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mREIT Update – High Yield and a Special Dividend

Investors have long been attracted to the high yields of mortgage REITs, which currently averages around 13 percent, nearly 7 times the average dividend yield of the S&P 500. The Fed’s announcement has caused drops in spreads, bond yields and homeowner’s borrowing costs, and as a result company’s earnings and dividends have been under pressure.

This will have a big impact on reinvestment for mREITs with low prepay protection.  November’s prepayment report showed a decline in overall prepayment speeds, but lower coupon speeds increased in the month. We continue to favor the mortgage REITs with prepay protected portfolios as they will have more stable cash flows from lower reinvestment needs. AGNC, AMTG, ARR, IVR, MTGE, and TWO have the lowest and most stable prepays in the sector.

Prepayment speeds on 30-year conventional speeds decreased 8% in November from the prior month, which was generally in line with expectations. Speeds on 3.5s rebounded potentially attributable to accelerated closing ahead of g-fee increases, rate relocks post September QE3 rally and closing delays due to Super Storm Sandy. The increase in 15-year speeds was in line with expectations.

The mortgage REITs are currently at a 7% discount to estimated fourth quarter book value and yielding 13.2%. Agency-only mortgage REITs are trading at a 7% discount to the hybrid peers.

While we continue to prefer the flexibility that hybrids have to invest across the entire mortgage universe, we see the Agency-only REITs offering better relative value today given the valuation discount. Trading at a discount to book value AGNC is our top pick; CYS and ARR also provide attractive relative value given current discounts to book.

The Board of Directors of CYS Investments, Inc. (CYS) declared a quarterly dividend of $0.40 per share of common stock for the fourth quarter of 2012, as well as a special dividend of $0.52 per share of common stock. The Company is making the special dividend to distribute the remaining REIT taxable income earned during 2012. These dividends will be paid on December 28, 2012 to common stock stockholders of record on December 21, 2012.  The company currently pays an annual dividend of$1.60 per share for a yield of around 12.3%.  CYS is trading at 87% of estimated book value.

American Capital Agency Corporation (AGNC) pays an annual dividend of five dollars per share for a yield of around 16.2%. The company invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored entities or by the United States government agency.  AGNC is trading at 95% of estimated book value.  American Capital Agency Corp. announced that its Board of Directors has authorized the repurchase of up to $500 million of its outstanding shares of common stock through December 31, 2013.

ARMOUR Residential REIT (ARR) invests primarily in residential mortgage backed securities issued or guaranteed by a United States Government-chartered entity, such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, or guaranteed by the Government National Mortgage Administration, a United States Government corporation (Ginnie Mae). The company currently pays an annual dividend of$1.08 per share for a yield of around 15.5%.  ARR is trading at 91% of estimated book value.

Mortgage REITs – Annaly Capital to Buy CreXus

Annaly Capital Management, Inc. ( NLY ) announced that it has put forth a proposal to acquire CreXus Investment Corp ( CXS ).

The proposal states that Annaly would purchase with cash the remaining outstanding stock of CreXus that is does not already own. Annaly currently owns about 12.4% (9.5 million) of the 76.6 million outstanding shares of common stock of CreXus.

Annaly would pay $12.50 per share in the deal. That is a +12.6% premium on the $11.10 share price that CXS closed at on Friday.

The potential acquisition has been made as Annaly seeks to diversify its investments.

The deal has only been put forth to the Board of Directors of CreXus and is still subject to approval.

Wellington Denahan, Chairman and Chief Executive Officer of Annaly Capital Management, Inc., made the following statement:

“Since our inception in 1997, Annaly has maintained the capacity to diversify its asset base to include real estate related assets in addition to Agency mortgage-backed securities if we determined that compelling other long-term investment opportunities exist relative to the Agency market. While we remain committed to the Agency market, given the current environment, we believe it is prudent to diversify a portion of our investment portfolio. Therefore, we may allocate up to 25% of our shareholders’ equity to real estate assets other than Agency mortgage-backed securities.

“A powerful step in this direction is the proposed acquisition of CreXus. We believe that wholly owning the commercial real estate platform we currently manage through FIDAC is complementary to our existing business and return profile and should provide stable and diversified risk-adjusted returns to our shareholders. CreXus’ capabilities and growth may be significantly enhanced when coupled with Annaly’s broad capital base.

“Our commercial real estate expertise, as well as our expertise in a number of other asset classes, are valuable strategic tools, and we look forward to updating the market on our portfolio as it evolves.

