As the credit crisis wound down and markets began to firm, smart investors came to the conclusion that real estate was probably going to be a pretty good investment at the then prevailing prices. Money began to flow into real estate related securities and exchange-traded funds to take advantage of what many thought to be a tremendous long-term opportunity.
The good news is that they were correct and real estate and real estate investment trusts made a startling recovery, making a lot of money for early investors. The bad news, though, is that these money flows continue today as a new breed of investor flocks to real estate-related securities.
Given the strong returns of the past five years, momentum investors and the unintended momentum chasers that are the retail investors continue pushing cash into the sector in hopes the strong returns will continue.
Income-seeking investors are also heavy buyers, as REITs are one of the few places left offering a decent yield. The good news is that many, if not most, are using indexes and ETFs to buy a real estate portfolio, and the smaller REITs not in the bigger funds are still available at bargain prices.
Small REITs to Buy: Silver Bay Realty Trust Corp (SBY)
Dividend Yield: 3.5%
Silver Bay Realty (SBY) is a classic example of an ignored REIT that still offers outstanding value at current prices. The REIT owns single family homes in the United States many of which were purchased at depressed prices following the credit crisis.
The homes have appreciated in value, but shares of the REIT have not. It took them much longer than expected to raise the dividend payment, as rehab and management costs dwarfed original estimates. Even today the yield is well below many other REITs at just 3.57%, so it is not an income investors favorite pick. It’s also not a top holding of any ETF, so there’s been no buying pressure from that source.
SBY stock trades at stated book value, but just 66% of management’s latest estimate of net asset value of $22.03 per share. Given that housing is nowhere near fully recovered, the long-term potential returns for Silver Bay could be extraordinary.
Small REITs to Buy: Arbor Realty Trust Inc (ABR)
Dividend Yield: 8.9%
Arbor Realty (ABR) has long been one of my favorite real estate related investments. Arbor invests in multifamily and commercial real estate-related bridge and mezzanine loans, preferred equity investments and other mortgage-related securities.
The market cap of Arbor is just $340 million, so it does not attract a lot of attention from large institutional investors; and ABR stock trades at just 71% of book value at the current price.
Arbor just announced that it has reached an agreement on the purchase of a leading national multifamily agency loan origination and servicing platform that originated over $3 billion in loans last year. Management expects this be accretive to both earnings and dividends almost immediately.
On the conference call, they estimate the dividend could grow to 66 cents to 70 cents from the current 60 cents a share. At the current price, ABR shares yield 9%, so Arbor is attractive for both income and growth-oriented investors.
Small REITs to Buy: Colony Capital Inc (CLNY)
Dividend Yield: 9.4%
If I was forced to pick one stock to invest all my money in for the rest of my life Colony Capital (CLNY) would make the list of finalists.
This REIT has five divisions: Colony Light Industrial Platform (“CLIP”), Single Family Residential Rental, Other Real Estate Equity, Real Estate Debt and Investment Management and operates in most segments of the global real estate markets.
Executive Chairman Thomas Barrack became a billionaire as a real estate investor, and Colony is managed in a fashion similar to the one Barrack used to build his fortune. CLNY shares trade a little below book value and yields 9.4% at the current price. Owing Colony is like owning a well-run high yielding real estate private equity form, and I expect to see high total returns form this stock over the years.
It’s not a top ten holding in any ETF, and with a market cap of just $1.9 billion, CLNY has not attracted much interest from large institutions. The people running Colony like the long-term outlook and they own 19% of the company.
As of this writing, Tim Melvin held all of the aforementioned stocks.
