Analyzing MREITs (Part 2)

Includes: ARR, IVR, MFA
by: Todd Johnson

This is part 2 of analyzing MREITs with limited non-agency security risk exposure. My goal is to find MREITs with 100% agency-security backing. The non-Governmental Sponsored MREIT has inherent risks, which are absent in agency backed securities. These issues were discussed in yesterday's article.

The MREIT sector has the highest yields in the marketplace, and trying to sort the pure-play agency-securities is vital to understanding the appropriate names to consider accumulating.

ARMOUR Residential REIT, Inc. (NYSE:ARR)

ARR is an agency security MREIT. The below chart shows the respective breakdown in Fannie Mae (OTCQB:FNMA), Freddie Mac (OTCQB:FMCC), and Ginnie Mae holdings. Each entity is a GSE and provides a safety net for any potential mortgage issues. ARR has a March 31st book value of $6.84, as indicated on page 30 of the 10Q.

ARMOUR Residential is paying a 12-cent a month dividend, or $1.44 per year. This equates to a 18.9% annual dividend yield based upon a $7.59 share price. ARR announced their scheduled 3-month dividend news on June 14th.

ARR's 3-year performance matches the total annualized rate of return for the S&P 500. Both gained 12% for the past 3-years.

MFA Financial, Inc. (NYSE:MFA)

MFA clearly identifies their exposure to agency-securities and non-agency securities. As the March 31st 10Q balance sheet, page 1, indicates: MFA owns (in millions) $3,201,840 in non-agency MBS paper. The net MBS paper is $10,576,350. MFA has 30.27% of its MBS paper in non-agency securities. This provides a potential problem if the non-agency paper defaults. This could conceivably have a negative impact upon the book value per share.

MFA Financial is paying a 23.5-cents quarterly dividend. This provides a 94-cent total annual dividend. The annual dividend yield is 11.8% based upon a closing MFA common stock price of $7.92.

MFA has significantly beat the S&P 500 with a total annualized rate of return of 9.1%
versus a -1.0% for the S&P 500. This is an impressive performance for an equity holding non-agency security MBS.

Invesco Mortgage Capital (NYSE:IVR)

Invesco Mortgage Capital pays an annual dividend of $3.94 per share. This equates to an 18.8% annual dividend yield. MFA has $1,517,630 (millions) in non-agency mortgage backed securities as of March 31st, (page 11). The potential risk of a mortgage security not being backed by a GSE is noteworthy.

Invesco Mortgage Capital pays an annual dividend of $3.94 per share. This equates to a 18.8% annual dividend yield.

Although IVR had a successful 14% total annualized rate of return in the past 3-years, the S&P 500 had an overall rate of return of 20%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.