- Significant increases in spread and book value.
- DX more than covered their dividend and may raise very soon.
- All four of the mREITs have stabilized over the last three quarters.
The mREITs have had a rock-star quarter this past quarter. There is no doubt they are a great buy now with good discounts to book value and decent dividends. Whether dividends will be able to go up in the near future is much harder to predict. It largely relies on the economy and what exactly rates will actually do.
I'll look at the four mREITs I follow and how their recent quarterly reports reflect on them and the sector as a whole.
BV 2nd Quarter end
BV 1st Quarter end
Closing price August 8, 2014
Spread 2nd Quarter
Spread 1st Quarter
2nd Qtr Est. Taxable inc (Core Earnings)
2nd Qtr Undistributed Taxable Inc
1st Qtr Undistributed Taxable Inc
12-month FFO (thru 2nd Qtr)
213. 1 Mil (Q1)
12-month dividends (thru 2nd Qtr)
69.1 Mil (Q1)
168 .1 Mil
2nd Quarter dividend
2nd Qtr leverage
1st Qtr leverage
2nd Qtr CPR
1st Qtr CPR
(Source: Cash King)
First, Book value: For a long time these mREITs have been trading at a significant discount to book value. This has increased since they posted tremendous Q2 results and the stock prices haven't followed. NLY is trading at a 13.5% discount, AGNC at a 11.6% discount, DX at a 5.8% discount, and MTGE at an 11.0% discount. I believe this is a great time to pick up these mREITs at a great value.
Spread: The spread continues to improve in AGNC and DX. MTGE's spread barely improved and NLY's did improve but still below Q4 of last year.
Taxable Income (Core Income): DX had the best taxable income vs. dividends. The others seemed to have unrealized gains and other "one time" charges which temporarily lowered their taxable income but DX's was actually the only one above their dividend.
Funds from Operations (FFO): With the exception of MTGE, FFO vs. dividends continues to improve. As compared to my last quarter's update here, you can see in most cases how 12-month trailing dividends are decreasing showing the effects of reduced share counts and reduced dividends. This is helping these guys build cash, a cushion, and good coverage. MTGE had an up and down, quarter 3 and quarter 4, which threw their FFO a little out of whack. Their most recent few quarters are very stable though so this also poses well for them going forward.
Leverage: Leverage has mostly dropped a little bit this last quarter, except NLY who slightly increased their leverage.
Constant Prepayment Rate (CPR): CPR ticked up for all four this past quarter. We need to keep an eye on this.
My Recommendation: DX still remains my favorite mREIT out of all four of these. As I explain here, they seem to be the most stable and have been continuously growing steadily unlike the ups and downs of the other three. DX's 10-Q isn't available yet, but they likely surpassed my goal of $40M Free Cash Flow for the most recent quarter.
AGNC and NLY seem to be a great buy based on valuation and steadying of their metrics as well. NLY's FFO continues to improve while their dividends are low and maintainable.
I believe the threat of rising rates is overstated. That threat is why these stocks have such good valuations and I believe an investor could do well in owning these. There obviously is a risk with mREITs, but I believe the economy will not tolerate significantly higher interest rates anytime soon and we will see lower rates much past 2015. I don't believe we will see a return to 5% or 6% in rates anytime in the next couple of years.
Disclosure: The author is long AGNC, DX, MTGE, NLY, MORL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.