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'TWO' Smart Ways to Participate in the Rental Housing Boom

Stocks in this article: TWO NLY

I'm particularly heartened by their management of CXS because it acquires, manages and finances commercial mortgage loans and other commercial real estate debt, commercial mortgage-backed securities and other commercial real estate-related assets. These kind of assets are doing very well and are not as affected by Fed monetary policies.

Two Harbors

A similar kind of REIT that has fared much better during the past month is Two Harbors Investment (TWO) which focuses on investing in, financing and managing residential mortgage-backed securities.

Their targeting of residential mortgage loans, residential real properties and other financial assets has shielded it from many of the challenges faced by REITs who mainly invest in government-backed mortgages. TWO's assets include agency RMBS which are collateralized by fixed-rate mortgage loans, adjustable-rate mortgage loans, hybrid mortgage loans or derivatives.

This emphasis on a variety of non-agency RMBS collateralized by prime mortgage loans, Alt-A mortgage loans, pay-option ARM mortgage loans and subprime mortgage loans allows it to own debt instruments that pay much higher yields.

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Besides all those profitable activities, TWO is building an inventory of single-family rental properties and houses. With low-interest loans offered by the government they can target houses that are selling at significant discounts to their replacement value while creating an abundant stream of rental income for shareholders.

TWO recently invested around $150 million in these kinds of homes (1,370 of them) in growing states like Arizona, California, Florida, Georgia, Nevada and North Carolina. Another exciting development is its recent announcement plans to spin off its residential real estate portfolio. The new company will be called Silver Bay Realty trust and TWO will own a large percentage of the company.

Silver Bay will be totally dedicated to purchasing, managing and renting more residential real estate. In time TWO's stake in Silver Bay will be distributed to current shareholders. In the meantime the income generated by this income-streaming operation will flow through to TWO shareholders and help support the current generous dividend yield of 12.3% yield (based on a share price of $11.70).

Two of a Kind

Here's a chart that compares how TWO's share price and NLY's share price have performed in the past year.

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