Many mortgage real estate investment stocks have plunged in the past couple of weeks. There has been a solid market correction since the election, and there have been concerns that QE3 and possibly additional quantitative easing from the Federal Reserve will create a wave of refinancing activity. Low interest rates cause homeowners to refinance in order to save money, but that savings often comes at the expense of the mortgage holder since it reduces the profit margin. However, the decline in some of these stocks appears exaggerated and as pointed out by famed investor Kyle Bass, some of these companies are better positioned than others because of non-agency exposure. Agency mortgage securities are generally higher quality and are backed by U.S. Government agencies. By contrast, Alt-A and Subprime loans that are not traditionally agency-backed, typically offer higher rates and lower credit quality. Since many of these borrowers do not usually qualify for traditional financing, they are as likely to take part in the refinancing boom. A few mortgage REIT companies have more significant exposure to non-agency mortgage-backed securities which are not as prone to refinancing, plus they are poised to benefit from an improving housing market which boosts credit quality. While these companies could face headwinds if additional quantitative easing measures are put in place, they could be more insulated when compared to others in this industry due to the higher exposure to non-agency paper.
Looking forward, many of the mortgage REIT stocks have taken a big hit as part of digesting the impact of QE3 and the wave of refinancings. Many of these stocks have already reduced dividend payouts to reflect the expectation of lower profits and bring the payout to levels which management believes is sustainable. Based on that and the exposure to non-agency paper, these stocks might have the best chance of maintaining relatively strong profit margins and high-yielding dividends:
Invesco Mortgage Capital (IVR) is a real estate investment trust that focuses its investments primarily in: residential mortgage-backed securities which are backed by a U.S. Government agency, residential mortgage-backed securities which are not issued or guaranteed by a U.S. government agency (non-agency), as well as commercial mortgage-backed securities. This company is externally managed and advised by Invesco Advisers, Inc. It is focused on achieving returns for shareholders primarily through dividends. Invesco's portfolio is allocated as follows: about 51.9% is agency-backed, 26.8% is non-agency, 19.1% is commercial mortgage-backed securities (or CMBS), and the remaining 2.2% is in equity investments. Invesco shares look attractive with a yield around 13%, plus, it trades below book value, which is around $20.96 per share.
Key Data Points For Invesco Mortgage Capital From Yahoo Finance:
Current Share Price: $19.83
52-Week Range: $13.81 to $21.64
Dividend: $2.60 which yields 13.1%
2012 Earnings Estimate: $2.76 per share
2013 Earnings Estimate: $2.60 per share
Chimera Investment Corporation (CIM) primarily invests in residential mortgage-backed securities, residential mortgage loans, and other real estate-related securities. It owns both agency-backed and non-agency mortgage securities. Chimera is externally managed by Fixed Income Discount Advisory Company or "FIDAC", which is a subsidiary of Annaly Capital Management, Inc. (NLY). As such, Annaly and FIDAC offers a quarterly "market commentary" which makes good reading for investors who want a current update on this sector and the impact of the Federal Reserve's QE3 program. Chimera shares look cheap and it currently trades about 20% below book value which is around $3.10 per share. Annaly also trades below book value, which is around $16.60 per share.
Key Data Points For Chimera Investment From Yahoo Finance:
Current Share Price: $2.66
52-Week Range: $1.81 to $3.16
Dividend: 36 cents per share which yields 13.5%
2012 Earnings Estimate: 47 cents per share
2013 Earnings Estimate: 45 cents per share
MFA Financial, Inc. (MFA) makes leveraged investments in both agency and non-agency residential mortgage backed securities. As of September 30, 2012, this company holds nearly $12 billion worth of assets which consists of about $7.2 billion worth of agency-backed securities, and around $4.7 billion in non-agency mortgage backed securities. This shows that MFA has significantly higher than average non-agency holdings which could benefit the company in the current market environment. For the third quarter, this company reported 19 cents per share in core earnings, which was close to the 20 cents it earned in the second quarter. MFA trades below book value, which is $9.07 per share.
Key Data Points For MFA Financial From Yahoo Finance:
Current Share Price: $8.15
52-Week Range: $6.24 to $8.77
Dividend: 84 cents per share which yields 10.3%
2013 (fiscal year) Earnings Estimate: 81 cents per share
2014 (fiscal year) Earnings Estimate: 87 cents per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.