mREIT Opportunities and Downside Protection

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 |  Includes: AGNC, ANH, CIM, CMO, CYS, HTS, IVR, MFA, NLY, TWO
by: Todd Johnson

Mortgage-REIT investors may want to consider downside risk protection via put options, if only to be aware of your potential to manage risk, options are available for most mREITs. The market currently has opportunities, so a quantitative analysis may help identify the current best buys.

I have put together a table with the following attributes: price; book value per share (bvps); price-to-bvps; annual dividend yield; and mREIT use of leverage for the period ending June 30th, 2011.

Valuation Metrics
The mREITS, with tempting buying opportunities in my opinion, include the following:

  • American Capital Agency Corp (NASDAQ:AGNC) offers a 19.7% yield. The portfolio is 100% agency-MBS. AGNC is operating, as of June 30th, with 7.5x leverage. The stock is trading at a 5% premium to book value per share. Investors may want to consider a September 2011 $26 put option for $40, representing 100-shares. The put option, AGNC110917P00026000, will provide downside protection for investors with temporary concerns about the financial markets.
  • Cypress Sharpridge Investments (NYSE:CYS) offers a 19.1% yield. CYS' portfolio is 100% agency-MBS. The leverage is a bit higher than AGNC, with 8.1x leverage. The stock is trading at a 2% premium to book value per share. Investors may want to consider a September 2011 $26 put option for $30. The put option, CYS110917P00012500, will provide temporary downside protection as Europe and the U.S. equity markets are volatile.
  • Invesco Mortgage Capital (NYSE:IVR) possesses non-agency MBS. This factor needs to be considered in terms of risk management. The yield is currently priced at 19.7% with a 5.2x leverage. The stock is trading at a 3% discount to book value per share. The IVR Sep 2011 17.500 put (IVR110917P00017500) offers temporary prrotection until, hopefully, the market's volatility can settle down. The leverage is low due to a management-stated lack of full investment secondary proceeds:
  • Hatteras Financial Corp (NYSE:HTS) has an intriguing valuation. The equity is trading at 100% book value per share. The yield is currently priced at 13.90% with a 7.4x leverage.The portfolio is 100% agency-MBS. HTS Sep 2011 25.000 put (HTS110917P00025000), for $30, covers a 5% downside on equity protection. Each contract represents 100 shares.
  • Annaly Capital Management (NYSE:NLY) offers a 14.5% yield. The portfolio is primarily agency-MBS. NLY is operating, as of June 30th, with 5.7x leverage. The stock is trading at a 6% premium to book value per share. NLY Sep 2011 16.000 put (NLY110917P00016000) offers, for $22, provides common share holders a maximum pain exposure of 10% through the third Friday of September. This is the date when the options expire, which this year is September 16th.

Investors can extend the put expirations and strike price according to their risk tolerance. In addition, mREIT holders may want to consider selling covered calls to generate income. Most mREIT holders are likely comfortable holding their position without any puts. Since the markets have been volatile this week, my goal was to share a methodology to reduce risk while maintaining your equity positions.

mREIT Valuation Metrics - June 30th, 2011 Sources: sec.gov and Company Websites
Symbol
Price BVPS Price/BVPS
Yield
Leverage
AGNC
$28.16
$26.76
1.05x
19.70%
7.5x
ANH
$6.90
$7.06
.97x
14.30%
7.0x
CIM
$2.99
$3.35
.89x
16.70%
1.9x
CMO
$12.48
$12.46
1.00x
14.70%
8.05x
CYS $12.60 $12.35 1.02x 19.10% 8.1x
IVR
$18.85
$19.34
.97x
19.70%
5.2x
MFA
$7.27
$7.84
.93x
12.80%
3.0x
NLY
$17.45
$16.45
1.06x
14.50%
5.7x
HTS
$26.64
$26.72
1.00x
13.90%
7.4x
TWO
$9.58
$9.89
.97x
16.00%
2.4x
Click to enlarge


Disclosure: I am long AGNC, CYS, HTS, NLY.