As the House and Senate have agreed upon a deal, I'll comment on my favorite mREITs for a potential buying list. They are listed in personal preference based upon performance, my views on management, effectiveness of secondary offerings, and SEC 10-Q considerations.
The below prices-per-share are likely to increase tomorrow, assuming the debt ceiling is a 100% signed deal. The yields are based upon current prices.
1. American Capital Agency Corp. (AGNC)
I recommend buying AGNC. AGNC remains my favorite mREIT name to establish a position in. Management has exceeded investors' expectations since their IPO. The book value per share had a nice 2nd quarter bounce, now priced at $26.76.
Management has selectively taken advantage of secondary offerings. As long as the yield curve remains positive, AGNC shares should continue to provide significant upcoming dividends.
- Book Value: $26.76
- Dividend Yield: 20%
- Annual Dividend: $5.60
2. Annaly Capital Management, Inc. (NLY)
I recommend purchasing NLY. I want to own Michael Farrell mREIT's pride and joy. Although Annaly's holdings in CIM should negatively hurt NLY, the loss should be more than offset on NLY's agency-MBS holdings.
In discussing the mREIT dynamics, Mr. Farrell commands everyones' attention. He has a significant position in NLY and is a proven mREIT management leader.
- Book Value: $15.76 (03.31.11 data)
- Dividend Yield: 15.5%
- Annual Dividend: $2.60
3. Hatteras Financial Corp (HTS)
I recommend buying HTS. Housing prices are continuing to decrease. Rates are low. These issues offer a backdrop of fewer prepays, which can be a significant agency-mREIT risk.
HTS remains the steady-Eddy in the agency-mREIT field. The SEC filings show the extensive use of hedging, limiting leverage, and playing the agency-MBS close to the vest. I may seek to reestablish HTS as a core holding. Atlantic Capital Advisors, LLC, is experienced in the agency-MBS industry. This is a management team I respect.
- Book Value: $26.76
- Dividend Yield: 15% - 20%
- Annual Dividend: $3.70 - $4.00
4. Cypress Sharpridge Investments (CYS)
I recommend purchasing CYS. The yield is terrific. The price-to-book is outstanding. Granted, we will have a CYS price-per-share jump early this week, but this name should be on everyones' list of names to own.
Management is sound as a pound. The company owns 100% agency-MBS. Book value has been increasing at a nice clip. The company is relatively non-discussed in relation to AGNC, NLY, HTS. They are putting up results which place them on my "must buy" list assuming the cards align correctly.
- Book Value: $12.35
- Dividend Yield: 19.4%
- Price: $12.31
- Annual Dividend: $2.40
5. ARMOUR Residential REIT (ARR)
I recommend selling ARR. When conditions warrant, I truly believe management will once again prove their history of failing mREIT investors.
In my opinion, ARR has a future which includes aces backed by eights. Management failed at a prior agency-mREIT. This fact continues to be a central theme in my disrepsect of management and placing any money with their team. I prefer to back winners, and avoid proven losers.
Unlike NLY or HTS with proven external managers, ARR is externally managed by ARMOUR Residential Management LLC (click here for my article on ARR). Bimini Capital Management (BMNM.OB) failed as a mREIT. Core individuals, as highlighted in the prior article, include Jeffrey Zimmer. I would advise running away from any involvement in which Mr. Zimmer is taking other-people's-money, again, in a new mREIT.
For those who have any faith in ARR, ask yourself if Mr. Zimmer has clearly learned anything from his first mREIT failure. Why is his involvement not highlighted on ARR's home page? Is the fact he destroyed significant capital not worthy of highlighting on the investor relations page? I personally want this caveat to be known as a caveat emptor to all prospective ARR investors.
I realize retail investors will love the monthly dividends of this former Special-Purpose Acquisition Company ((SPAC)). Many companies choose to have an IPO and provide a road show highlighting the management skills. Why was a SPAC chosen as the organizational setup of choice? I assume it was due, appropriately, because Jeffrey Zimmer and ARR's current head trader have Bimini Capital Management baggage.
- Book Value: $7.19 (03.31.11 data; should increase for 06.30.11 SEC data)
- Dividend Yield: $1.44
- Annual Dividend: 20%
6. Chimera Investment Corporation (CIM)
CIM is a name I want to avoid. A NLY subsidiary is externally managing CIM, but the business model is lacking an appropriate foundation. CIM possesses a significant percentage of non-agency paper. I 100% respect the external managers, but this is a stock in the wrong place at the wrong time.
As the economy continues to weaken, the credit worthiness of the non-agency paper should take hits to the book value per share.
My gut instinct is to avoid prime mREITs holding 1st or 2nd lien loans on the balance sheet. In addition I want to avoid jumbo prime MBS. CIM has the wind blowing in its face at the present time.
- Book Value: $3.18 (03.31.11 data)
- Dividend Yield: 16.90%
- Price: $3.10
- Annual Dividend: 16.9%
I currently do not hold any mREIT positions in any accounts. I plan on purchasing the above names. My income-producing actions last week are clearly defined in this Apple (AAPL) and McDonald's (MCD) article. Many roads lead to Rome, and this is one way to make regular consistent income with proven winners. As my followers know, capital preservation is crucial. Thus the need to be proactive with the mREIT and debt ceiling issue.
It's a simple trade - based upon conviction in AAPL and MCD - but one that I believe, if you follow, will produce returns in excess of any agency-mREIT. If it doesn't I welcome the debate and feedback!