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
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