Agency Mortgage REITs Offer Deep Discounts To Book Value And High Yields

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 |  Includes: AGNC, CYS, NLY
by: Albert Alfonso

Agency Mortgage REITs "mREITs" have had a rough time since the Federal Reserve announced QE3 on 13 September 2012. In an 11-to-1 vote, the Federal Reserve decided to launch a new $40 billion a month, open-ended, bond purchasing program of agency mortgage-backed securities and also to continue an extremely low rates policy until at least mid-2015. The share price declines for several of these agency mREITs have been particularly severe since this announcement.

For example, CYS Investments (NYSE:CYS) has declined 19.75%, American Capital Agency (NASDAQ:AGNC) has declined 19.8% and Annaly Capital (NYSE:NLY) has declined 20.0%. Indeed, it is remarkable just how severe and consistent this decline in share price has been for these three companies.

AGNC Chart

AGNC data by YCharts

Discount to Book Value

However, this decline in share price has caused these companies to now trade for deep discounts to third quarter 2012 book values. CYS, AGNC and NLY now trade for discounts of 19%, 11% and 16%, respectively. Please note that on December 21, CYS paid a $0.52 special dividend. CYS' discount to book value adjusted for this special dividend is 16%.

CYS Adjusted CYS AGNC NLY
Price $11.79 $11.79 $29.00 $14.01
Book Value as of Sept. 30 $14.46 $13.94 $32.94 $16.60
Discount to Book Value 19% 16% 11% 16%
Click to enlarge

Stock Repurchases

Each of these companies has also announced stock repurchase programs. mREITs often issue shares when stock prices are over book value. This tactic is accretive to book value. The reverse of this tactic is buying back shares under book value, which should also be accretive to book value. On November 15, CYS announced a $250 million stock repurchase program. On October 29, AGNC announced a $500 million share buyback program. On October 16, NLY announced a 1.5 billion share repurchase program. The stock repurchase programs are not chump change either. For CYS, $250 million represents 12.13% of its market cap. For AGNC, $500 million represents 5.05% of its market cap. For NLY, $1.5 billion represents 10.98% of its market cap.

CYS AGNC NLY
Market Cap $2.06 billion $9.9 billion $13.66 billion
Stock Repurchase Program $250 million $500 million $1.5 billion
Stock Repurchase as % of Market Cap 12.13% 5.05% 10.98%
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Dividends

Each company has also announced a dividend recently. While we will not know the full effects of QE3 until the companies announce Q4 earnings, these recent dividends can give you clues as to the effects of the Fed's actions. On December 10, CYS announced a $0.40 quarterly dividend. This was a 11.1% decline from the previous quarter's $0.45 dividend. On December 14, AGNC announced a $1.25 quarterly dividend. This was inline from the previous quarter's $1.25 dividend. On December 18, NLY announced a $0.45 quarterly dividend. This was a 10% decline from the previous quarter's $0.50 dividend. I had earlier predicted a 15% reduction in Annaly's dividend. The yields for these companies, using the recent dividends, are quite high. At current prices, CYS now yields 13.6%, AGNC yields 17.24%, and NLY yields 12.85%.

CYS AGNC NLY
Previous Dividend $0.45 $1.25 $0.50
Current Dividend $0.40 $1.25 $0.45
Reduction 11.1% NA 10%
Current Yield 13.6% 17.24% 12.85%
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Conclusion

While the full effects of quantitative easing are still not known, I believe that the decline in agency mREITs is overdone. Yes, the dividends for these stocks are heading lower, but it should be offset somewhat by increases in book value. The stock repurchases programs instituted by each company should also further help increase book value. I personally think that CYS is the cheapest of the group, while AGNC may be at the most risk of further declines, especially if it were to reduce its dividend.

Disclosure: I am long CYS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.