Last week, a stronger-than-expected GDP report spooked Wall Street, causing stocks to sell off a bit. The fear of higher rates is the boogey man that keeps traders up at night, because the removal of the low interest rate punch bowl could bring stocks’ five-year party to a screeching halt.
For income-seeking individual investors, higher interest rates can’t come soon enough but the truth is that it won’t happen fast enough to do any good. Even when the Fed does start to back away and let rates rise, it won’t let them go up very fast, and it will be many years before we see fixed-income investments provide acceptable returns that meet the need for generating income.
If you had the cash and the fortitude to put money to work in blue-chip stocks and REITs back in 2009 and 2010, you have done very well and your investments are providing a solid dividend yield based on your cost. As a bonus, you also have huge capital gains.
If you have cash to put to work today, it’s a different picture. Stocks have increased substantially and most blue chips are no longer a bargain. The REIT indices yield just about 3%-3.5% and the larger REITs trade well above book value. To find income that meets our needs, we have to move away from the larger real estate related investments and be focused on valuation as well as yield.
Arbor Realty (ABR)
Arbor Realty (ABR) has been one of my favorite REIT investments for several years. This company invests in commercial real estate loans as well as preferred and equity investments in real estate projects. Arbor has been seeing strong results this year with real estate markets have generally improving, and the company has done a solid job of underwriting its loans.
Arbor has a loan and investment portfolio value at about $1.6 billion and has just two nonperforming loans with a net value of about $6.3 million. Last month, Arbor had a liability of $58 million terminated when the property way refinanced. The net result was an increase in book value for $7.55 to $8.71, so the shares are a bargain right now, trading for less than $7.
Arbor shares currently yield 7.5% at the current price and are a good fit for most income portfolios.
Apollo Commercial Real Estate Finance (ARI)
Apollo Commercial Real Estate Finance (ARI) is also in the commercial real estate business, making and investing in loans related to a wide range of commercial properties. This REIT has a huge advantage over its competitors because of its relationship with private equity giant Apollo Global Management (APO).
Using its parent’s contacts around the world, Apollo Commercial sees deals no one else will get to see and can get money to work on advantageous terms. Management is not shy about promoting the edge the relationship gives them. Apollo’s website flatly sates, “We believe our relationship with Apollo Global Management provides us with significant advantages in sourcing, evaluating, underwriting and managing investments.”
Shares of the REIT are cheap right now, trading at just 89% of book value. The yield is 9.7% so shares of Apollo Commercial make an excellent alternative for income-seeking investors.
Bottom line: It is harder to find investments that produce adequate income right now. By searching the smaller REITS, though, we can still find bargain issues with high dividend yields
As of this writing, Tim Melvin was long ABR and ARI.