Seeking Alpha
Long/short equity, research analyst, dividend investing, tech
Profile| Send Message|
( followers)

Real Estate Investment Trusts ("REITs") and particularly mREITs have been a hot topic in the market as the net interest rate spread continues to narrow. This is still a very lucrative market segment as even low interest rate spreads can be profitable due to the use of leverage. SA Contributor Rupert Hargreaves recently wrote a great overview of interest rates spreads for some popular REITs and it is a great read.

REITs come in many shapes and forms but at the most fundamental level are companies that buy and sell real estate assets. At one extreme you can have a company that owns real property and on the other end of the spectrum there are companies that hold no real assets but instead buy mortgage backed securities ("MBS"). Companies generate income primarily from the net spread between the interest income earned on these securities/investments and the cost of borrowing as well as hedging activities. Since these companies are required to distribute such a high percent of earnings to investors, the yields are much higher than you find with more traditional companies. However, the stock prices and dividends can both be quite volatile. Additionally, this makes some traditional metrics, such as payout ratios, less meaningful.

For details of the strategy and my screener details, please consult my methodology on the topic (last modified 1/21/2013). In brief, the screen focuses on relative stable equities with a concentration on liquid companies at affordable valuations. This is summarized below:

  • Dividend Yield ≥ 4.0%
  • Ex-Dividend Date = Next Week
  • Market Capitalization ≥ $1B
  • P/E Ratio: 0-20
  • Institutional Ownership ≥ 15%
  • Ideally Modest YTD S&P 500 Underperformance
  • Minimal European Exposure
  • Financial Services Firm

After applying this screen, I arrived at the financial service equities discussed below. Depending on your belief in the investment hypothesis, you may decide to hold long enough for the dividend or to hold for the long-term. The information presented below should simply be a starting point for further equity research in consultation with your professional financial advisor before making an investment decision. My goal is to present new companies to you and provide a brief overview of their recent developments. This should not be considered a substitute for your own due diligence.

Invesco Mortgage Capital Inc. (NYSE:IVR): 11.85% Yield; Ex-Dividend 3/27

Overview And Strategy - $3.0B mREIT that invests in agency and non-agency residential MBS, commercial MBS, in addition to direct residential and commercial mortgage loans.

Firm Specific News -

Financial Performance And Metrics -

  • Book Value: $22.01
  • Price/Book: 1.00
  • Leverage (Debt/Equity): 6.1
  • Performance YTD: 11.4%
  • Revenue Growth/(Contraction) (QoQ): 5.7%

Dividend History ($0.65 per Share Quarterly) - The dividend payment has remained constant since 2011 when it was drastically reduced from $1.00 per share quarterly. Management continually stresses that a goal is to maintain the dividend so I do not forecast any dramatic increases in the near-term. However, the shift toward non-agency securities has the potential to result in a payment increase.

(click to enlarge)

Invesco Mortgage Capital is one of the more diverse REITs I follow with non-agency securities and commercial MBS accounting for approximately 30% of total assets as management continues to shift its strategy towards these higher yielding securities. In 2012 alone, the agency allocation plummeted by 49% as rates continue to decline. The net yield on agency securities is only 1.1% compared to 3.1% for non-agency and 3.3% for commercial MBS. This implies that Invesco is growing riskier but they utilize different levels of leverage for each security which reduces risk. For example, agency leverage is 9.3x but commercial MBS leverage is only 2.9x. This is still a risky mREIT but I am comfortable paying book for the company. Note that the stock is trading at its 52-week high so I recommend extra caution if considering a dividend capture.

(click to enlarge)

(Source: Presentation At Credit Suisse 14th Annual Financial Services Forum 2/13/13)

Annaly Capital Management, Inc. (NYSE:NLY): 11.44% Yield; Ex-Dividend 3/27

Overview And Strategy - $15.3B mREIT that invests in agency MBS.

Firm Specific News -

Financial Performance And Metrics -

  • Book Value: $16.81
  • Price/Book: 0.96
  • Leverage (Debt/Equity): 6.6
  • Performance YTD: 14.9%
  • Revenue Growth/(Contraction) (QoQ): (10.7%)

Dividend History ($0.45 per Share Quarterly) - The dividend has been steadily decreasing since 2010 so future decreases are likely.

(click to enlarge)

Authors at Seeking Alpha continue to be bullish on the stock and it is one of the largest publicly traded REITs. However, the sliding dividend is troubling. I prefer American Capital Agency Corp. (NASDAQ:AGNC) because it has maintained its dividend and offers a substantially higher yield with similar leverage. Despite favoring AGNC, NLY is a solid ex-dividend candidate.

Hatteras Financial Corp. (NYSE:HTS): 9.95% Yield; Ex-Dividend 3/27

Overview And Strategy - $2.8B mREIT that invests in agency MBS.

