Mortgage REIT stocks have had a rough few days based on speculative concerns that the SEC might change the tax status or leverage levels employed by some of these companies. This has led to a dip in most mREIT stocks that appears to be a great buying opportunity. The sell-off reminds me of when investors were selling high yield bonds at the lows and with yields of about 20% during the financial crisis.
Those high yield bonds rebounded sharply in the following months and became one of the best performing asset classes. With many mREIT yields close to 20%, there is plenty of rebound potential especially when you consider the almost zero interest rate policy that is expected to continue for the next couple of years, if not longer.
A recent WSJ.com article provides more insight into the concerns for mREIT stocks and offers positive comments by two leading analysts. The article states: "Mr. Fandetti, however, writes that there’s no need to panic: “It is important to remember that the SEC has historically expressed the view that agency whole pool certificates are allowable under the exemption, so we’d be surprised if agency-mortgage-backed securities did not qualify under the final rules.” and the article goes on to say "Sterne Agee analysts Jason Weaver and Henry Coffey take a similar view. In a report released today, they wrote that “…the most likely outcome is a clarification of the existing exclusion which may seek to guide some industry practices but would also reduce regulatory uncertainty, arguably a rather neutral outcome.” They argue that the sectors increasingly large role in the mortgage industry would also make the SEC loathe to rock the boat too much." The article even appears to mock the overblown fear and investors selling these stocks by calling it "Mortgage REITS: Analysts Respond To Their Impending Doom".
With the mREIT companies playing an important role in the markets and providing much needed liquidity, I have to agree that the SEC is not likely to make any drastic changes. It would not even be right to do so to existing mREIT stocks, as that would be changing the rules in the middle of the game. When investors realize there isn't likely to be any hugely disruptive changes to these business models, mREIT stock prices are likely to spike higher, just as high yield bonds did a couple of years ago.
It's doubtful the SEC will propose major changes and even if they did, it is not likely to happen any time soon. Furthermore, there would be very strong opposition to any big changes by the entire industry and a multitude of investors nationwide who rely on dividend stocks. In a short term focused market filled with fear, buying opportunities like this arise. Many of these stocks are set to pay a dividend in the coming weeks, which is an added bonus. Here a few ways to buy into the recent mREIT stock dip and pick up yields that cannot be found in many other major asset classes:
Chimera Investment Corporation (CIM) is a real estate investment trust (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 is trading substantially below the theoretical liquidation value of the company, with the book value at $3.35 per share. Also, Chimera already uses less leverage than most other companies in this sector. Chimera has very strong rebound potential and insiders have bought about 230,000 shares in the last several months which shows significant confidence in the value of this stock. See the insider buying here.
Here are some key points for CIM:
- Current share price: $2.89
- 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 17.2%
- Book value: $3.35 per share
Annaly Capital Management, Inc., (NLY) is a mortgage real estate investment trust (REIT) company, based in New York. Annaly pays a dividend of about $2.60 annually which is equivalent to a yield of around 14.8%.
Here are some key points for NLY:
- Current share price: $17.37
- 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 real estate investment trust (REIT) that invests in residential mortgage-backed securities, and both commercial and residential mortgage loans. AGNC now yields nearly 20%, it's very hard to find that kind of dividend anywhere.
Here are some key points for AGNC:
- Current share price: $27.27
- The 52 week range is $22.03 to $30.76
- Earnings estimates for 2011: $4.02
- Earnings estimates for 2012: $5.47
- Annual dividend: $5.60 per share which yields about 19.6%
- Book value: $26.76 per share
Hatteras Financial Corp (HTS) is a mortgage real estate investment trust (REIT) company, based in North Carolina. HTS trades at a discount to book value.
Here are some key points for HTS:
- Current share price: $26.11
- 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 14.5%
- Book value: $26.72 per share
MFA Financial (MFA) is a real estate investment trust (REIT) that invests in residential mortgage-backed securities. MFA trades at a discount of about 10% to book value.
Here are some key points for MFA:
- Current share price: $7.04
- 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 13.4%
- Book value: $7.75 per share
Armour Residential REIT (ARR) is a real estate investment trust (REIT) that invests in residential mortgage-backed securities. ARR trades for a premium of about 2% to book value, but offers a very high yield at nearly 20%.
Here are some key points for ARR:
- Current share price: $7.30
- 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 19.2%
- Book value: $7.14 per share
iShares FTSE NAREIT Mortgage REIT (REM) is an exchange trade fund (ETF) 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: Annaly Capital, American Capital Agency, Chimera Investment, MFA Financial and others. This is the safest way to buy the dip in this sector.
Here are some key points for REM:
- Current share price: $13.07
- 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%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long CIM.
