Tuesday, April 21, 2009

iStar Financial: The Yield Play

iStar Financial Inc. (NYSE: SFI) is a publicly traded real estate investment trust (REIT) focused on the commercial real estate industry.

The only reason I got involved with this company is certainly the fact that it is a great income source, but I later came to notice that it did not come at such a cheap price. Basically iStar, as Ben Graham most notorious student Warren Buffett would put it, is a cigar-butt type of investment; let me explain with a simple analogy. You are walking down the street and, all of a sudden, you find a cigar-butt on the floor. It is repulsive but there’s one or two puffs left on it. It is still ugly but since you are looking for a free puff, you smoke it. That is the definition of a cigar-butt investment; it is free (or almost) but there are a couple of earnings left on it. The shaky nature of the company still makes it attractive for me.
They suspended their dividend in the fourth quarter of 2008. I am holding my position for the simple reason that as soon as the dividend is reinstated, the yield on the my shares will be incredible! Assuming the reinstate the dividend at 20 cents per quarter, less than 75% of the original dividend. At today's closing price of 3.72$ a share, I still get a 21% yield.

So why, if the opportunity is great enough not to be missed by a beginner, doesn't everybody jump on it? It is actually quite simple, people do not know when the dividend will be reinstated and uncertainty is very bad for the price of a stock. Fortunately enough, I am patient and i will wait for as long as it will be necessary because my average purchasing price is way lower than today's closing price.

Comprehensive financial information can be found on their website at: http://www.istarfinancial.com/
Interestingly enough, they put a lot of money for the quality of their website and annual reports and kept doing it for their 2008 annual report, even after a terrible performance.

Full disclosure: the author holds a long position in SFI

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