Firm Specific News -

Financial Performance And Metrics -

  • Book Value: $31.09
  • Price/Book: 0.91
  • Leverage (Debt/Equity): 7.4
  • Performance YTD: 13.4%
  • Revenue Growth/(Contraction) (QoQ): 14.7%

Dividend History ($0.70 per Share Quarterly) - Hatteras has been unable to maintain its dividend payment for more than three consecutive quarters recently and the dividend has steadily dropped from $1.20 per share in 2010 to $.70 per share today. I anticipate future decreases based upon this pattern.

(click to enlarge)

Overall Hatteras Financial Corp. is an average mREIT that is facing declining dividend payments. The combination of a ten percent yield and discount to book value compensate investors for the downtrend in payments but it is necessary to be cautious with Hatteras due to the high level of leverage relative to its peers.

Two Harbors Investment Corp. (NYSE:TWO): 9.26% Yield; Ex-Dividend 3/28

Overview And Strategy - $4.1B mREIT that invests in agency (81%) and non-agency (19%) MBS in addition to credit sensitive loans and mortgage servicing rights.

Firm Specific News -

Financial Performance And Metrics -

  • Book Value: $11.54
  • Price/Book: 1.20
  • Leverage (Debt/Equity): 3.66
  • Performance YTD: 24.6%
  • Revenue Growth/(Contraction) (QoQ): 87.6%

Dividend History ($0.32 per Share Quarterly) - Aside from a fiscal cliff induced dividend payment at the end of 2012, Two Harbors' dividend has been relatively flat at $.40 per share. It will be interesting to see if the decline to $.32 is temporary and whether the payment will return to $.40 in the near future.

(click to enlarge)

Two Harbors trades at a substantial premium to its competitors but at December 31, 2012, the annualized yield on agency (4%) and non-agency (9.5%) were higher than most other mREITs I follow. These high yields are not without risk as 87% of the non-agency portfolio is sub-prime (up from 26% in 2010). Clearly TWO is pursuing riskier assets to increase the interest spread earned. This risk is mitigated by the relatively low leverage and more aggressive hedging. I believe that Two is one of the better managed mREITs but the question is are you willing to pay such a premium for the stock? Personally I am not and would avoid it for dividend capturing. The stock has been up 53% in the past year and I would consider it a less expensive stock.

(Source: Presentation at Goldman Sachs Housing Finance Conference 3/7/13)

Capstead Mortgage Corp. (NYSE:CMO): 9.15% Yield; Ex-Dividend 3/26

Overview And Strategy - $1.3B mREIT that invests in agency MBS.

Firm Specific News -

Financial Performance And Metrics -

  • Book Value: $15.55
  • Price/Book: 0.84
  • Leverage (Debt/Equity): 8.6
  • Performance YTD: 14.3%
  • Revenue Growth/(Contraction) (QoQ): (4.4%)

Dividend History ($0.31 per Share Quarterly) - The dividend inched up one penny per share this quarter but the downtrend is overwhelming. The dividend has declined nearly 50% in the past four years but at least the rate of decline has slowed.

(click to enlarge)

Capstead has been struggling to profitably deploy the approximate $375 in equity capital raised over the past two years and overall performance is suffering. This likely explains why the stock is trading at such a large discount to book relative to its peers. Yield spreads are declining for all mREITs but I would likely consider another firm this week.

CreXus Investment Corp. (NYSE:CXS): 7.55% Yield; Ex-Dividend 3/26

Overview And Strategy - $1.0B mREIT that invests in commercial MBS and related investments.

Firm Specific News -

Financial Performance And Metrics -

  • Book Value: $11.84
  • Price/Book: 1.12
  • Leverage (Debt/Equity):
  • Performance YTD: 8.2%
  • Revenue Growth/(Contraction) (QoQ): (51.1%)

Dividend History ($0.25 per Share Quarterly) - The dividend surged until 2012 when it has exhibited downward volatility. I expect the dividend to stabilize and the yield to hover around nine percent going forward.

(click to enlarge)

As mentioned above, Annaly has offered to purchase CreXus for $13 plus accrued dividends until April 16, 2013. Currently CreXus is trading at $13.26 and I would not recommend a dividend capture strategy on a company with an outstanding offer to purchase the company as it introduces unpredictable volatility.

The information presented has been summarized below. I make no warranties regarding the information in the chart as industry classifications are frequently imperfect. Orange and green represent "avoid" and "consider" classifications, respectively.

(click to enlarge)

Please refer to profile page for disclaimers.

Disclosure: I am long AGNC. 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.

Additional disclosure: Please refer to profile page for disclaimers.

Source: 6 mREIT Dividends To Consider And Avoid This Week