Earnings Season Preview: What to Expect From These High-Yield REITs

With CYS Investments (NYSE: CYS  ) having reported slightly lower earnings this week, earnings season for real estate investment trusts (REITs) has arrived.

It's important to remember, however, that since the massive financial crisis bottomed out in late 2008, the financial sector has rebounded spectacularly, though earnings growth has slowed quite a bit in recent quarters:

Sources: S&P data and author's graphical design chops.

Sources: S&P data and author's graphical design chops.

That's certainly been the case for REITs, which were absolutely crushed during the financial crisis. Markets have come back to ordinary conditions -- albeit at incredibly low interest rates -- but the economy is still in poor shape. This affects some REITs in different ways than others. Let's take a look at some of the major players.

Company Name

Expected Reporting Date

Expected EPS

Year-Ago EPS

Reported EPS Last Quarter

% Surprise Last Quarter

Plum Creek Timber (NYSE: PCL  ) Oct. 24 $0.30 $0.20 $0.27 (7%)
Annaly Capital (NYSE: NLY  ) Oct. 24-26 $0.65 $0.60 $0.63 11%
Chimera (NYSE: CIM  ) Oct. 25 $0.14 $0.14 $0.15 (7%)
American Capital Agency (Nasdaq: AGNC  ) Oct. 25 $1.40 $1.30 $1.36 (3%)
Weyerhaeuser (NYSE: WY  ) Oct. 28 $0.12 $0.20* $0.06 (33%)
RAIT Financial (NYSE: RAS  ) Oct. 28 $0.04 ($0.34)* $0.50 NM
Resource Capital (NYSE: RSO  ) Nov. 2 $0.13 $0.27 $0.13 (3%)
Invesco (NYSE: IVR  ) Nov. 3 $0.87 $1.01 $0.99 0%
Two Harbors (NYSE: TWO  ) Nov. 7-17 $0.40 $0.41 ($0.01) (42%)
ARMOUR Residential (NYSE: ARR  ) Nov. 8-18 $0.36 ($0.14) ($0.62) NM

S&P Capital IQ, Earnings.com, and Yahoo! Finance. NM = not meaningful.
*Normalized.

There are many different kinds of REITs -- the only thing they truly have in common is a commitment to return more than 90% of their earnings to shareholders in the form of dividends. The stocks in the table all have big yields ranging from about 4% (Weyerhaeuser) to 22% (Invesco).

In fact, commercial REITs can be analyzed as members of their industry. In the case of Weyerhaeuser and Plum Creek Timber, that's, well, timber. Unfortunately for these two, timber prices haven't been spectacular lately, and, with a weak economy and an oversupply of homes, neither has the construction market.

RAIT Financial and Resource Capital operate in the commercial real estate market. Businesses aren't exactly on an office-space expansion spree these days, so investors will want to continue to keep a close eye on occupancy rates.

The other names on the list are residential mortgage REITs, which borrow money on the overnight market to buy mortgage-backed securities. They make money on the difference between the cost of their short-term funding and income from their portfolios. This low-interest-rate environment has been especially kind to them because, unlike commercial REITs, their portfolios tend to be protected against default by the government. For this reason, I've bought shares of Annaly and Chimera for a real-money portfolio I manage for The Motley Fool.

"Operation Twist," the Federal Reserve plan to lengthen the duration of its portfolio, could put pressure on long-term interest rates that generate mortgage REIT interest income. It's also a tangible reminder that the Fed could drive those rates down further if it decides to take more aggressive action to deal with the unemployment crisis. Not only can lower rates crimp interest income, but they can also make refinancing more attractive for homeowners. Residential mortgage investors really don't like prepayment.

It's unlikely that dividends will take a major hit from the Twist this quarter, but remember that stock prices can be forward-looking. It'll be interesting to see how dangerous these medium-term risks to residential REITs turn out to be.

Though REITs can be attractive for their high yields, keep in mind that many face a variety of risks these days. If you're looking for steadier dividend opportunities and the potential for stock appreciation, The Motley Fool has put together a special report, "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this special free report, and now you can access it today at no cost. Get instant access to the names of these 13 high yielders -- it's free.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter, where he goes by @TMFDada. The Motley Fool owns shares of Annaly Capital Management, Plum Creek Timber, and Chimera Investment. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy..


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  • Report this Comment On October 22, 2011, at 4:32 PM, zorro6204 wrote:

    Oops, truth squad here again. Or at least to provide some clarification.

    RAS does own commericial property in its two big securitizations it foreclosed on, primarily. But most of RAS was invested in residential mortgages, not that it matters much, none of those CDO's are performing and they defeased the bad ones.

    RSO's five legacy securitizations own no commercial real estate, but two of them loaned to commericial projects. It should be noted that most of their holdings are bank loans.

    In spite of the relationship of management (same family), I hate to mention RAS and RSO in the same breath! Night and day in terms of performance since the crash. RSO is the gem, RAS is holding its own for the moment, we'll see what happens, there's still some recourse debt coming up. RSO has practically none.

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