Omega Healthcare Investors (OHI) is the largest publicly traded real estate investment trust (REIT) ...
A Commercial REIT with a 9% Yield
08/24/2012 6:15 am EST
But as seasoned yield hunters know, there's more to a yield than just the number. The company has to be strong enough to maintain its dividends for the long term...and this one has the strength, says Bryan Perry of Cash Machine.
I've been talking for the better part of a year about how corporate balance sheets are considerably healthier than consumer balance sheets, so the natural tendency in an economy that's slowing would be to allocate funds to commercial real estate instead of residential. Although the yields aren't as high, the safety of principal takes priority until economic growth turns back up.
For this reason, Apollo Commercial Real Estate Finance (ARI) makes good and timely sense. ARI is a commercial mortgage real estate investment trust (mREIT) that primarily originates, invests in, acquires, and manages senior performing commercial real estate mortgage loans, commercial mortgage-backed securities, and other commercial real estate-related debt investments throughout the United States.
Real estate remains a core focus in our portfolio, but it's wise to insulate the downside risk by making a lateral move into the more predictable commercial space.
ARI's primary purpose is to create a diversified portfolio of performing commercial real estate mortgage loans and commercial mortgage-backed securities (CMBS) that will be held to maturity. These CMBS are expected to provide stable attractive cash-flow yields for stock holders with stable dividends, complemented by capital gains. Income first, capital gains second: That's right up my alley.
The company posted second-quarter earnings this past Monday that beat estimates by a penny, coming in at 41 cents per share. Net income for the three months ended was $9.9 million, or 47 cents per share, as compared with net income of $6.5 million, or 37 cents per share, for the three months ended June 30, 2011.
Management declared a 40-cent dividend, the ninth consecutive payment at that level, which translates to a current yield of 9.52%. (Because this is a REIT, all dividends are taxed as ordinary income.)
With heavy exposure to AAA-rated CMBS, blue-chip obligations to the likes of Hilton Worldwide and loans backed by first mortgages throwing off a 15% combined internal rate of return, it's not difficult to see why such a strong set of holdings is so appealing. We can sleep comfortably knowing we own this kind of financial strength.
In addition, the company's GAAP book value per share at June 30 was $16.59, as compared with $16.46 at March 31, meaning the shares are trading right at a very attractive 1.0 times book value. The increase in the book value was primarily the result of net unrealized gains on the company's portfolio of CMBS.
Its one-year chart shows a nice pattern of higher highs and higher lows within a smooth uptrend. That's the kind of steady technical formation I'm looking for in a headline-driven market.
Apollo Commercial Real Estate Finance is a very straightforward business model that brings an element of higher quality to owning real estate that will benefit in an economic rebound. ARI will be a nice addition to our Conservative High-Yield Portfolio—and it's one that we should be able to own for an extended time. Buy ARI under $17.
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