It appears the rate on the 10-year treasury yield will stay below the 3% level for at least the end of year. Job and economic growth are just too tepid to support higher rates. In addition, escalating political tension in D.C. around the debt limit and budget talks is likely to trigger further flights to "quality" which could lower interest rates further.
Given this, I am adding to my allocation to the high yield plays that were hurt previously by the quick rise in interest rates. Here are a couple of interesting plays with yields over twelve percent and that have recently attracted large insider purchases as well.
Resource Capital (RSO) purchases and manages a diversified portfolio of commercial real estate-related and commercial finance assets in the United States. Like most mortgage REITs, Resource Capital pulled backed from May through early September as "taper" talk from the Federal Reserve drove the ten year treasury yield from ~1.6% to 3%. The stock declined more than 10% from its highs.
There are two significant reassuring signs on the company. First, at its recent dividend declaration, the company chose to keep its payout steady and did not have cut the dividend like several other mortgage REITs have been forced to do recently. Second, an insider made a ~$500K purchase of new shares two weeks ago.
The shares are cheap at slightly less than book value and 8.5x forward AFFO (Adjusted Funds from Operations). Revenues are also projected to shoot up more than 30% in 2014. The shares yield just under thirteen percent (12.7%) and the company has doubled operational cash flow since the end of FY2010. In the last completed quarter the company had a 50% sequential increase in commercial real estate loans which bodes well for future cash flow growth.
American Capital Agency (AGNC) invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored entities or by the United States government agency. The stock is down some 30% from its highs prior to the recent interest rate rise that started in May. It also yields over thirteen percent (13.5%)
Insiders are starting to step up to the plate. A director bought some $500K worth of shares in late July. This follows a similar $500K purchase in March by another insider at higher levels. Another vote of confidence was divulged recently when the company announced it had repurchased some 12mm shares so far in the third quarter.
Revenues are tracking to doubling this year and the consensus analyst projection calls for similar sales growth in FY2014. The shares sell for less than stated book value and ~5x forward consensus projected AFFO, a discount to its five year average (6.0).
As interest rates stabilized or decline, I expect the entire mortgage REIT sector to perform well as income investors come back to these high yield plays. RSO and AGNC should be on income investors' "shopping lists" as it recently was for insiders at both companies.