2012 is already showing positive signs for the economy, but the real estate market is still full of uncertainty. The following REITs are top on my list of due diligence to-do’s. If you hold them, use the details below to make a call for your own portfolio.
New York Mortgage Trust Inc (NYMT) has a diversified asset investment portfolio, with holdings from leveraged agency backed mortgage securities (MBS) to the ones with elements of credit risk but with reduced leverage. New York Mortgage Trust provides a high yield of 14% and is currently trading just over its book value of $6.75, near the $7 mark. In the past two months, analysts have given 2 strong buys and 6 buys making it a potential hedging stock for investors.
New York Mortgage Trust management is headed by Jim Fowler, who has vast experience in mortgage investing, mortgage trading, and equity research and has worked with the likes of JMP Securities and Oppenheimer. As the rates of mortgage increase, New York Mortgage Trust is poised for a gain in 2012, as its portfolio consists majorly of labor-adjusting business loans. The 5 year average dividend yield is 13%, but the dividend growth is negative.
Dynex Capital (DX) is a REIT which invests in mortgage loans and securities on a leveraged basis, casting a cautious ‘eye’ on it. Dynex Capital offers a dividend yield of more than 12%, financing its investments through a combination of repurchase agreements, securitization and equity capital. Dynex Capital trades with a market capitalization of $365 million, with a low price earnings multiple of 9 times. The REIT is trading near the $10 mark above its 50,100 and 200 day moving averages.
Dynex Capital reported a year on year quarterly revenue growth of 66% and offers a quarterly dividend of $0.28 per share. The net income for the quarter ended September 2011 was at $1.5 million, down 88% from second quarter 2011-- mainly due to decreased total revenues. Although Dynex Capital reported a decrease from previous quarter, the annual net income saw an increase in the last three years. I would be cautious about entering Dynex Capital at this time, atleast until the annual reports for the year 2011 are available.
Walter Investment Management Corp (WAC) is a mortgage service provider specializing in subprime, non-conforming and other credit challenged assets. In July 2011, Walter Investment Management completed the acquisition of Green Tree, an independent fee based service provider, for $1 billion. Although it lost some REIT tax benefits after this acquisition because Green Tree does not operate in the same asset classes, Walter Investment Management will gain more freedom to invest in different asset classes.
Walter Investment Management is currently trading near the $20 mark, very close to its tangible book value of $21. Walter Investment Management recorded a growth of more than 300% (YoY) in quarterly revenues. However, it was mainly due to the acquisition of GTCS Holding LLC (Green Tree). Walter Investment Management generates an operating cash flow of $77 million, and has an enterprise value of close to $4 billion, which includes a high debt value of just over $3 billion.
Mission West Properties Inc (MSW) is a self managed and integrated Real Estate Investment Trust, which operates primarily in the Silicon Valley portion of the San Francisco Bay area. Mission West Properties offers a dividend yield of 6%, marginally better than its $5 billion market capitalization competitor Digital Realty Trust Inc. (DLR), which offers 4% yield. Currently trading near the $9 mark, Mission West Properties has declared a quarterly dividend of $0.13 per share payable on January 12, 2012.
Mission West Properties reported a quarterly revenue growth of 7% with the operating margin of 50%, but the net profit margin for the most recent quarter is a meager 8%. This is mainly due to a high interest expense close to $21 million. I would personally consider Mission West Properties a ‘HOLD’, as the REIT is seeing an upward trend since October 2011, trading above its 50, 100 and 200 day moving averages.
PennyMac Mortgage Investment Trust (PMT) is a hybrid mREIT (mortgage REIT) which invests in both agency backed and non agency backed securities. Although PennyMac Mortgage Investment’s first dividend was only in August 2010, since then it has increased twice and is now at 50 cents per share per quarter, or $2 per year. One of the interesting facts for PennyMac Mortgage Investment is that around 74% of ownership is in the hands of major financial institutions such as BlackRock.
PennyMac Mortgage Investment is trading near the $17 mark, a 12% discount to its book value of $19. The company’s management is headed by able heads. such as current CEO Stanford L. Kurland, who has worked with Countrywide as CFO and COO prior to founding PennyMac Mortgage Investment. PennyMac Mortgage employs a flexible program, wherein homeowners may modify the loan’s terms and conditions, such as decreasing loan rates in exchange for a longer term. I believe 2012 should bring some good luck for the REIT with the economy showing signs of recovery.
MFA Financial, Inc. (MFA) invests in both agency and non-agency backed mortgage-backed securities, on a leveraged basis. MFA Financial has been offloading agency backed MBS in exchange for non agency backed MBS, which has made its portfolio more riskier. The portion of non agency backed MBS was 12% in 2009 and now it stands at 34% as of 2011. Non-agency MBS come with lower interest rates but higher default risk.
The REIT is currently trading near the $7 mark, inside a short range of $6 to $8, at a price earnings multiple of 7 times as compared to the industry average of 30 times. MFA Financial provides a dividend yield of 14% and generates an operating cash flow of $300 million. In 2012, I expect it to be able to take advantage of the low interest rates and offer an even higher dividend yield to its investors. Of course, when doing your own due diligence be aware of the uncertainties facing REITs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.