Why mREIT Stocks Should Be Heading Higher Soon

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Includes: AGNC, ARR, CIM, HTS, MFA, NLY, REM
by: Hawkinvest
Mortgage Real Estate Investment Trusts have been in a downtrend with the market, even though they provide some of the biggest dividend yields available. A new Barrons.com article details recent investor issues with this sector by stating:

“The biggest concern in mortgage REITs would be if everyone starts to refinance their mortgages, which would lower yields for existing investors,” Robinson said in an interview. But those who could’ve done so largely have by now, he believes. “So the real risk is that the government steps in with a program that can significantly increase refi activity,” Robinson said."

The article also states another concern:

... one risk he’s watching is a proposal to let homeowners who are underwater in their current mortgages refinance at lower rates. Such a plan reportedly being considered by the Obama administration could seemingly undercut the value of funds focused on mortgage-backed securities. Robinson says that while worth monitoring, such a program would wind up costing the government too much. “We just don’t see giving away cheap loans as a prudent solution at this point,” he argued.

These risks seem overblown and Obama's plan is not likely to happen. Congress is not in any rush to enact more bailouts and giveaways. Many borrowers can't take advantage of lower rates due to bad credit as well as lack of equity and the ones who can have likely done so already. The recent data on refinancing activity does not support investor fears stated above. According to the Mortgage Bankers Association, refinance activity fell by 6.3% and had dropped about 12% in the previous week. See that data here.

Once investors digest this data and realize that there is no wave of refinancings and that the mREIT stocks are oversold, bargain hunters, and income investors should be coming into the sector. A short covering rally is also likely soon and could fuel an even bigger rally. Furthermore, many of these stocks pay dividends in September and October and that should support the interest in these stocks as well. Here are the stocks that are providing strong yields and could rebound soon:

Chimera Investment Corporation (NYSE:CIM) is a real estate investment trust (REIT) that invests in residential mortgage-backed securities, and both commercial and residential mortgage loans. With a yield of about 18%, 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 about $3.35 per share.

Here are some key points for CIM:
Current share price: $2.84
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 18%
Book value: $3.35 per share

Annaly Capital Management, Inc., (NYSE: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: $17.81
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 (NASDAQ: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: $28.39
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 20%
Book value: $26.76 per share

Hatteras Financial Corp (NYSE: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: $26.27
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 (NYSE: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
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 14.2%
Book value: $7.75 per share


Armour Residential REIT (NYSE: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: $7.43
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 19.4%
Book value: $7.14 per share

iShares FTSE NAREIT Mortgage REIT (NYSEARCA:REM) is an exchange trade fund (ETF) that invests in a number of mortgage real estate investment trusts. This allows investors to diversify across a number of holdings in this fund which include: Annaly Capital (NLY), American Capital Agency (AGNC), Chimera Investment (CIM), MFA Financial (MFA) and others.

Here are some key points for REM:
Current share price: $13.19
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.