The first of our March picks for The 25% Cash Machine portfolio will be our third Mortgage REIT, Alesco Financial Inc. (AFN).
Not all Real Estate Investment Trusts (REITs) are created equal and in the midst of the sub-prime market meltdown some mortgage REITs became highly exposed. There are golden pockets of strength and opportunity in the global REIT market, particularly in the specialty finance REITs. This particular opportunity I've identified exhibits sustained growth and appears to be a strong prospect for rising dividend payouts.
Alesco Financial Inc. (AFN) is a Real Estate Investment Trust, but unlike many REITs that own real estate directly, Alesco makes investments in real-estate-related (and other) securities.
Alesco's portfolio is made up of investments in Trust Preferred Securities (TruPS), mortgage backed securities and Corporate Loan Obligations. Alesco is managed by Cohen and Co. -- an asset-management firm that primarily lends to real estate and financial services.
Alesco expects to capitalize on Cohen's referral network, and its experience in debt structuring and risk management in the capital markets. AFN's management structure -- combined with its portfolio strategy -- should provide investors with good, risk-adjusted returns and cash distributions, coupled with the tax advantages that go hand-in-hand with REIT investments.
Alesco is a Maryland corporation formed in October 2003 to acquire residential mortgage assets and commercial mortgage bridge loans in the United States -- including loans owned jointly with others. In October 2005, the board of directors engaged Bank of America Securities to review its business plan and explore means of maximizing shareholder value.
As a result of the review, there was a substantial asset redeployment and a definitive agreement (approved by stockholders in October 2006) to merge with a specialty finance REIT that was managed by Cohen and Co. Cohen became the long-term manager that began assisting Alesco in the redeployment of its assets into the following asset classes:
Alesco plans to invest in other types of investments within Cohen's areas of expertise, such as mezzanine real estate loans, mortgage loans, corporate tenant leases and equity interests in real estate.
Alesco just declared its first quarterly dividend for 2007 of 30 cents per share. Extrapolating that out we get an annual dividend payout of $1.20 per share. With the stock currently trading at $11.10, we are getting a current yield of 10.8%, which is why I was attracted to the stock in the first place. Here's the dividend table for last year:
| Declaration Dates | Record Dates | Payment Dates | Total Distribution | Ordinary Income Dividend |
| 3/7/06 | 3/16/06 | 3/30/06 | 3 cents | 3 cents |
| 5/5/06 | 5/12/06 | 5/26/06 | 3 cents | 3 cents |
| 8/21/06 | 9/1/06 | 9/14/06 | 3 cents | 3 cents |
| 9/25/06 | 10/5/06 | 10/16/06 | 50 cents | 50 cents |
| 10/18/06 | 11/1/06 | 12/15/06 | 28 cents | 28 cents |
| Totals | n/a | n/a | 87 cents | 87 cents |
Now that AFN has three months behind its asset redeployment plan, management has communicated to the investment community that it plans to focus on increasing the dividend payout going forward, as the most meaningful way to enhance shareholder value.
AFN now holds a rich portfolio of structured notes paying interest to the REIT, and is underpinned by strong commercial real estate assets and a growing portfolio of loans issued to good, stable, medium-sized businesses similar to the type of Business Development Companies we already own.
The basket of securities owned by AFN generates more than enough income to pay the $1.20 annual dividend, which is why I believe a hike in the payout is likely later this year, and I believe these pools of money are not well-understood by investors.
In fact, AFN has some similarity (in structure) to our holding in Deerfield Triarc Capital (DFR), up 28% since I recommended it in Sept. 2006. I definitely want to add another complex REIT structure that's hard for the average investor to get their arms around and, since Deerfield has been a big winner for us, I want to increase our exposure and weighting to the specialty finance sector.
In the midst of an uneasy 2006 U.S. housing market, the U.S. REIT market managed an impressive average return of 35%, with certain top-performing segments returning even more than that -- for example, 45% in office space, 45% in healthcare, 41% in self-storage and 40% for apartments.
The overall U.S. REIT industry performance exceeded major U.S. benchmarks for the seventh-straight year, and that beat the Russell 2000 at 18.37%, the Dow Jones Industrials at 16.29%, the S&P 500 at 15.79% and the Nasdaq Composite at 9.52%.
General sentiment agrees that after a booming year in the sector, 2007 should continue to show gains as substantial commercial real estate deals are already making advances in the new year. Opinions vary, but industry experts suggest an overall strengthening in the areas of office space, apartments and self-storage.
I recommend buying Alesco Financial Inc. (AFN) up to $11.50 per share. The average daily volume for AFN is 400,000 shares and this trading volume level should provide us with the kind of liquidity we need to move in and out of positions. If possible, use limit orders to buy AFN. Remember that you should be investing 3% of the total amount you've allocated to our portfolio, as we build out our list to 33 securities.
The reason I'm sending this information in an alert -- and not waiting for the Monthly newsletter coming out Friday -- is that Alesco trades ex-dividend this Thursday (March 1). So, try to own it by the closing bell on Wednesday (Feb. 28) in order to be entitled to the dividend that gets paid out on March 15. My one-year price target for the stock is $15.
Alesco Financial Inc. (AFN) (as of 2/26/07)
Current Price: $11
52-Week Range: $8.01 to $11.99
Target Price: $15
Dividend Yield: 10.92%
Dividend Payout (Annual): $1.20
Payout Frequency: Quarterly
Ex-Dividend Date: March 1
Div. Payment Date: March 15
Market Cap: $125 million
I'll have a few more comments about Alesco later this week in the monthly newsletter.
Bryan Perry
Editor The 25% Cash Machine