Today's Golden REIT Pick: CYS
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As mortgage rates continue to stand at historical lows, mortgage RIETs are continually rewarding their investors with both a nice dividend income as well as share growth. Most have consistently held on to double digit dividend yields throughout 2012, and they are likely to continue to outperform the market through year end and beyond.
In this article, I will show how CYS Investments (NYSE: CYS), based on its double digit dividend yield and consistently strong share performance, could continue to line investors’ pockets at least through 2014.
CYS Continues its Growth Spurt
The company’s second quarter 2012 financials were recently released, stating core earnings of just under $45 million. As of June 30, 2012, the net asset value per share equaled $13.52 per, after declaring a $0.50 dividend per share on June 8, 2012. CYS also showed that the company had a second quarter 2012 net income of over $101 million. CYS currently has a leverage ratio of 7.6 to 1, with a liquidity position of over 1 billion.
Considering the company’s Net Interest Income Per Share, CYS generated $.513 in the first quarter of 2012, and $.49165 in quarter two. Although this seems high, it is important to keep in mind that CYS is an mREIT and must distribute at least 90% of its pro forma taxable income to its shareholders. Otherwise, the firm could face entity related excise taxes.
On July 16, 2012, CYS completed an underwritten public offering of 46 million common shares, with a price per share of $13.70. This offering raised over $622 million – most of which was invested into Agency RMBS and interest rate swaps and caps.
Recently, CYS also announced that it priced an underwritten public offering of 3 million shares of its 7.75% Series A Cumulative Redeemable Preferred Stock. These shares have been priced at $25 per share, with an anticipated $75 million in gross proceeds that is intended for use for additional investments in agency RMBS, along with general corporate purposes.
For investors who own CYS shares, the company pays a $.50 per share quarterly dividend, equating to $2 per share annually. This provides investors with a dividend yield of slightly above 14%.
How Other REITs Stack Up
Because of the low interest rate environment, there are a number of other REITs that are staying on course with CYS in terms of growth, as well as high dividend yields. American Capital Agency (NASDAQ: AGNC) is also a likely candidate for continued share growth. In fact, this REIT has recently been providing its investors with one year returns of 23% and three year annualized returns in the 30% range.
The company had a strong first quarter 2012, issuing 76 million new common shares via a secondary offering in March. In addition, American Capital’s net interest income per share was $1.695 during this quarter versus $1.54 in the first quarter of 2011.
Likewise, ARMOUR Residential REIT (NYSE: ARR) has been producing a dividend yield of over 17%, given its monthly dividend of $0.10 per share. It was recently announced that Jeff Zimmer, its current CFO, will be stepping down and will be replaced by James Mountain, so any change in management style will remain to be seen.
With an estimated $47 million in taxable first quarter 2012 income, and close to $57 million in second quarter 2012 taxable REIT income, this firm is in a great position to continue rewarding investors – as is Annaly Capital Management (NYSE: NLY) with its current dividend yield at just under 13%. This REIT states potential future rate uncertainty as one of the reasons for keeping its leverage ratio at a somewhat low 5.8. Because of Annaly’s conservative approach by management, this REIT will likely be prepared in just about any type of future rate situation. At the moment, though, Annaly has had 3-year annualized returns of 18%.
Annaly’s investors should be a bit cautious, though, as the shares were recently downgraded to “underperform” from “market perform” by FBR Capital Markets. The primary reason for this seems to be the potentially increased exposure to higher prepayments based on the size of the company’s portfolio.
With the all-around good news for some of the REIT industry players, there is one where the performance has not been so great. Chimera Investments (NYSE: CIM), although paying a nice dividend yield of over 20% and holding a good price to book ratio of 0.67, the company’s 2013 earnings per share estimate of $0.45 is lower than 2012’s estimate of $0.47. So investors may want to be somewhat cautious.
An even bigger issue, though, is that the company has been lax in providing a great deal of information on its actual earnings since the third quarter of2011. This could present a big problem – especially if actual earnings continue down the path of its last three reported quarters – at 15 cents for the first quarter 2011, 14 cents for the second quarter, and 13 cents for quarter three. It is felt by some that Chimera may not be able to continue paying a dividend at all by the second quarter of 2013 if its dividend’s rate of decline continues in this manner.
The Bottom Line
Overall, it is possible that some mREITs may experience slight losses in the second half of 2012. But it’s important to keep in mind that these REITs are not successful solely due to the low interest rates of the past few years. Therefore, I firmly believe that although the ups and downs of rates may affect performance somewhat, they will certainly not dictate the entire fortune of such companies. This is much more up to each individual REITs management team.
Given this, along with the strong earnings per share estimates for 2012 of $2.23 and for 2013 of $2.21, CYS is likely to keep rewarding investors with share growth as well as dividend income. That, added to the low interest rate environment that is predicted to last at least through 2014, should bode well for REITs. I feel that REITs overall, and more specifically CYS, will likely continue to provide a steady upward momentum for investors going forward in both the short and long-term.
BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.