The mortgage sector has been underperforming over the last few quarters due to QE3 measures taken by the government. But REIT stocks are beginning to rebound as mortgage rates increase along with the spread. Most of the companies in the sector reported declines in net interest rate spreads and were forced to cut dividends to stay afloat.
Lately there have been some voices on the ill effects of the strategy and supporting a withdrawal of QE3. However, such a thing is not possible in the short run, but it may be time to analyze some of the REITs and take a position now to gain in the time ahead. Discussed below are three residential REITs with yield greater than 14%.
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*As of May 20, 2013. Source: Finviz.com.
ARMOUR Residential REIT, Inc. (ARR) is externally managed by Armour Residential Management LLC. ARR's main business is to invest in hybrid adjustable rate and fixed-rate residential mortgage-backed securities. Considering insider buying, three board members increased their holdings in ARR in March.
The company is in the category of high-yielding REITs, with a dividend yield of 13%. However, there has been a recent decline in yield. The company's business is risky as of now. The operating history is limited because the company only formed in 2007, making it impossible to precisely track and estimate future earnings, margins, and yields.
A few months ago, the company completed an underwriting offering of 65,000,000 shares of the common stock. The proceeds, as per the company, will be used for additional agency securities as market conditions warrant and for general corporate purposes. The offering will help the company with much-needed funds to drive growth.
For Q1 2013, the core income for ARR came in at $67.5 million, or $0.20 per common share. GAAP income came in at $102.3 million, or $0.29 per common share. Armour also reported a decline in the net interest rate spread, which forced the company to increase its overall leverage ratio. This might not be favorable for dividends, as more money will be used to service debt. ARR's P/E ratio is 7.65 and the P/B ratio is just 0.83. The value metric shows that the company has a fair chance to grow, but investors should remain cautious as of now due to the sector's decline.
New York Mortgage Trust, Inc. (NYMT) is an internally managed REIT that invests in mortgage-related and financial assets. The company has been able to do better with its return on equity compared to the corresponding quarter of the previous fiscal. The improved ROE can be considered a strong aspect of NYMT; compared to the industry average the company has done better, although it should be noted that it has underperformed compared to the S&P 500.
For fiscal Q1 2013, net income attributable to common stockholders came in at $15.4 million, or $0.31 per common share. That's vs. net income attributable to common stockholders of $5.8, or $0.42 per common share, for the corresponding quarter of the previous year. Revenue growth was very impressive.
NYMT has an impressive yield of 15.41%. The P/E ratio is moderate 6.15 and the P/B ratio comes in at 1.07, which also seems to be balanced. That makes the stock a strong consideration for income investors. NYMT has strong revenue growth, attractive valuation levels, and stable cash flows, which guarantees continued dividends.
American Capital Agency Corp. (AGNC) is a real estate investment trust. The primary source of income for the company is investing on a leveraged basis in agency mortgaged-backed securities. AGNC was recently downgraded by Nomura from Buy to Neutral after the company did not perform well in the first quarter of 2013. For the first quarter the company experienced book value losses and falling spreads.
The net income for the company has been declining and return on equity has been unimpressive. The profit for the first quarter of 2013 came in at $231 million, a decline from $641 million quarter over quarter. Net income was recorded at $228 million, compared to $641 million last year. Net interest income fell marginally to $407 million from $408 million last year.
The company pays an annualized dividend of $5.00 per share and the dividend yield is 17.21%, which is quite impressive. However, maintaining the same dividend will be hard for the company as of now. The latest results from the REIT do not allow it to do so. This Seeking Alpha article explains further.
While all three companies no doubt have impressive yields, NYMT seems to be well-positioned for good returns. In the case of ARR, the company's future course is difficult to estimate precisely because it is relatively new. AGNC pays good dividends, but is struggling with the declining profits.