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Billionaire Steve Cohen Bought This Real Estate Investment Trust

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Real estate investment trusts, or REITs, are hot in the markets. Just on January 17th, CBS Corporation (NYSE:CBS) rose 8% on the news that the company would spin out its billboard advertising unit as such a company; of course spinouts are looked upon highly in general, but REITs can achieve tax arbitrage as long as they distribute 90% of profits to shareholders. On the same day, billionaire Steve Cohen’s SAC Capital Advisors filed a 13G with the SEC to disclose that the fund owned 3.3 million shares of Colony Financial Inc (NYSE:CLNY), giving it 5.2% of the total shares outstanding.

Colony invests in commercial mortgage loans and other real estate debt, and has a market capitalization of about $880 million (with an average of about 640,000 shares traded daily and a current stock price of over $21, for over $13 million in daily dollar volume). Our database of 13F filings shows that SAC had owned about 340,000 shares of the stock at the end of September, so Cohen and his team have been buying quite a bit of this position in the last three and a half months. See more of Cohen’s stock picks.

Steven CohenBecause REITs distribute considerable cash to shareholders, they often make attractive income stocks and Colony Financial Inc is no exception with an estimated forward dividend yield of 6.6%. The most recent quarterly payment was 40 cents per share, which actually annualizes to a 7.5% yield. That payment was an increase from the 35 cents per share the company had offered in the previous two quarters. While Colony does tend to maintain increases in its dividend payments over time, the figure for its December 2010 dividend was slightly higher than future payments. In any case, we would expect that yields would indeed be high which is of particular interest in a low interest rate environment.

Colony’s core earnings- a financial metric which adds back depreciation- was $12 million for the third quarter of 2012, down from $16 million in Q3 2011 (though for the first nine months of the year, core earnings were up). Depreciation is often not a relevant “expense” in real estate as real estate assets- as opposed to equipment or other assets- are unlikely to decrease in value and may actually increase in price, and for this reason earnings are often not useful in evaluating REITs. Annualized core earnings were $56 million, and the current market cap represents a multiple of 16 on that figure.

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