Is There Still Value In The mREITs Sector?

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


The mREIT sector has been on a tear lately. I wanted to take a look a little early at the mREITs I hold and see where they stand. I also wanted to look to see why despite MBS rates going down and the rest of my mREITs going up, Dynex Capital Inc. (NYSE:DX) continued to fall.

I'll look at Annaly Capital Management, Inc. (NYSE:NLY), American Capital Agency Corp. (NASDAQ:AGNC), Dynex Capital Inc., and American Capital Mortgage Investment (NASDAQ:MTGE).

The Facts





BV 4th Quarter end

Est. $12.06


Est $8.16


BV 3rd Quarter end





Closing price 7 Feb 14





Spread 4th Quarter

Est 1.01%


Est 1.75%


Spread 3rd Quarter





4th Qtr Est. Taxable income

Est. $0.30


Est $0.29


4th Qtr Undistributed Taxable Inc





3rd Qtr Undistributed Taxable Inc





12-month FFO (thru 4th Qtr) Est -$6.04 Bil Est $1.98 Bil Est $210 Mil Est $220 Mil
12-month dividends (thru 4th Qtr) Est -$1.80 Bil Est -$1.73 Bil Est -$70 Mil Est -$170 Mil

1st Quarter dividend





Stock buybacks (2013)

40.3 mil (10%)

7.6 mil (13%)

(Source: Cash King)

First, Book value: In 4th Quarter, I'm estimating NLY was down 5% like AGNC and MTGE. It could give a surprise and I think that would be good for the stock. I'm also estimating DX was down 5%. AGNC was down 5% and MTGE was down 4%. As of the close on 7 Feb, 14, I'm estimating NLY trades at a roughly 10% discount and DX trades at only a 2% discount. AGNC is at an 8% discount and MTGE at a 9% discount as of 7 Feb, 14. These discounts have come down significantly compared to the last few quarters, partly due to the increase in share prices and the book value dropping slightly in the most recent Quarter. Also, keep in mind that MBS rates have dropped about 30 basis points and that could put current book value above 3rd Quarter values. Also, with the Fed announcing its second round of tapering, an additional $10 billion, rates went down. I believe Fed tapering is well built into the prices, and as long as rates stay low for the short-to-mid term, book values will remain relatively stable. At current rate, we will likely see 1st Quarter book values higher than 4th quarter.

Spread: From 3rd Quarter to 4th Quarter, AGNC increased its spread again. MTGE also increased its spread significantly. This could be a very encouraging sign for future quarters if this can be maintained. I'm estimating a stable spread for NLY, although it could go up slightly. I'm estimating a 10 basis point increase in spreads for DX.

Taxable Income: I'm estimating NLY's 4th Quarter taxable income is equal to its 1st Quarter dividend. I'm estimating a slight increase to DX's income though I'm not expecting a dividend increase yet. AGNC's taxable income is now equal to its dividend, with its UTI increasing slightly. This is encouraging if AGNC can continue to buyback shares and increase its taxable income and UTI. MTGE's taxable income continued to increase with its UTI, therefore increasing as well. If it continues buybacks and continues these rises in taxable income and UTI, then we could see a dividend increase as soon as next quarter.

Buybacks: AGNC and MTGE have been buying back shares like they are going out of style. This is a good thing, with prices being below book value. AGNC bought back a total of roughly 10% of the float last year and MTGE bought roughly 13%. As I've been saying, even through the fear in the sector last year, this bodes well for earnings per share and dividends as it makes the dividends cheaper. I've been saying this would pay off in coming quarters, and I think with MTGE at least a dividend increase is imminent within the next two quarters at current trajectory.

FFO and dividend coverage: AGNC and MTGE haven't released their 10-Qs yet, so I can't get cash flow data, so all the above data are estimates. DX, MTGE, and AGNC clearly have their dividend more than covered. Their 10Qs will be key to see if their FFO vs dividends are improving, and will help reveal the likelihood of a dividend increase soon. NLY's situation is a bit of a special circumstance, since it completed the acquisition of CreXus in May of last year. So, its FFO is negative, which is likely the result of that acquisition. Its FFO is improving, and I'll be looking for at least $52 Mil for 4th Quarter when I can get my hands on its 10Q.

Recent Actual Performance

AGNC, MTGE, and NLY have gone up about 5% to 10% over the last 4 weeks since rates have been falling and they reported results. DX has missed out on some of these gains, since it wasn't as discounted as the rest. DX could see a bounce when it reports, if its report is decent.

I bought many of these mREITs at low prices anticipating to hold for long term and to wait for rising yield on cost on each of them. I've accumulated when others were fearful, and have already begun to see the fruits of those purchases.

I also bought shares in many of these mREITs back in July and August, when many were getting out. Not only did I get a good price, but I've been receiving the dividends in the meantime for my patience.

Going Forward

I believe the best value in mREITs, at least among the ones I invest in above, is MTGE. I believe MTGE will be increasing its dividend within the next two quarters because its taxable income more than covers for the dividend, UTI is increasing, it is buying back shares below value, and its spread has increased. We'll have to see what DX and NLY report in the next few weeks. I like all of the above four mREITs overall and have been purchasing them. I think they will all do well in the future, but MTGE is clearly positioned the best as of right now.

Disclosure: I am long MORL, DX, MTGE, NLY, 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.