Real estate seems to be on the mend. The best way to play this is with four promising stocks that cover different aspect of the property market. Three of them are real estate investment trusts. Two are in mortgages, one in homebuilding, and the fourth in regional shopping malls.
The first company, iStar Financial Inc. (NYSE:SFI) took a beating in 2008. with its non-agency mortgages (read: federally supported organizations like Fannie Mae don’t back them). But it may be having a rebirth as real estate prospects improve. American Capital Agency Corp. (NASDAQ:AGNC), specializing in agency mortgages, doubled in the past four years, and still commands attention with a very high dividend.
Mortgage REITs bounced back nicely from the dark days of the financial crisis. According to the FTSE NAREIT Real Estate Index, mortgage REITs overall are up almost 11% in total return (price appreciation plus dividends) thus far this year. Most of that comes from their lush dividends.
Toll Brothers Inc (NYSE:TOL), the lone non-REIT entry, eyes expanding into the condo arena and benefits from a home-buying recovery. The SPDR S&P Homebuilders exchange-traded fund is up almost 7% this year. And Simon Property Group, Inc (NYSE:SPG) – which pays a respectable 2.9% dividend and owns all of its underlying properties – is the nation’s largest mall owner, a sector also enjoying a rebound. The NAREIT gauge is ahead over 20% in 2013.
The real estate debacle was so devastating that these encouraging signs are a tonic for investors. In the last decade, the general consensus was that the only way property values could go is up. Credit terms were loose, banks were quick to offer deals, and buyers were in a frenzy to get their hands on the American Dream. As late as 2005 to 2006, many homes in much-desired areas were going for 10% to as high as 20% above asking price. Forget about fair market value – the homes were selling based on what people were willing to pay – and actually, what banks were willing to lend.
My wife and I bought a home in 2005. We had a certain range in mind and a certain budget to follow. Regardless of what we knew our limitations were, our bank was doing everything it could to throw money at us. The bank told we could have almost 30% more than what we had budgeted for, and even offered us an interest-only mortgage so we could “afford” the payments. Fortunately, we resisted the temptation, but sadly, others gave in. In 2008, the walls came tumbling down and real estate prices plummeted.
In iStar Financial Inc. (NYSE:SFI)’s fourth quarter 2012 earnings conference call, company Chairman Jay Sugarman said that the REIT was making progress turning its $500 million in non-performing loans (about a fourth of its portfolio) into cash or performing assets. He expected 40% of NPLs to make that improvement by year-end. Meanwhile, performing loans yield a nice 7.9%. While still in the red, this is a company deals with mainly financial high-end private and corporate real estate – where recovery is under way.
This company took a beating from the financial crisis. It fell from $50 per share in February 2007 to a rock-bottom $0.76 in February 2009. Since then, it has recovered to around $10. Although it’s still struggling to improve, iStar Financial Inc. (NYSE:SFI) could be a considerable bargain, showing a book value of $15.85 per share.
American Capital Agency Corp. (NASDAQ:AGNC) wants nothing to do with the potentially more lucrative but riskier non-agency market. It recovered from a low of $14.73 in March of 2009, to around $33 lately. AGNC primarily invests in collateralized mortgage obligations (bundles of mortgage-backed securities) and mortgage pass-through securities, with the comfort that Freddie Mac, Fannie Mae, and Ginnie Mae guarantee their interest and principal payments.