3 Commercial REITs That Will Make You Money, 2 That Won't

REITs pay out 90% of their REIT net income by way of dividends to shareholders. With the economy looking weaker than it has for some time, here we look at 5 REITS that concentrate on commercial properties and mortgages:

Apollo Commercial Real Estate (ARI): Shares are trading around $12.40, as against their 52-week trading range of $11.79 to $17.14. At the current market price, the company is capitalized at $255.37 million. Earnings per share for the last year were $1.12. It paid a dividend of $1.60 last year (a yield of 12.90%).

The company announced a 12-month share repurchase program in August that will see $35 million of shares bought back. This was just after it had announced a 29% increase in its second quarter operating earnings. Shares have been pulled back from their year high as investors have shied away from equity investments. But Apollo’s earnings growth should remain strong through the next twelve months and support the dividend. The company is indicting its confidence with its share repurchase program, and investors should follow suit.

Getty Realty Coporation (GTY): Shares are trading at $15 at the time of writing, against their 52-week trading range of $13.41 to $32.20. At the current market price, the company is capitalized at $498.24 million. Earnings per share for the last fiscal year were $1.66, placing the shares on a price-to-earnings ratio of 9. It paid a dividend of $1.00 last year (a yield of 6.70%).

Getty Realty operates mostly in the leasing of retail gas stations and convenience stores. Its largest tenant is Cambridge Petroleum Holding Inc, a small niche player. It is behind in rental payments, and observers are concerned by its creditworthiness. This calls into question a large part of Getty’s earnings. Until this matter is resolved, I see no upside for the shares. Avoid.

Starwood Poperty Trust (STWD): ! Shares a re trading at $16.70 at the time of writing, at the low end of their 52-week trading range of $15.89 to $23.67. At the current market price, the company is capitalized at $1.56 billion. Earnings per share for the last fiscal year were $1.61, placing the shares on a price-to-earnings ratio of 10.42. It paid a dividend of $1.76 last year (a yield of 10.50%).

Starwood is seeking to continue its securitization program, having completed the securitization of $154.4 million of four mortgages at the end of August. It now has around $120 million of loans left, which are targeted for securitaization. The completion of this process should shield it from any marked economic downturn and resulting defaults. Earlier in the month, the company announced plans to repurchase up to $100 million of its own shares. A company that is protecting its earnings, whilst at the same time showing confidence in its strategy. Buy.

Whitestone REIT Class shares (WSR): Shares are trading around $11.20 at the time of writing, as against their 52-week trading range of $10.05 to $14.94. At the current market price, the company is capitalized at $122.88 million. Earnings per share for the last fiscal year were $0.11, placing the shares on a price-to-earnings ratio of 98.16. It paid a dividend of $1.14 last year (a yield of 10.20%).

Whitestone owns and leases out around 40 properties in the Texas region. It has cash of $57.78 million, and debts of just $103.05 million. Its long-term leasing agreements should protect earnings going forward, which are expected to come in at around $0.94 per share this year, and then rise to around $1.20 the year after. This should underpin the dividend, though longer term profitability will be driven by the performance of the retail economy over the next three to five years. For those confident in a strong economic turnaround, the shares are a buy. For others, they are best left alone.

Redwood Trust Inc (RWT): Shares are trading around $10.50 at the time of writing, as against their 52-week trading range of $10.09 to $17.16. At the current market price, the company is capitalized at $827.20 million. Earnings per share for the last fiscal year were $0.76, placing the shares on a price-to-earnings ratio of 13.83. It paid a dividend of $1.00 last year (a yield of 9.50%). Redwood’s portfolio of commercial and residential real estate loans and securities is being attacked from all directions. Firstly, the economic climate is not conducive to its core businesses: a slowdown will mean more defaults on residential mortgages, and hardship for the commercial sector. Further, short-term interest rates are being pushed higher by the Fed’s Operation Twist. This will place pressure on Redwood’s loan book margins. If the Fed’s attempts to kick start the economy work Redwood’s profits will increase accordingly, though it is too early to say with any confidence. Avoid for now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.