 

Hatteras Financial (HTS) has a 12% Dividend Yield

Hatteras Financial (HTS) is a real estate investment trust formed in 2007 to invest in single-family residential mortgage pass-through securities guaranteed or issued by U.S. Government agencies or U.S. Government-sponsored entities, such as Fannie Mae, Freddie Mac or Ginnie Mae.   Hatteras announced financial results for the quarter ended September 30, 2012.

Book value per share increased 7.8% in the quarter to $29.60; 4.3% higher than our estimate. Book value growth was aided by the opportunistic deployment of capital from the August preferred deal into the 15-year sector ahead of QE3.

During the quarter ended September 30, 2012, the Company earned net income of $82.0 million, or $0.83 per diluted common share, compared to net income of $89.1 million, or $0.91per diluted common share, during the quarter ended June 30, 2012. Net interest income for the quarter ended September 30, 2012 was $79.6 million, compared to $83.0 million for the quarter ended June 30, 2012 reflecting the continued compression of net interest margin.

The Agency MBS portfolio increased by $4 billion (18%) in the quarter. The end of period balance was 14% above our estimate. The percentage of 15-year fixed MBS as a percentage of the portfolio increased to 17% from 7% last quarter, now totaling $4.4 billion from $1.6 billion. Average earning assets for the quarter increased by 15%, and were 7% above our estimate.

The Company declared a dividend of $0.80 per share of common stock with respect to the quarter ended September 30, 2012, compared to a $0.90 per share dividend for the quarter ended June 30, 2012.

Hatteras is trading at an 11% discount to third quarter book value and yielding 12.15% on the expected next 12 months dividends.

Hatteras has an equity summary score of 9.2 out of 10 for a VERY Bullish outlook.

Impact of Share Buyback on Annaly Capital

Annaly Capital Management, Inc. (NLY) announced that its Board of Directors has authorized the repurchase of up to $1.5 billion of its outstanding common shares over a 12 month period.  Annaly currently has 975 million shares outstanding with a market cap of $15.59 billion.  The buyback is 9.62% of the current market cap.

Based on FY 2013 earnings projections, the buyback will have an EPS accretion of 10.64%.  By adding the accretion with the current dividend yield of 12.5% the total return will be 23% without changing the PE ratio.  It will be hard to find a better high yield investment with this type of potential.

Zacks Investment has Annaly rated as neutral or hold with a 12-month price target of 18.30.  The target price is 15.6% higher than the current market price.

The current low interest rate environment has reduced potential investment returns, only partially offset by low short-term funding costs.  Prepayment rates on residential mortgages have also recently increased as agencies complete programs to repurchase delinquent mortgages and stabilize housing markets.  As a result, we expect net interest margins to narrow moderately over the next 12 months. Longer term, we think Annaly’s conservative financial posture places it in a strong position to expand its portfolio of agency mortgage backed securities once investment markets become more attractive. We think Annaly can augment investment income with higher fees from an expanding portfolio of assets under management for third parties.

Q3 earnings are expected to be announced after market hours on October 29, 2012.  Investors should hold up new purchases until the Q3 results.

Here is a link to the best mortgage REITs for the next quarter.

Buy This Stock for a 16% Dividend Yield

New York Mortgage Trust (NYMT) has priced its underwritten registered public offering of 13.5 million shares of common stock at a public offering price of $6.89 per share.  Currently the shares are trading at $6.46 so investors can buy the stock below the IPO price.  One of the best times to buy shares is when they sale shares to raise funds.  Typically, the stock price will sell off when new shares are made public creating a cheaper buying price.

New York Mortgage will report Q3 earnings on October 30.  The Company reported Q2 net income attributable to common stockholders of $5.1 million, representing net income per weighted average share of $0.34 for the quarter ended June 30, 2012, as compared to$4.2 million of net income attributable to common stockholders and net income per weighted average share of $0.44 for the quarter ended June 30, 2011.

New York Mortgage has a current dividend yield of 16%.  The dividend was increased 8.0% in Q2 2012.  On September 18, 2012 the board of directors at New York Mortgage Trust approved a dividend of $0.27 per share.

Here are the recent analyst actions:

On October 1, 2012 Thomson Reuters/Verus upgraded NEW YORK MORTGAGE TRUST INC NEW from SELL to BUY.

On September 28, 2012 Ativo Research upgraded NEW YORK MORTGAGE TRUST INC NEW from FAVORABLE to MOST FAVORABLE.

