I took a look about two or three months ago at some of the popular mREITS and the ones I own to see if they were a buy. In my opinion they were a buy, and I did buy some. I believe they are still a buy as their prices have come down even a tad further from where they were though not a lot. My feeling with mREITs, and I'll talk about this later, is sometimes you have to take a decent price instead of waiting for the perfect price. In the meantime you could miss some hefty dividends. I'll talk about this more later. First, let's take a look at the facts.
BV 3rd Quarter end
BV 2nd Quarter end
Closing price 31 Dec 13
Spread 3rd Quarter
Spread 2nd Quarter
3rd Qtr Est. Taxable income
3rd Qtr Undistributed Taxable Inc
2nd Qtr Undistributed Taxable Inc
12m Trailing FFO
12m Trailing Dividends paid
4th Quarter dividend
Stock buybacks (3rd+4th Qrts)
40.1 mil (10%)
4.7 mil (8.6%)
First, Book value: In 3rd Quarter NLY was down 2.5%, AGNC was down only 1%, and MTGE was down 1%. As of the close on 31 December 2013 NLY trades at a 21.5% discount, AGNC at a 23.6% discount, and MTGE at a 21.9% discount. These are even greater discounts than two months ago. Furthermore, with the Fed relatively more stable now than two months ago when there was a ton of uncertainty, these are huge discounts to a liquid, easily valuable and sellable asset. I expect 4th Quarter Book Values will be relatively stable with a worst case of down a few percent, a big difference from 20+% discounts.
Spread: From 2nd Quarter to 3rd Quarter NLY and AGNC actually increased their spread. MTGEs and DXs spread went down but was already much higher than both AGNC and NLY.
Taxable Income: NLYs 3rd Quarter taxable income is now only $0.02 shy of its 4th Quarter dividend. AGNCs taxable income is now $0.36 shy with undistributed taxable income decreasing down to $0.57 in 3rd Quarter. MTGEs taxable income is $0.20 above its 4th Quarter dividend and its undistributed taxable income actually increased $0.17. They could now support nearly one dividend on undistributed taxable income alone. DX's taxable income is right inline with its 3rd Quarter and 4th Quarter dividends.
Buybacks: AGNC and MTGE both bought back some shares in 3rd and 4th 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: AGNC, MTGE, and DX all 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
I've been a bull for mREITs for some time now. They've had a hard time for the last four or so months but I believe this has been a great time to accumulate shares. Long term they will provide huge returns.
I'm a value investor and thus like to get in on a company at a good value/price but sometimes you have to balance waiting for the right price with settling for a decent price. In the cases of mREITs I'm a strong proponent of getting in at a decent price if you believe long term they are good prospects. By waiting months before buying you may miss good dividends for the possibility but not guarantee of lower prices.
I wrote an article a few months ago stating these as a buy and prices have come down roughly 5%. I've always been a proponent of trying to get close to the bottom. No one is going to get in right at the bottom. With mREITs and their lofty dividends I'm ok with missing the bottom by 5%. With Fed uncertainty mostly behind us, a 2 year budget signed and a somewhat clear path ahead I fully believe we will not see much better prices than today on mREITs. That coupled with their great dividends that will stabilize and start going back up in the next couple of quarters the long term return potential is huge.
Below are my most recent buys and as a comparison the adjusted price (for dividends received) that I would have to buy them at today to get a better deal.
31 Dec Price
3 Jul 13
5 Jul 13
5 Jul 13
5 Jul 13
26 Jul 13
1 Aug 13
5 Aug 13
6 Aug 13
19 Aug 13
19 Aug 13
28 Aug 13
3 Sep 13
3 Sep 13
3 Sep 13
5 Sep 13
9 Sep 13
7 Nov 13
8 Nov 13
22 Nov 13
I believe mREITs are for long term income. That is how I utilize them in my portfolio at least. I'm sure they can be used for short to medium term trading as well. Sell high, buy low. Regardless, of your technique and style I think we are at lows right now and opportunity abounds.
As you can see from the chart, many of my NLY buys were a little high. I'm in it for the long term though and over time they will make up lost time. Not to mention they are at a huge book value discount and once that corrects we'll have huge gains in capital appreciation if someone chooses to sell.
Regardless of what you believe, I think most can agree that we are nearer to a low in the mREITs than we have been in a long time. I think right now is probably the best opportunity to buy mREITS than in the last six months though there have been some decent opportunities still. I would and will buy more if prices stay depressed.
With the budget battle mostly settled and the Fed starting tapering and laying out some insight into the future most of the political issues surrounding interest rates have subsided. We will have a debt ceiling battle likely in the next month or two and that could cause some fluctuations.
Several of the mREITs have been buying back shares at depressed prices. This will bode well for them down the road. With continued dividend cuts and stabilizing rates I believe we're near the end. 4th Quarter results will be key for the mREITs to see if there will be another move down and more dividend cuts or stabilization and likely a move up. I believe there will be volatility in mREITs as we approach 4th Quarter results. If bad results are reported the mREITs will move down moderately. If good results are posted they stand to gain an amazing amount as they move back closer to book value. Regardless, I believe these mREITs should provide decent to outstanding returns 1 to 5 year time frame as rates stabilize, slowly move up and their spreads increase.
I'd be willing to make a wager and say the adjusted price as computed above for all my holdings bought in 2013 will be lower than any price the mREITs hit by June of 2014. Between the dividends received and the eventual (soon) price increase for the mREITs my adjusted prices above will continue to improve.
For those also interested you can purchase Market Vectors Mortgage REIT Income ETF (MORT) or UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) and buy a basket of REITs to help diversify, etc.
I do own MORL and the performance thus far has been fantastic. Since it is leveraged 2x the annual dividend rate is in excess of 20% for the past six months or more. There are risks of course but the gain potential is huge.
I hope everyone has a great New Year and I wish much investing success to all!