Seeking Alpha
Value, growth at reasonable price, deep value, contrarian
Profile| Send Message| ()  

The mortgage real estate investment trust stocks are providing incredible yields to investors these days. With rates stuck near zero for at least a couple more years, smart investors are building a portfolio that will pay them much more than what most bonds, certificates of deposits, and other common investments will pay. If you can buy a high yielding investment that has a strong chance of appreciating in price as well, you can really boost your investment results.

Most of the mortgage REIT stocks trade for a premium to book value but Chimera (CIM) has recently dipped below book value and offers one of the highest yields in the sector. Another interesting fact is that Chimera is managed by Annaly Capital Management (NLY). Chimera's website states:

We are externally managed by Fixed Income Discount Advisory Company, a wholly-owned subsidiary of Annaly Capital Management, Inc.

With Chimera shares trading at a meaningful discount to book value and offering an above average market yield, one of two things is likely to happen. Either the shares of Chimera go up and the discount to book value narrows, or we could see another REIT (perhaps even Annaly Capital, since NLY already manages Chimera) offer to buy Chimera. Regardless of the outcome, Chimera looks too cheap compared to many other mortgage REIT stocks. A number of REIT stocks trade for a 10-15% premium over book value and Chimera trades for about 12% below. For Chimera to trade more in line with the sector, it would have to jump about 30% higher. Take a look below at the yields and book values of the stocks below and you will see why Chimera should be heading higher.

CIM is a REIT that invests in residential mortgage-backed securities and both commercial and residential mortgage loans. With a 17.4% yield and a share price below book value, this looks like a great buying opportunity. Chimera should be trading for at least $3.50 per share based on the book value.

  • Current share price: $3.09
  • The 52-week range is $2.62 to $4.36
  • Earnings estimates for 2011: 60 cents per share
  • Earnings estimates for 2012: 59 cents per share
  • Annual dividend: 52 cents per share which yields 17.4%
  • Book value: $3.35 per share

NLY is an mREIT based in New York. Annaly pays a dividend of about $2.60 annually which is equivalent to a yield of around 14.8%. As noted above, Annaly already manages Chimera and knows the business and assets well enough to possibly consider a buyout.

  • Current share price: $17.74
  • The 52-week range is $14.05 to $18.79.
  • Earnings estimates for 2011: $2.53 per share
  • Earnings estimates for 2012: $2.38 per share
  • Annual dividend: $2.60 per share which yields 14.8%
  • Book value: $16.55 per share

American Capital Agency (AGNC), is a REIT that invests in residential mortgage-backed securities, and both commercial and residential mortgage loans. AGNC trades for about a 8% premium to book value.

  • Current share price: $28.63
  • The 52-week range is $22.03 to $30.76
  • Earnings estimates for 2011: n/a
  • Earnings estimates for 2012: n/a
  • Annual dividend: $5.60 per share which yields about 19%
  • Book value: $26.76 per share

Hatteras Financial Corp (HTS) is an mREIT based in North Carolina. HTS trades for about a 5% premium to book value.

  • Current share price: $27.47
  • The 52-week range is $23.80 to $31.98.
  • Earnings estimates for 2011: $4.20 per share
  • Earnings estimates for 2012: $4.23 per share
  • Annual dividend: $4 per share which yields 14.8%
  • Book value: $26.72 per share

MFA Financial (MFA) is a REIT that invests in residential mortgage-backed securities. MFA trades for a slight discount of about 3.5% to book value.

  • Current share price: $7.42
  • The 52-week range is $6.71 to $8.64
  • Earnings estimates for 2011: $1.01 per share
  • Earnings estimates for 2012: $1.06 per share
  • Annual dividend: $1 per share which yields 13.8%
  • Book value: $7.75 per share

Armour Residential REIT (ARR) invests in residential mortgage-backed securities. ARR trades for a premium of about 4% to book value, but offers a very high yield at nearly 20%.

Current share price: $7.43
The 52-week range is $6.80 to $8.33
Earnings estimates for 2011: $1.01 per share
Earnings estimates for 2012: $1.06 per share
Annual dividend: $1.44 per share which yields 19.66%
Book value: $7.14 per share

iShares FTSE NAREIT Mortgage REIT (REM) is an exchange trade fund that invests in a number of mortgage real estate investment trusts. This allows investors to have diversification across a number of holdings in this fund which include NLY, AGNC, CIM, MFA and others. This fund yields about 10% which shows that Chimera and a few other stocks are providing yields far above the market.

  • Current share price: $13.65
  • The 52-week range is $12.54 to $16.07
  • Earnings estimates for 2011: n/a
  • Earnings estimates for 2012: n/a
  • Annual dividend: about $1.50 per share which yields over 10%
Source: What If Annaly Capital Took Over Chimera Investment?