New York Mortgage has an equity summary score of 9.8 out of 10 for a VERY Bullish outlook.  First Call analysts have a BUY recommendation with a 2.0 rating.

New York Mortgage has a 12-month price target of $8.

Mortgage REITs are Still an Attractive High Yield Dividend Play

Mortgage REITs have garnered increased attention among investors in recent weeks after the Federal Reserve announced stimulus measures focused on the purchases of mortgage backed securities.  The Market Vectors Mortgage REIT Income ETF (MORT), which seeks to replicate the price and yield performance of the Market Vectors Global Mortgage REITs Index, has gained over 20 percent year-to-date.

Mortgage REITs (mREITs) continue to be that right place for high yield investors.  The mortgage REITs are currently at a 4% premium to estimated third quarter book value and yielding 12.0%.  One of the biggest risks to mREITs is increasing mortgage prepayments as the reinvestment risk is higher when interest rate spreads decline.  The latest data suggests that mortgage prepayment rates showed a slowdown in the level of activity in September.

However, we expect increases in speeds in upcoming months given the rally in rates.  We continue to favor the mortgage REITs with prepay protected portfolios as they will have better third quarter book value performance from increased pay-ups on specified pools and more stable cash flows from lower reinvestment needs.  Prepayment speeds on 30-year conventional speeds decreased 11% in September from the prior month. Trends were generally consistent between the 30-year and 15-year sectors.

The best mortgage REIT plays are IVR, MTGE, and ATMG in the next quarter.

American Capital Mortgage Investment Corp. (MTGE) reported net income for the three months ended June 30, 2012 of $32.2 million, or $1.15 per share, and net book value of $22.08 per share.  The Company has a current price to estimated 3Qbook value of 106% indicating it is trading at a 6% premium.  However, American Capital has a dividend yield of 14.72% that has been increased 165% in the last year.

Coverage on American Capital Mortgage was initiated with an Outperform at JMP Securities. The stock price target is $26.50.

Invesco Mortgage Capital Inc. (IVR) reported net income of $79.8 million, or $0.68 per share (basic and diluted), for the quarter ended June 30, 2012 and its book value per share was $18.40.   The Company has a current price to estimated 3Qbook value of 105% indicating it is trading at a 5% premium.  Invesco Mortgage has a dividend yield of 12.54%.

Morgan Stanley recently upgraded Invesco Mortgage from EQUAL-WEIGHT to OVERWEIGHT.  The stock price target is $22.00.

Apollo Residential Mortgage, Inc. (AMTG) reported Net income was $26.4 million or $1.24 per share, for the three months ended June 30, 2012 and its book value per share was $19.65.   The Company has a current price to estimated 3Qbook value of 104% indicating it is trading at a 4% premium.  Apollo Residential has a dividend yield of 16.02%.

New mREIT with High Yield and Strong Buy Rating

Western Asset Mortgage Capital Corporation (WMC) is a REIT that invests primarily in Agency RMBS, which are residential mortgage-backed securities for which the principal and interest payments are guaranteed by a U.S. Government agency (such as GNMA) or a U.S. Government-sponsored entity (such as FNMA or FHLMC).  The Company closed of its initial public offering (IPO) on May 15, 2012 with an initial stock price of $18.75.  The stock is currently trading at a 15% premium to the IPO price.

For the 47-day period within the quarter ended June 30, 2012, the Company earned net income of$0.41 per diluted share. During the period, the Company generated core earnings of $4.8 million, or$0.47 per diluted share.

As of June 30, 2012, the Company owned an aggregate securities portfolio equaling $1.92 billion in market value, comprised of $1.53 billion of 30-year fixed-rate Agency RMBS, $223.7 million of 20-year fixed-rate Agency RMBS, $76.8 million of fixed-rate collateralized mortgage obligations and $86.3 million market value of Agency interest-only and inverse interest-only strips.

On July 26, 2012, WAM Capital announced today that its Board of Directors has declared a cash dividend of $0.38 per share for the quarter.  This is an annual dividend yield of 7.02%.  The payout was 93% of EPS but will be 100% of EPS in coming quarters.

WAM Capital has a market cap of $219 million.  WAM Capital is projected to have $2.01 per share in earnings this year.  This is a PE of 9 and an annual dividend yield of 9.26% (based on 100% payout) this year.  The company is projected to grow earnings 52% to $3.06 in 2013.  This is an estimated forward PE of 7.1.

The company has an analyst rating of 1.5 (strong buy) with 8 analysts following.

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