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Finding Value and 11.0%
Yields in REITs |
Published:
July 9,
2007
Not
all subprime mortgage lenders are bad. In fact, the sell-off in
the sector has created a value opportunity for well-managed
subprime lenders like Vestin Realty Mortgage II (Nasdaq: VRTB,
$5.83). Since
listing on the Nasdaq exchange in May 2006, Vestin shares have
held steady above the $5.00-range, even amid the recent subprime
mortgage meltdown.
This mortgage REIT (real estate investment trust) pays a monthly
dividend of $0.0535, which equates to $0.64 annually and gives
the stock a yield of
11.0%. With cash flow of $17.8 million, the trust paid
out $16.3 million worth of dividends in 2006, giving it a 92%
payout ratio.
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Since 1995, the Las Vegas lender has made more than $2.0 billion
in loans and has diversified its loan portfolio across 11
states. The company was formed in 2001 and has paid out monthly
dividends since 2003. It converted to a real estate investment
trust last year after merging with a subsidiary.
The firm's dividend is powered by revenue from the interest
income on short-term (one to two-year) commercial real estate
loans. The loans are backed by trust deeds or mortgages, and the
company maintains a fairly conservative loan-to-value ratio of
70%. In other words, its $300 million loan portfolio is backed
by real estate worth about $429 million.
Many mortgage REITs use leverage to expand their investment
opportunities, but borrowing money against real estate assets
also puts these firms at risk if interest rates rise. What makes
Vestin particularly attractive to risk-averse investors is its
policy of remaining virtually debt-free to limit risk.
Still, the company is not entirely risk-free. In late 2006, it
had four delinquent loans on the books, worth $35 million, that
will likely go into foreclosure.
In March, management approved a share buyback program, allowing
it to take $10 million worth of shares off the marketplace.
Share buybacks like that generally bode well for the share
price.
As a REIT, Vestin's dividend income is taxable at the ordinary
income tax rate of up to 35%, making the shares suitable for a
tax-deferred IRA or 401(k) type of account. The company has a
dividend reinvestment plan, and you can call 610-649-7300 for
more information.
Action To Take ---> With its
stated "low-to-no-debt" policy, Vestin's double-digit yield may
be less risky than many of its subprime mortgage peers. Still,
rising long-term interest rates together with a slowing economy
could reduce demand for commercial real estate loans and weigh
on the company's returns. As such, we consider VRTB a more
aggressive high-yield play.
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
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