Billionaire Steve Cohen Bought This Real Estate Investment Trust

Real estate investment trusts, or REITs, are hot in the markets. Just on January 17^th, CBS Corporation (NYSE:CBS) rose 8% on the news that the company would spin out its billboard advertising unit as such a company; of course spinouts are looked upon highly in general, but REITs can achieve tax arbitrage as long as they distribute 90% of profits to shareholders. On the same day, billionaire Steve Cohen’s SAC Capital Advisors filed a 13G with the SEC to disclose that the fund owned 3.3 million shares of Colony Financial Inc (NYSE:CLNY), giving it 5.2% of the total shares outstanding.

Colony invests in commercial mortgage loans and other real estate debt, and has a market capitalization of about $880 million (with an average of about 640,000 shares traded daily and a current stock price of over $21, for over $13 million in daily dollar volume). Our database of 13F filings shows that SAC had owned about 340,000 shares of the stock at the end of September, so Cohen and his team have been buying quite a bit of this position in the last three and a half months. See more of Cohen’s stock picks.

Because REITs distribute considerable cash to shareholders, they often make attractive income stocks and Colony Financial Inc is no exception with an estimated forward dividend yield of 6.6%. The most recent quarterly payment was 40 cents per share, which actually annualizes to a 7.5% yield. That payment was an increase from the 35 cents per share the company had offered in the previous two quarters. While Colony does tend to maintain increases in its dividend payments over time, the figure for its December 2010 dividend was slightly higher than future payments. In any case, we would expect that yields would indeed be high which is of particular interest in a low interest rate environment.

Colony’s core earnings- a financial metric which adds back depreciation- was $12 million for the third quarter of 2012, down from $16 million in Q3 2011 (though for the first nine months of the year, core earnings were up). Depreciation is often not a relevant “expense” in real estate as real estate assets- as opposed to equipment or other assets- are unlikely to decrease in value and may actually increase in price, and for this reason earnings are often not useful in evaluating REITs. Annualized core earnings were $56 million, and the current market cap represents a multiple of 16 on that figure.

Chuck Royce’s Royce & Associates owned 1.7 million shares of Colony Financial Inc at the end of September (find Royce’s favorite stocks). SAB Capital Management, a fund managed by Brian Jackelow which has investments in many other REITs,  initiated a position of about 530,000 shares (check out more stocks SAB was buying). Multiple Colony insiders sold shares at the end of December (see a history of insider sales at the company); while we don’t consider insider sales to be as significant as insider purchases, since the principles of diversification can make insider selling rational, it is still a factor to be aware of.

Of course, investors could consider other REITs instead of Colony if they are interested in the high yields offered by this type of business. Examples of diversified REITs include Vornado Realty Trust (NYSE:VNO), W.P. Carey Inc. (NYSE:WPC), and National Retail Properties, Inc. (NYSE:NNN), which all carry yields in the 3% to 5% range and have been publicly traded for at least one year. Some REITs with particularly high yields- and, as a result, quite a bit of attention from the market- are Annaly Capital Management, Inc. (NYSE:NLY) at 12% and American Capital Agency Corp. (NASDAQ:AGNC) at 16%. However, we would note that these companies have decreased their dividend payments in recent quarters and so investors should be wary of putting too much emphasis on the current yield.

Disclosure: I own no shares of any stocks mentioned in this article.