industry taking a solid knockout punch during the 2008 financial crisis, one of the only three mortgage REITs that were able to meet analyst expectations in the third quarter of 2011 was the American Capital Agency Corporation (NASDAQ:AGNC). With a highly experienced management team led by Gray Kain, the president of American Capital Agency, the company has been successful in providing consistent results to its shareholders for the last 9 quarters.
American Capital Agency has been among the best mortgage based REITs, which have an annualized return of 23% over the past three years, leaving behind Hatteras Financial Corp (NYSE:HTS) and Two Harbors Investment Corp (NYSE:TWO). American Capital Agency invests in those agency backed mortgage-based securities for which the interest payments and principal amount is assured by the US Government and its entities. American Capital Agency is currently trading near the $28 mark, just off its 52-week high near the $30 levels. This stock is a great candidate for further due diligence. Its valuation appears overlooked for the moment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.