A Must-Own, High-Yield, Low-Beta REIT Portfolio

Includes: AGNC, EQR, HCP, NLY, SPG
by: Bidness Etc

REITs portfolio

We recommend yield-hungry investors to invest 50% of their portfolio in American Capital Agency Corp (NASDAQ:AGNC) and Annaly Capital Management, Inc. (NYSE:NLY), and the rest in HCP, Inc. (NYSE:HCP), Simon Property Group Inc. (NYSE:SPG) and Equity Residential (NYSE:EQR). The portfolio beta comes out to be 0.58 with a YTD return of 9.33%. Analysts present a bullish target price of $62.55, 15% above the current price. The average dividend yield of this portfolio is a lucrative 8.8%, well above the prevailing 10-year treasury yield.


Year To Date Performance (%)

Dividend Yield (%)

Current Price ($)

Mean Price Target ($)

Bullish Price Target ($)











































American Capital Agency Corp. (AGNC)

American Capital Agency Corp's stock with a YTD of 16.4% offers a combination of incentives for yield-hungry investors. The low risk stock offers an unmatched sustainable dividend yield of 15.5%, combined with attractive book value multiples and strong financial muscle.

The stock, with a dividend yield of 15.5% and a beta of 0.2, operates in the Residential REITs Industry and invests in agency securities to generate returns. It generated $472b cash from its operating activities, while it paid a total dividend of $301.3mn on common stock in 1Q2012. This depicts that the company has the muscle to continue sustained shareholder distributions in the future at a lower risk, when compared with most of its industry peers.

With regards to its book value, the company's stock is trading at a modest premium compared to most of its peers. It has a price-to-book value of 1.11x compared to 1.02, 1.03, 0.8 and 1.05 for Armour Residential REIT Inc (NYSE:ARR), CYS Investments Inc. (NYSE:CYS), Chimera Investment Corp (NYSE:CIM) and Annaly Capital Management Inc. , respectively.

The stock is currently trading at $32.68, and has mean analyst price target of $32.28, with a bullish target price of $35.

Click here for a more detailed thesis on AGNC.

Annaly Capital Management, Inc. (NLY)

NLY, another major residential REIT, with an attractive dividend yield of 13.1% and a beta of 0.22, offers yield-hungry investors an excellent opportunity for higher returns at lower risk. The fact that the company has been able to beat analysts' expectations in its first quarter earnings gives it additional value. However, since NLY has significant exposure to European Banks' U.S. subsidiaries, any developments in the Euro zone would materially affect NLY's earnings. NYL engages in mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other securities representing interests in obligations backed by pools of mortgage loans.

Unrealized gains on interest rate swaps and interest-only agency mortgage backed securities led to a material 29% surge in its bottom line, which reached $901.8mn from $699.9mn in 1Q2012 YoY. Credit Suisse (NYSE:CS) and Morgan Stanley (NYSE:MS), after looking at future growth prospects, have raised their estimates for 2012 earnings to $1.84 and $2.02, respectively. Their previous estimates were $1.8 and $1.9.

By the end of March this year, the company had a record low leverage ratio of 5.8x compared to the 12x target debt-to-equity ratio. Analysts expect the company to increase its leverage in the coming quarters, resulting in enhanced returns for the company.

The stock's price-to-book multiple is trading in close to its peers. NLY's price-to-book value is 1.05x, as compared to 1.08x and 1.0 for Capstead Mortgage Corporation (NYSE:CMO) and MFA Financial Inc. (NYSE:MFA).

The company generated cash from operations of $2.46b during 1Q2012, and paid dividends of $534mn, clearly showing its strength and ability to continue dividend payments in future. Investors would particularly be more interested in the 13.1% dividend yield stock, since it offers a low beta of 0.22. The stock is currently trading at $16 with mean analyst target price of $16.94, with a bullish target price of $20.

Investments in both AGNC and NLY are subject to prepayment risk, stemming from the Federal Housing Finance Agency's Home Affordable Refinance Program 2, and interest rate risk, stemming from the Fed's reserves intentions for quantitative easing. These can adversely affect revenues for both companies.

Click here for a more detailed thesis on NLY.

HCP, Inc. (HCP)

Within the Health REITs Industry, HCP continues to be a major beneficiary of the aging U.S. population, and advances in medicine and regulatory constraints. HCP maintains a diversified portfolio of health properties combined with its ability to continuously generate stable cash flow, recent acquisitions, and its capacity to sustain a high dividend yield and financial strength.

The nature of leases at HCP has enabled it to generate stable cash flows. Leases are usually of longer duration because relocation cost for healthcare tenants is very high. No more than 10% of leases expire in any given year, and an average of 5% over the next 10 years. The company's debt is scheduled in a way that no more than 12% of debt matures in any given year, until 2015. The company, in line with its industry peers, has 32.1% debt in its capital structure.

The stock is offering a 5.0% dividend yield at an FFO yield of 6.93% for 2012, clearly depicting sustainability in future dividends. The stock, with a beta of 0.86, is currently trading at $42.94 with an analyst mean price target of $40.50 and a bullish price target of $46.

Click here for a more detailed thesis on HCP.

Simon Property Group Inc. (SPG)

A diversified portfolio of regional malls, significant capitalization and its continued appetite for large acquisitions, led to a relatively flat same store NOI, despite a recent cyclical downturn. SPG is the largest REIT with a market cap of $45.8b.

The staggered nature of the lease expiration schedule has reduced the risk of rent roll down. Since most of the SPG tenants are highly rated by Fitch, the company faces minimal tenant default risk.

The stock, with a beta of 0.98, offers a 2.8% dividend yield at an FFO yield of 5.38% for 2012, which is only slightly lower than its cap rate of 5.5.

Equity Residential (EQR)

Within the Retail REITs Industry, EQR is another large player with a market cap of $17.9b, which engages in ownership and management of regional malls, Premium Outlets, The Mills, community/lifestyle centers and international properties.

EQR, with a beta of 1.01 and a dividend yield of 2.3%, has an FFO yield of 4.1%. Analyst mean target price estimate for EQR is $63.41, with a bullish target price of $68.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.