2 Attractive 7% Yielders

It was an interesting week in the market especially in regards to the reaction to some stronger than expected economic reports. During the week, Q3 GDP was revised up to 3.6% and consumer confidence came in at a five month high. On Friday, the monthly jobs reports was more robust than expected with over 200,000 new jobs created and unemployment dropped to 7.0%.

As expected the stock market rallied strongly on Friday on the job report. However, unexpectedly interest rates did not budge much during the week even as "Taper" talk picked up strongly. The ten year treasury yield ended the week at 2.86%.

I believe the muted reaction to the increasing chance of the Federal Reserve starting to pull back on its liquidity to the market has to do with the rapid rise in interest rates over the last few months. The ten year has already moved up substantially from ~1.6% in May. Maybe a good portion of the reaction to the "Taper" has been factored into interest rates.

This would be good news for the high-yield sectors that have underperformed the market as interest rates have rose over the past six months. Within these sectors, I like some commercial real estate plays. Commercial real estate has slowly recovered from the depths of the recession and has yet to approach "bubble" territory again like residential real estate in selected cities like Miami.

Default and charge off rates continue to decline across the space as well. Here are two attractive 7% plus yield plays within the sector I like at current levels.

I added some Arbor Realty (ABR) to my income portfolio on Friday. Arbor is primarily a commercial real estate investment trust (REIT). The company invests in multi-family and commercial real estate-related bridge loans, mezzanine loans and other real estate-related assets. It also holds some investments in mortgage-related securities and real estate property.

After declining some 15% since interest rates started to back up in May, Arbor is selling at a cheap valuation. The shares are priced at less than 90% of book value. In addition, this REIT provides a generous seven plus yield (7.9%) at current prices. Payouts have increased some ~75% since 2012 as the company continues to recover from a near death experience during the financial crisis.

Only two analysts cover this REIT. One has a $9.25 a share price target on ABR, the other is at $9 a share. Both price targets are significantly above the current price of $6.60 a share. Revenues are tracking to an over 40% gain this fiscal year and the consensus is for a ~15% gain in FY2014. The shares are not expensive at ~10x forward AFFO (Adjusted Funds from Operations).

Colony Financial (CLNY) is a similar REIT to Arbor. The company manages a diversified portfolio of real estate-related debt investments. It primarily focuses on commercial mortgage loans, CMBS, mezzanine loans, real estate owned properties, debtor-in-possession loans, bridge loans, etc.

The most attractive feature for income investors is Colony's robust yield (7.1%). The REIT has more than doubled dividend payouts since coming public in 2009. In addition, the median price target by the three analysts (low target: $23 a share, high target: $26 a share) that cover the shares is $25 a share; 25% above the current price of this REIT.

Colony is also cheap on a book value basis where it sells at ~90% of book value. The company is growing revenues at a rapid rate. Revenue should increase better than 55% this year and over 45% in FY2014. CLNY goes for under 11x AFFO, a slight discount to its historical average (12.4).

Source: 2 Attractive 7% Yielders

Disclosure: I am long ABR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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