Will This REIT Boost Your 2013 Portfolio?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the historically low interest rates of the past few years, REITs have offered tremendous income opportunities for investors. But lately, certain REITs have seen a slowdown in growth, turning some investors in other directions for higher dividend yields. In this article, I will discuss why CYS Investments (NYSE: CYS) - even with its recent drop in net income - can still provide income and growth opportunities.
Overall, CYS performed well throughout 2012, even though the company's recent declaration of both fourth quarter and fiscal 2012 earnings do not paint a pretty picture. In fact, for the fourth quarter 2012, CYS reported a net loss of more than $41 million, equating to $0.24 per share. This is a vast difference from the firm's third quarter 2012 net income that ended up in excess of $240 million and $1.46 per share respectively.
In the area of net investment income, CYS reported just over $58 million for the fourth quarter 2012, but a net loss from investments of $96 million - both figures also off significantly from the company's third quarter 2012 results. Given the fourth quarter 2012 results, the share price of CYS has lost some ground based on investor worries about the company's net asset value.
CYS also announced that its Board of Directors would be repurchasing up to $250 million worth of common stock. As of early February 2013, analysts had lowered CYS's target share price from $14 to $12, noting that the company's core spread income of $0.21 plus drop income of $0.18 per share fell short of the $0.40 core dividend in the fourth quarter of 2012. This $0.40 was lower than the $0.45 estimate.
It was also noted that CYS' book value ended 2012 at just over $13, which was also lower than the original target of $14.46 on a linked quarter basis. This led some to believe that the CYS dividend was under pressure.
Yet, although CYS's share price has suffered due in large part to these figures, the firm is still paying investors a nice quarterly dividend of $0.40 per share, equaling a dividend yield of 13%. In addition, CYS announced in mid-December 2012 that it would also pay shareholders a special dividend of $0.52 per share.
This special dividend was paid out in order to distribute the remaining REIT taxable income that was earned in 2012. The special dividend was paid on December 28, 2012 (to stockholders of record on December 21, 2012). At the same time, CYS also declared a series A preferred stock cash dividend of $0.484375 per share of series A preferred stock for the quarterly period that began on October 15, 2012 and ended on January 14, 2013. With a P/E ratio of over 9 and earnings of 1.63, I still feel that investors should not count CYS out in terms of income or growth in either the short or long term.
How Other REITs Are Faring
Other REITs are currently seeing somewhat similar results, as the interest rate compression has caught up on the asset side, and the rates that mREITs can earn have fallen. This essentially reduces the spread that REITs can collect in the middle. Another big factor that has had an effect on REITs is the Federal Reserve's stepping in to purchase billions in mortgage-backed securities. This has had the effect of subsequently pushed up prices, and at the same time reduced yields.
For instance, American Capital Agency (NASDAQ: AGNC) has seen a decrease in its net book value per share, down from $32.49 to $31.64 in just the fourth quarter of 2012 alone. This follows a first quarter 2012 drop in NBV from $25.21 to $23.43 per share. American Capital Agency's fourth quarter results were mixed. The company’s net spread income per share was $0.89, which was short of the Zacks Consensus Estimate of $1.01. However, net interest income was $423 million, which was higher than the Zacks Consensus Estimate of $350 million.
While this may appear to be negative, American Capital's dividend yield of 16% ($1.25 per share) still remains healthy - and the company had also maintained the same dividend throughout 2012. This is in contrast to some of the others in the REIT arena such as Annaly Capital (NYSE: NLY), which has had a steadily decreasing dividend since the second quarter 2011.
Currently, Annaly pays shareholders $0.45 per share, equating to a dividend yield of just over 12%, with earnings per share of 1.74. The good news here is that Annaly's shares were recently raised from a Neutral rating from Underperform. This may be due in large part to the company's reporting of a fourth quarter 2012 gain of 32 cents per share - even though this missed the estimate of 37 cents. The bad news is that it is expected that the firm will be steadily lowering its dividend over the near term.
Two Harbors Investment (NYSE: TWO), another in the REIT arena, has also seen poor earnings reports, along with a high dividend yield. This company's yield stands well above 17%, paying out between $0.36 and $0.55 per share. This REIT could be a great growth and income play - especially if investors can pick up additional shares in the $12 range.
Resource Capital (NYSE: RSO) is also paying out a healthy dividend yield of just under 13%. This REIT, focusing primarily in the commercial sector, actually has posted some positive numbers of late, including a return on equity of nearly 10%. This REIT also came in at 2012 annual earnings per share of $0.58, up from the firm's 2011 annual EPS result of $0.56.
The use of leverage has always been the cornerstone of the REIT industry, and it will likely continue to be. This has played a big part in the ability of REITs to offer their investors consistently strong dividend yields.
Although the shares of CYS have been recently downgraded from their "Buy" rating, I feel that this REIT can still offer investors a consistently strong dividend yield - especially if additional shares can be picked up in the $12 range.
StockCroc1 has no position in any stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!