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iStar Financial Inc. (SFI), American Capital Agency Corp. (AGNC): How to Play the Real Estate Resurgence

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.

iStar Financial Inc.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.

The company looks to be a considerable value, with a book value of over $31 per share and an affordable price/earnings multiple of just under 8. The delicious extra is its $5 annual dividend – giving it a yield just north of 15%.

Toll Brothers Inc (NYSE:TOL), known for its focus on luxury homes, shows plenty of potential upside as its current P/E ratio is pushing 12, still below that of the Standard & Poor’s 500, and return on equity is a respectable 17%. If its gamble on condos pays off, betting that baby boomers will want to downsize to more convenient living, not necessarily less-expensive, then you may see this stock push to new heights. Over the past five years, its stock has advanced twice as much as the S&P 500.

Toll may also be a future dividend-paying stock. Although the company does not currently pay one, shareholders may eventually ask for a piece of the builder’s copious $7 per share in cash.

Simon Property Group, Inc (NYSE:SPG) has come back into the spotlight gradually buying and fixing up stagnant malls – mainly from distressed companies after the real estate bubble burst. In 2010, Simon offered to purchase money-losing General Growth Properties Inc (NYSE:GGP) for $10 billion – a deal supported by many General Growth Properties Inc (NYSE:GGP) investors – but the plan ultimately fizzled. Although falling short of the deal, Simon still shows a solid 29% ROE and pays an annual dividend of 2.9%.

SPG has a P/E ratio that is a bit high, at over 33. But it may be worth the premium as it looks to acquire more properties and generate revenues from leases as the economy improves. Investors looking for income may consider Simon’s preferred stock (SPGPRJ), which pays a tidy 5.9% annually.

Will real estate and REITs always go up? We know the answer is no. But until we can find a way to create new land, space will continue to become more and more limited as time goes on – and land and real estate more valuable.

The article How to Play the Real Estate Resurgence originally appeared on and is written by Sterling Raskie.

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