Before we move off into the long weekend, I want to finish up with the real estate sector. As I have mentioned, it has been second only to small banks as a source of profits over the years.
While real estate-related securities have been a popular theme the past few years, almost all the money has flowed into the larger REITs that are included in the indexes and ETFs that track the sector. It has been an asset allocation trade that includes real estate in a portfolio regardless of valuation factors. I think we can be a lot more successful with a rifle than a shotgun when it comes to buying property and mortgages on the stock exchange.
One of the better ways to identify a real estate-related investment is to identify those that are trading at a discount to asset value and are seeing strong buying from insiders. At the end of the day, after all the opinions and predictions about real estate markets and interest rates are on the table, the people who know the most about the condition and prospects of a particular company are those who oversee and run the companies.
I am gratified to see that several of the companies I have already mentioned this week have seen buying by corporate officers and directors. BRT Realty (BRT), Invesco Mortgage Capital (IVR) and Apollo Commercial Real Estate (ARI) have all seen insider buying in 2015. All of them are cheap based on asset value, and I think they are well-run companies with substantial long-term upside. In the case of Apollo and Invesco, you enjoy double-digit yields while you wait for the shares to appreciate.
ARMOUR Residential REIT (ARR) is a company I have liked and owned for some time. I have heard dire predictions of its demise more times than I can count since I have owned the stock, but the co-CEO and one director disagree with the dour outlook put forth by analysts. ARR manages a portfolio of residential mortgage-backed securities. The company recently cut its dividend from $0.05 a month to $0.04 because of low interest rates and tightening interest margins. It expects the payout to be at that level for the second quarter of 2015. At the current price, that's a yield of over 15%. The shares are trading at 65% of book value, so there would appear to be solid upside in the stock. It is highly volatile, but it looks like all they have to do is not blow up entirely for us to make money as long-term investors. Insiders would appear to agree.
I am intrigued by the long-term potential of CatchMark Timber Trust (CTT). The company owns 393,300 acres of timberland in Alabama, Florida, Georgia, Louisiana and Texas. It has been growing by buying new acreage, which seems to be working. Year-over-year revenue increases on the last quarter of 177% and posted a profit compared to a loss in the comparable period of 2013. Management is projecting continued strong revenue gains in 2015. The shares trade right at asset value and yield 4.27% at the current price.
This has the potential to be a big winner, and profits and dividends continue to increase as the economy slowly recovers over the next few years. One director is convinced the future is bright, as he purchased an additional $75,000 of stock in the company in late February. I am not rushing to buy the stock at book value, but if it slips to a discount during market decline, I would be a buyer as well.
No one knows more about the financial condition of a company than the CFO, so when they are buying shares of their company in the open market, it makes a significant statement. That has been the case with shares of AG Mortgage Investment Trust (MITT). The CFO of the REIT raised his stake in the firm in mid-March.
AG Mortgage invests in residential and commercial mortgage assets, other real estate-related securities and financial assets like asset-backed securities covered by auto loans, credit cards, recreational vehicles and student loans. The intriguing thing about this REIT is that it is managed by a subsidiary of Angelo Gordon, a very successful distressed debt and alternative investment manager. This should give MITT a bit of an edge when it comes to researching and trading these types of securities. The stock is trading at 94% of asset value and is yielding over 12% at the current price.
Following insiders has always worked well for me, and following their actions in real estate securities has been particularly profitable.
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