ETF Teardown: The Best REITs

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool. ETFs hold a collection of stocks that share certain elements and allow investors to get in early on what they believe are tomorrow's big trends.

Investors bullish on future growth in real estate can turn to the iShares Dow Jones U.S. Real Estate ETF, whose top holdings include Simon Property Group (NYSE: SPG  ) and Public Storage (NYSE: PSA  ) . But because this ETF invests in a number of REITs, its broad diversity also limits your upside -- and investors may dilute stellar returns from that one amazing company in the crowd.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best investments in real estate. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors quickly locate great stocks, the 5,500 stocks rated in CAPS can be "tagged" with descriptors that group the company with others sharing certain qualities -- "Biofuels," for example, or "Drug Delivery."

Selecting the REIT-Diversified label in CAPS gives you a list of 56 companies that trade on American exchanges. This particular collection of investments has performed worse than the general market in the past year, down 26.5%, while the S&P 500 has dipped by 18.7%.

To gauge which companies the CAPS community thinks offer the best opportunities in this particular space today, we'll sort a sampling of these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine a few companies to see who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Getting down to the nitty-gritty
Here are some diversified REIT stocks I've gleaned from CAPS today.



Market Capitalization (billions)

Rayonier (NYSE: RYN  )



Arbor Realty Trust (NYSE: ABR  )



Northstar Realty (NYSE: NRF  )



Douglas Emmett



Digital Realty Trust



If a tree falls ...
With residential homebuilders such as Lennar (NYSE: LEN  ) and KB Home (NYSE: KBH  ) still stinging, timber sales have fallen sharply. Strong demand for performance fibers, as well as demand for higher- and better-use rural properties, helped Rayonier offset the decrease in timber prices, though. The timberland management company did see sales fall to $284.2 million in the first quarter, compared to $299.7 million last year. But earnings rose 16% to $40.6 million, compared to $35.1 million a year ago.

The near future doesn't show a lot of upside from here, though -- the company anticipates reporting second-quarter and annual earnings results that are lower than last year’s, thanks to ongoing softness in timber and real estate markets. The good news for investors is that despite the lowered forecasts, the company announced it will maintain its regular $0.50 dividend, giving it a healthy 4.4% yield. Despite economic real estate woes, CAPS members remain bullish on timber, with 291 out of the 298 members rating Rayonier predicting that it will outperform the S&P.

Looking to the Northstar
While few companies that deal in debt and securities are avoiding the pain of the current real estate slump, small caps like Northstar may be able to take advantage of the challenging economic times. In fact, the company’s small size and significant level of insider ownership -- along with other impressive metrics -- capture many of the attributes that makes for a winning investment.

Northstar’s management is looking to take advantage of what CEO David Hamamoto sees as some of the best market opportunities in years. The company recently had its majority-owned health-care real estate venture, Wakefield Capital, LLC, sell $100 million worth of convertible preferred equity interest. The company plans to combine the approximately $90 million it will receive from the transaction with another $80 million it raised in May to enhance its liquidity position and give it the flexibility to pursue opportunities.

With Northstar's stock taking another southern drop lately, the company's $0.36-per-share dividend gives it greater than an 18% annualized dividend yield. Not surprisingly, 295 out of 321 CAPS members rating Northstar expect it to outperform the broader market going forward.

Lead a horse to water ...
Plucking individual stocks from the real estate sector is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than blindly accepting a recommendation. After all, even the best stock pickers can be horribly wrong.

Do you agree that real estate is poised for a rebound? Or is the bottom still a ways away? Give your own opinion at Motley Fool CAPS.

The Motley Fool Income Investor service scours the market for solid investments paying investors money to hold shares. See which dividend-paying firms the team is recommending today with a free 30-day trial.

Fool contributor Dave Mock loves doing the teardown part -- it's the put-back-together part he hates. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy dips Twinkies in chocolate.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 09, 2008, at 11:41 AM, mytown wrote:

    This looks real good NOW!

    NEW YORK, Oct. 8 /PRNewswire-FirstCall/ -- NorthStar Realty Finance Corp. (NYSE: NRF - News) today announced that its Board of Directors has declared a cash dividend of $0.36 per share of common stock, payable with respect to the quarter ended September 30, 2008. The dividend is expected to be paid on November 14, 2008 to shareholders of record as of the close of business on November 4, 2008. The Company's common shares will begin trading ex-dividend on October 31, 2008.

    Based on the closing price of $4.15 per share on October 8, 2008, this distribution represents an annualized dividend yield of approximately 34.7%.

    Additionally, the Company's Board of Directors has authorized a share repurchase program of up to 10,000,000 shares of the Company's outstanding common stock, or approximately 16% of the Company's outstanding common stock. The Company currently has in excess of $250 million of cash liquidity.

    Stock repurchases under this program will be made from time to time through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities.




  • Report this Comment On February 02, 2009, at 2:08 PM, cmitchellw wrote:

    I would love to see an update of this article. A lot has changed since it was written. How about some current guidance?

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