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This REIT Yields 9.0% and
Should Offer Above-Average Gains |
Published:
June 2, 2008
Redwood Trust (NYSE: RWT, $33.75) is a real estate
investment trust (REIT) that specializes in jumbo residential loans
(mortgages of $417,000 or higher)
through highly complex instruments called "credit enhanced
securities" (CESs). Started in 1994, the company has been highly
successful, providing a compounded annual return of +15.6%,
including reinvested dividends.
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Redwood has a history of regularly raising dividends. In 2000,
for example, it distributed $1.61 per share. That amount jumped
to $2.80 in 2005, and the company now pays
$0.75 a quarter,
which creates a projected annual payout of $3.00 for 2008.
In addition, each November the company has historically
distributed a special, variable payout based entirely on
additional earnings. In 2007, this amount was $2.00 per share,
creating total dividends of $5.00. At current prices that
amounts to a historical yield of
14.8%.
In its latest annual report, management warned investors not to
expect a special dividend this year. As such, you can anticipate
a smaller total distribution of $3.00 per share, giving the
stock a still hefty forward yield of
9.0%.
Roughly 40% of Redwood's business is done in California. The CES process involves
separating non-investment-grade instruments built to absorb
credit losses from the higher-quality investment aspects of the
issue.
Redwood's investment focus puts it at the eye of the U.S.
housing market hurricane. Delinquent payments on residential
mortgages in the company's CES program rose from 0.96% to 1.25%
in the past three months. While the company isn't securitizing
any new jumbo mortgages for the time being, it is using its
considerable cash flow to buy assets at bargain prices.
Management is sanguine on the company's long-term outlook,
saying in the recent annual report that it viewed 2008 with
caution as a year with "tremendous long-term earnings
potential." Specifically, the company anticipates "extraordinary
opportunities to make new investments" from falling asset prices
and reduced competition in its market niche.
Clearly, the stock is risky. RWT could still be hurt if there is
a further downturn in real estate that impacts higher-priced
homes financed by jumbo loans. That would be particularly true
if the downturn was sharp in California. Still, from a low of
$24.07 in November, RWT rallied to over $40 as recently as April
1st.
Redwood
Trust is not for the faint of heart. Still, with total annual
returns of +15.6% for the past decade, the company is capable of
excellent performance. The relatively sure yield and opportunity
to buy the shares at a time of extreme market pessimism make
this issue suitable for high-risk investors. We will continue to
monitor RWT for a safer entry point for more conservative
investors.
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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