mREITS: The Time Is Now To Buy... Not Sell

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 |  Includes: AGNC, MTGE, NLY
by: Cash King

Introduction

Recently many authors have been slamming the mREIT sector. I can't deny they've been navigating some rough waters and have been reporting some nasty results. I believe that they are near the bottom. I'm not saying that they are at the bottom and there is no downside risk. I'm merely speculating that the downside risk is limited and the upside risk is better looking at these long term. As Warren Buffet once said, "Be fearful when others are greedy and greedy when others are fearful." I can't help but wonder if now is one of those times to be greedy given all the fear and sell calls. A matter of fact we're beyond the sell calls and have gotten to the "don't buy yet" calls. I believe we're at the buy time partly because the dividends outweigh the limited downside risk. I'll exam Annaly Capital Management Inc (NYSE:NLY), American Capital Agency Corp (NASDAQ:AGNC), and American Capital Mortgage Investment (NASDAQ:MTGE).

The Facts

NLY

AGNC

MTGE

BV 3rd Quarter end

$12.70

$25.27

$22.37

BV 2nd Quarter end

$13.03

$25.51

$22.63

Closing price 7 Nov 13

$11.04

$21.64

$19.79

Spread 3rd Quarter

1.01%

1.37%

1.77%

Spread 2nd Quarter

0.98%

1.24%

1.94%

3rd Qtr Est. Taxable income

$0.28(core)

$0.29

$0.85

3rd Qtr Undistributed Taxable Inc

Unk

$0.57

$0.60

2nd Qtr Undistributed Taxable Inc

Unk

$1.07

$0.43

12m Trailing FFO

-$6.5 bil

$2.5 bil

$173.89 mil

12m Trailing Dividends paid

-$1.8 bil

$1.7 bil

$150.69 mil

3rd Quarter dividend

$0.35

$0.80

$0.70

Stock buybacks

Unk

11.9 mil (3%)

3.2 mil (5.7%)

Click to enlarge

First, Book value: NLY down 2.5%, AGNC down only 1%, and MTGE down 1%. As of the close on 7 November 2013 NLY trades at a 15% discount, AGNC at a 16.7% discount, and MTGE at a 13% discount.

Spread: NLY and AGNC actually increased their spread. MTGEs spread went down but was already much higher than both AGNC and NLY.

Taxable Income: NLYs taxable income is $0.07 shy of its dividend. AGNCs taxable income is $0.51 shy with undistributed taxable income decreasing down to $0.57. They could support one more quarters worth of dividends at current rates if they wanted to. MTGEs taxable income is $0.15 above its dividend and its undistributed taxable income actually increased $0.17.

Buybacks: AGNC and MTGE both bought back some shares in 3rd quarter. This will decrease the total cost of dividends and increase the earnings per share since there are less shares now. Both of these will help these two in paying/increasing dividends down the road. They've also stressed the desire to continue buying back shares as long as the price is at a discount to book value. This should bode well for both in the medium to long term. We should start seeing drastic effects from these in the coming quarters if they keep it up.

FFO vs. Dividends: 3rd Quarter 10Q unavailable for MTGE. AGNC and MTGE both have positive FFO compared to dividends for the trailing 12 months. That bodes well for forward dividends if that can be maintained. NLY has a negative 12 month trialing FFO and has paid dividends. This could be cause for concern but NLY has been known to have huge quarterly fluctuations. They had positive FFO in excess of dividends in 3rd Quarter. This figure may be distorted by their recent (last couple of quarters) adventure into commercial. They had two huge negative FFO quarters for 1st and 2nd quarter. If the 3rd quarter excess FFO above dividends paid can be maintained then they'll be in a good position.

Recent Actual Performance

Oftentimes, many people decide to wait for a better price to get in on a stock. This is a good technique when the dividend yield is relatively low. I partake in value investing and wait for many stocks to be fairly valued or better before purchasing any. However, when you have a high yield stock waiting for the rock bottom could potentially be devastating. You are missing the outstanding yield in the meantime and meanwhile may never see your price target. By the time you lament, and purchase above your price you may have already missed two or more quarters of dividends and have to purchase at a price above the recent low. In a high yield stock like the mREITs that is 6% value lost by waiting just from the missed dividends.

I'm going to provide actual buys I've executed recently in the mREIT world and adjust based on the dividends received from those buys. This will show the price today someone would have to buy the mREITs at in order to get better performance from them than I have based on when I bought. This will show that the fear mongering and refusal to buy by some individuals over the past few months is and will be a mistake as they miss out on those dividends waiting for an exceptionally low price that may never come to pass.

Stock

Date

Purchase Price

Dividends Rec

Adj Price

7 Nov Price

Difference

MTGE

3 Jul 13

$17.74

$0.70

$17.04

$19.79

-$2.75/share

AGNC

5 Jul 13

$20.59

$0.80

$19.79

$21.64

-$1.85/share

MTGE

5 Jul 13

$16.25

$0.70

$15.55

$19.79

-$4.24/share

NLY

5 Jul 13

$11.44

$0.35

$11.09

$11.04

$0.05/share

MTGE

26 Jul 13

$18.69

$0.70

$17.99

$19.79

-$1.80/share

NLY

5 Aug 13

$11.75

$0.35

$11.40

$11.04

$0.36/share

MTGE

6 Aug 13

$19.90

$0.70

$19.20

$19.79

-$0.59/share

NLY

19 Aug 13

$11.07

$0.35

$10.72

$11.04

-$0.32/share

AGNC

19 Aug 13

$20.55

$0.80

$19.75

$21.64

-$1.89/share

AGNC

3 Sep 13

$22.43

$0.80

$21.63

$21.64

-$0.01/share

NLY

5 Sep 13

$11.54

$0.35

$11.19

$11.04

$0.15/share

NLY

7 Nov 13

$11.12

$0.00

$11.12

$11.04

$0.08/share

Click to enlarge

Several conclusions can be drawn from the above chart. It appears July when the taper announcement for September was made that mREITs took huge hits and that was a good time to buy. We may have one more of those as we approach next year but holding now you still get to reap the dividend in the meantime.

Based on the bottom that NLY hit in July, and where it is at now, it is a good time to buy. I do not believe NLY will go down much more anytime soon. This is a good chance to get in and reap the dividends. Note, most of my NLY holdings (adjusted for the dividends already collected) are pretty close to 7 November's closing or within about one dividend of it. If you try and wait for NLY to drop much more and didn't get in on this price I'm afraid you will probably miss the chance.

Regardless, we are talking about pennies on the share essentially. I do not feel MTGE or AGNC will approach their lows of early July and an opportunity may have already been missed.

Going Forward

Two conclusions can be drawn. If you feel that the mREITs are still headed down and are nowhere near the bottom then there is nothing I can say to talk you out of it likely. If you are open minded and/or are long term focused here are my opinions of these three.

I believe NLY is a steal right now. They are diversified, experienced and near their July and 52 week lows. They may drop their dividend($0.30) a little and their stock price may go down a little(high 10s). I believe though the downside risk to the dividend and the stock price is limited and the risk you take by waiting is missing out on the roughly 12% annual or 3% quarterly dividend.

I believe MTGE is very well positioned to hold or increase their dividend in the future. The low prices of early July will not be back for it but recent pullbacks are still a decent opportunity to get in. AGNC may drop their dividend a little more($0.60 or $0.70) and likely the stock will drop a little more($20s). They seem to be weathering the storm the worst out of the three. Overall, for a long term perspective they are still a buy in my book but not as good as NLY or MTGE.

Disclosure: I am long NLY, AGNC, MTGE. 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.