By Joshua Schroeder Every day it seems like more and more people are on board with the recovery in real estate. Even the hardcore skeptics are being forced to admit that the market has stabilized and that prices are beginning to move higher. Most of the attention in the media seems to be focused on the housing sector which an investor can get exposure to through the large banks (XLF), home builders (XHB) and home renovation stocks (HD). Back in the spring of 2012 I wrote a blog on identifying solid high yielding dividend stocks in which I mentioned three companies that I either had a position in or was in the process of buying. Two of these companies were small cap REITs, Northstar Realty Finance (NRF) and Newcastle Investment Corp (NCT), and the other a shipping company, Knightsbridge Tankers (VLCCF). With this in mind, I thought it may be helpful to take a look back and evaluate the performance of these three dividend stocks almost a year later and see what there is to learn.
Let’s start with the loser, VLCCF. It was a bad call and a stock I lost money on. However, the worst part is not that I lost money; it is that I did not adhere to my own advice. In my post “3 Keys to Identifying Good Dividend Stocks” I wrote the following:
“Entering high yield stocks at the right time to capture not only the dividend, but potential stock price appreciation is critical. It requires a lot of patience to wait for the right entry point… Identifying undervalued high dividend stocks in industries that are just emerging from cyclical downturns or that are taking advantage of unusual macro-economic conditions is a key component to maximizing returns in this space.”
The shipping industry was, and still is, suffering from over capacity. VLCCF’s aging fleet resulted in poor operational efficiency compromised their ability to operate at a profit given the historically low spot rates. I overestimated VLCCF’s financial capacity to renew the fleet, lower operational costs, as well as the length of the cyclical downturn in spot rates. In other words I was too early. I still believe that a number of shipping stocks offer value, but my timing and stock selection last spring was dead wrong.
Alternatively, dividend stocks NCT and NRF have produced solid results. Both stocks have benefitted from the cyclical rebound in residential and commercial real estate, owing in large part to the low interest rate environment. At the same time that non-diversified mREITS like Annaly Capital have underperformed over the same time period due to refinancing exposure and greater interest rate risks, the diversified and opportunistic approach of NRF and NCT have allowed these companies to take advantage of still present market dislocations. And this has created value for shareholders.
For example, by co-investing in excess mortgage servicing rights (MSR’s) with recapture rates that are trending higher and lower prepayment rates, NCT has been able to tap a good potential source of additional cash flow. And this may support higher future dividends. In addition to its diversified real estate portfolio, NRF recently made an opportunistic investment in limited partnership interests in a number of real estate private equity funds. This will result in NRF receiving 85% of the Funds distributions until it has received 1.5x multiple on its invested capital.
I have owned NRF since 2010, largely because of the strength of management, but I started buying NCT again recently. Both stocks are up nearly 50% since that time and NRF has raised its dividend for 6 straight quarters. Additionally, NCT recently announced the spin-off of New Residential Investment Corp. (NRZ), a new residential focused mortgage REIT with shares scheduled to be issued in March. While neither of these dividend stocks is likely to be mentioned in the mainstream media, they have been a good way to play the momentum resulting from the rebound in real estate. It’s also important to note that Steve Cohen’s SAC Capital recently tripled its stake in NRF to nearly 10 million shares.
- Northstar Realty Finance Website – Presentation – 4Q
- Northstar Realty Finance Website – SEC Filings – Schedule 13G
- Newcastle Investment Corp Website – Presentations
Long Positions in NRF, NCT, SFL, and NLY at the time of publication.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.