By Siraj Sarwar
Mortgage real estate investment trusts [mREITs] have recently been able to generate massive profits due to fairly flexible investment strategies capable of adapting quickly to rapidly changing market conditions. This has enabled most of them to be able to offer distributions that are far more attractive than most other investments. For income-oriented investors mREITs have become an extremely popular investment vehicle.
In this article, I pick three less-known mREITs. These mREITs have returned significant income to their shareholders in difficult economic and financial environment. In addition, these mREITs have extremely flexible business models and strong investment strategies to tackle unstable financial conditions. All of these mREITs offer eye-catching dividend yields of over 12%. These are Invesco Mortgage Capital (NYSE:IVR), Apollo Residential Mortgage (NYSE:AMTG) and Two Harbors Investment Corp (NYSE:TWO). Let's observe each mREIT for its potential distributions and projected returns.
Apollo Residential Mortgage, Inc. invests mainly in finances, and manages Agency mortgage-backed securities, non-Agency mortgage-backed securities, residential mortgage loans and other residential mortgage assets. Recently, this mREIT has announced a quarterly dividend of $0.70 per share.
Based on the NASDAQ, the mREIT has started paying dividends at the start of 2012. For the full year of 2012, the mREIT paid dividends of $3.40 per share, including a special dividend of $0.35. This is a gigantic dividend in such a tough financial and economic situation. Below are few key matrices demonstrating the mREITs ability to sustain dividends.
Earnings Per Share [EPS] next Year 5.67%
Quarterly revenue growth 265.85%
Operating Margin 92.2
Profit Margin 89.5%
Payout ratio Trailing Twelve Months [TTM] 36.5%
Recently, the mREIT announced full year results with a massive operating income of $53.4 million or $2.67 per share. The mREIT's full year net income stands at $1,677 million or $8.36 per common share. The mREIT has a strong portfolio of residential mortgage-backed securities consisting of Agency RMBS with a fair value of $3.63 billion and non-Agency RMBS with a fair value of $605.2 million.
In addition, in the last year alone, it was able to increase book value per common share by 4.8% from $21.46 to $22.49 per common share. Moreover, it has one of the best net interest spread rates of 2.7%. Net interest spread rate is a key metric to examine a mortgage REITs profitability. Over the year, Apollo Residential was able to maintain one of the highest spread rates even in the current low interest rate environment.
Apollo Residential is a new player in the real estate sector. Last year was the first year for Apollo as a publicly traded company. Over the year, this mREIT has shown an exceptional business strategy which led it to achieve massive earnings. For the full year of 2012, it returned nearly 56% to shareholders in the form of combined price appreciation and dividends.
Two Harbors Investment Corp is a second stock on the collection. The mREIT was formed to invest mainly in residential mortgage-backed securities. Two Harbors is one of the top players in the equity market. The stock made a remarkable recovery after collapsing to almost $5 in May of 2010. As of the time of writing, the stock was trading for $13.84. In the last year alone, its stock gained almost 27.53%. This is a very high performance for a stock that offers double-digit yields.
TWO data by YCharts
Furthermore, Two Harbors is well known for paying substantial dividends. Recently, this mREIT has announced a quarterly dividend of $0.32 cents/share plus a special dividend of $0.35 to distribute the company's shares of Silver Bay Realty Trust Corp (NYSE:SBY). For the full year of 2012, this mREIT has paid dividends of $1.71 per share, yielding at 12.96%.
At the end of 2012, Two Harbors has generated $1.05 billion in comprehensive income. The mREIT has derived above 16% of its total return from its non-agency portfolio while the remaining return has been generated from the agency portfolio.
Furthermore, over the past year alone, the REIT has grown its business three-fold. Remarkably, it expanded its market capitalization from $1.3 billion to $4.03 billion. Below are few key matrices demonstrating the mREITs ability to sustain dividends.
Revenue Growth (3 year Average) 450%
Operating Margin % TTM 86.4
Net Margin % TTM 64.2
Payout ratio 144%
EPS Next Year Growth 1.55%
Invesco Mortgage Capital Inc. invests mainly in financing and mortgage loans and managing residential and commercial mortgage-backed securities. Recently, Invesco Mortgage announced a quarterly dividend of $0.65 cents per common share.
IVR data by YCharts
At present, Invesco offers one of the best quarterly dividends of 0.65 cents/share. Due to the continuing depressed economy, the mREIT had to sustain similar quarterly dividends over the past five quarters. For the full year of 2012, the mREIT paid dividends of $2.60 per common share, yielding 12.71%. Moreover, over the past year alone, its stock gained nearly 16.88%.
Furthermore, it has a quite flexible business model which can adapt to difficult economic and financial environments. With the Fed's recent initiative of Operation Twist, QE3 and QE4, Agency RMBS has become quite expensive. Consequently, spread rates have fallen; as a result, Agency RMBS are now trading at a premium.
Therefore, with a flexible business model, this mREIT has been able to quickly change its investment strategy. It switched its focus from agency RMBS to non-agency RMBS and commercial mortgage-backed securities (CBMS). Based on this new investment strategy, the mREIT decreased its agency RMBS portfolio by $604 million. Additionally, Invesco increased its CBMS portfolio and non-agency RMBS by $297 million and $534 million, respectively.
Invesco looks like a good buy with a price-to-book ratio of 1.2 and a dividend yield of 12.17%. The mREIT has an attractive, smart and flexible investment strategy to sustain and grow returns for investors. With the recent change in its investment strategies, Invesco is well-positioned to sustain and increase attractive returns for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by Siraj Sarwar, one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.