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Finding Value and 11.0% Yields in REITs
By: Carla Pasternak
Editor
High-Yield Investing, High-Yield International
Published: July 16, 2007

Not all subprime mortgage lenders are bad. In fact, the sell-off in the sector has created a value opportunity for well-managed subprime lenders like Vestin Realty Mortgage II (Nasdaq: VRTB, $5.90). Since listing on the Nasdaq exchange in May 2006, Vestin shares have held steady above the $5.00-range, even amid the recent subprime mortgage meltdown.

This mortgage REIT (real estate investment trust) pays a monthly dividend of $0.0535, which equates to $0.64 annually and gives the stock a yield of nearly 11.0%. With cash flow of $17.8 million, the trust paid out $16.3 million worth of dividends in 2006, giving it a 92% payout ratio.

Since 1995, the Las Vegas lender has made more than $2.0 billion in loans and has diversified its loan portfolio across 11 states. The company was formed in 2001 and has paid out monthly dividends since 2003. It converted to a real estate investment trust last year after merging with a subsidiary.

The firm's dividend is powered by revenue from the interest income on short-term (one to two-year) commercial real estate loans. The loans are backed by trust deeds or mortgages, and the company maintains a fairly conservative loan-to-value ratio of 70%. In other words, its $300 million loan portfolio is backed by real estate worth about $429 million.

Many mortgage REITs use leverage to expand their investment opportunities, but borrowing money against real estate assets also puts these firms at risk if interest rates rise. What makes Vestin particularly attractive to risk-averse investors is its policy of remaining virtually debt-free to limit risk.

Still, the company is not entirely risk-free. In late 2006, it had four delinquent loans on the books, worth $35 million, that will likely go into foreclosure.

In March, management approved a share buyback program, allowing it to take $10 million worth of shares off the marketplace. Share buybacks like that generally bode well for the share price.

As a REIT, Vestin's dividend income is taxable at the ordinary income tax rate of up to 35%, making the shares suitable for a tax-deferred IRA or 401(k) type of account. The company has a dividend reinvestment plan, and you can call 610-649-7300 for more information.

Action To Take ---> With its stated "low-to-no-debt" policy, Vestin's double-digit yield may be less risky than many of its subprime mortgage peers. Still, rising long-term interest rates together with a slowing economy could reduce demand for commercial real estate loans and weigh on the company's returns. As such, we consider VRTB a more aggressive high-yield play.



Carla Pasternak
Editor
High-Yield Investing

About High-Yield Investing

High-Yield Investing is a monthly investment newsletter that brings you a wealth of information on the market's leading income stocks and funds, as well as a host of relatively unknown investment options that you probably won't find coverage of anywhere else. Many of these securities provide investors with annual dividend yields of 10%, 15%, even 20% or more. The newsletter not only provides subscribers with investing ideas that produce incredibly high dividend yields, but the kicker is that these high-yield investments have also consistently outperformed the major market averages. (Learn More)

About Carla Pasternak

Editor of StreetAuthority.com's High-Yield Investing newsletter since its inception in May 2004, Carla Pasternak draws on a variety of financial backgrounds to make profitable calls on income-generating stocks for her readers.

Carla has been employed in the investment industry for more than two decades. In addition to her work as a writer for several nationally recognized financial publishers, her previous experience includes a position as president of a well-respected investor relations firm. She has also been writing shareholder reports for public companies since 1980.

A highly successful investment analyst, Carla specializes in high-yield, income-paying stocks. In that pursuit, she's always mindful to select companies that not only pay rich dividends, but that also deliver strong long-term capital gains. Furthermore, Carla's experience in writing SEC filings gives her the added insight required for her to truly understand a company's current and future financial health.

On the educational front, Carla holds BA, MA, MBA and Ph.D. degrees. When she's not watching the market, she's teaching business courses at the college level and managing millions of dollars in portfolio assets.

To learn more about Carla Pasternak's premium income investing newsletter -- High-Yield Investing -- please visit this link.


 

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