Colony Financial: This REIT Doesn’t Fear Rate Increases

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There has been a lot of concern of late about what is going to happen to some high-yielding securities when the Fed finally raises rates. Bond yields jumped up this week as fears of an earlier-than-expected rate hike have weighed on the bond market, and we have seen selling in some income securities. REITs have been hit pretty hard, falling 2.5% in just the past week as investors began to bail in anticipation of higher rates.

reits, colony financialJanet Yellen and the Fed dispelled some of those fears yesterday when they kept the considerable period of time language when referring to low rates. The economy isn’t growing fast enough for the fed to consider raising rates, and it may be 2016 before we see a meaningful rate hike from the central banks.

Trying to decipher what the fed may do and how the markets will react is usually a waste of time for investors. Rather than worrying about rate moves, REIT investors would be better off paying attention to what they are buying and what price they are paying for a particular collection of assets.

Colony Financial (CLNY) is a good example of a REIT whose future is probably not going to hurt by higher rates. The REIT is opportunistic and looks to acquire real estate related assets on discounted or distressed terms and realize profits as they recover or are disposed of on favorable terms.

Colony was formed in 2009 and all of its assets have been acquired since the crisis and bargain prices. The company has purchased loans in the secondary market that were distressed in some way and are staring to cash some of these in for solid gains.

So far, CLNY has realized gains on 26 deals with an average internal rate of return of 20%. It recently foreclosed on a loan it had purchased and took over a 103 hotel group. Colony successfully refinanced the debt, replaced management and reflagged under national known hotel brands.

Colony has acquired loans from the FDIC at a substantial discount that are seeing realization, not to mention a portfolio of discounted mortgage loans from Spain. CLNY is originating short-term floating rate loans on commercial real estate and hotel properties. The company has invested $550 million in Colony American Homes, an investment vehicle created for the purpose of acquiring and renting single-family homes.

None of Colony’s activities in seeking out and monetizing undervalued and distressed real estate related assets is going to see much effect from what steps the fed may or may not take.

You can buy Colony shares right at book value right now, and the stock is yielding 6.4% at the current price. Let everyone else worry about the Fed. Colony is opportunistically exploiting pockets of value in real estate markets. With a leverage ratio just 31% they are much less leveraged than other REITs. Colony should be able to kick off a steady stream of profits and dividends no matter what happened with the Fed in the future.

As of this writing, Tim Melvin was long CLNY.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/reit-seasons/.

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