Seeking Alpha
Research analyst, long/short equity
Profile| Send Message| ()  

I came across an article of James Shell, a fellow contributor, on the mortgage REITs, and I beg to differ with his views on certain occasions.

Dividend yield rate is definitely NOT something we can measure a REIT on, since it is legally mandatory to give out 90% of a REIT’s income as dividends among the shareholders. So, even more important than dividends, are the future income potentials of the REIT.

Again, we can never judge a REIT’s management efficiency by calculating its growth in revenue, just when the mortgage rates are at all-time low and the housing values are yet to return to their normal levels. But still, we will take that into consideration (courtesy to James Shell).

Shares (in millions)

YOY Rev Growth

MRQ Revs (in millions)

Growth $/Share

American Capital Agency (AGNC)

183.6

576%

$326.8

1.471

Armour Residential REIT (ARR)

84.758

1085%

$39.7

0.425

Chimera Investment (CIM)

1027

9%

$177.6

0.016

CYS Investments (CYS)

59.551

296%

$64.6

0.718

Invesco Mortgage Capital (IVR)

115.38

244%

$131.3

0.672

Annaly Capital Management (NLY)

970.1

33%

$926.6

0.318

Two Harbours Investment (TWO)

140.6

574%

$65.9

0.387

Nobody holds the candle to American Capital Agency in the above regard. Nice growth!

What we can watch for now, is the leverage ratio. Why? Leverage ratios will show much the company might be at risk, and what the shareholder’s equity will amount to, in case of liquidity.

Funds from operations (FFO), which consists of adding back depreciation to and subtracting out gain or loss on property sales from the net income, gives us the true picture of a REIT’s financial performance. In fact, to be consistent and relevant, FFO is used in the calculation of dividend payouts.

Moreover, I would also like to check which ones deal in government-backed securities and which don’t, or whether they are on fixed rate or floating rate. Personally, in this distressed state, government-backed securities just render us the peace of mind we need.

According to the article by Jim Fink, this was the dividend yield chart of the following mortgage REITs.

Mortgage REIT

Dividend Yield

American Capital Agency (AGNC)

18.8%

Cypress Sharpridge Investments (CYS)

17.6%

Chimera Investment Corp. (CIM)

16.1%

Invesco Mortgage Capital (IVR)

20.1%

Annaly Capital Management (NLY)

14.2%

Resource Capital Corp. (RSO)

17.7%

Hatteras Financial (HTS)

14.2%

Anworth Mortgage Asset Corp. (ANH)

13.8%

MFA Financial (MFA)

13.2%

If you are confused about the term “dividend yield”, it means how much you earn for every dollar you invest. It is derived by dividing dividend per share by price per share. So, American Capital Agency is doing pretty good in that.

Mortgage REIT

EBITD Margin

American Capital Agency (AGNC)

62.52%

Cypress Sharpridge Investments (CYS)

79.46%

Chimera Investment Corp. (CIM)

71.6%

Invesco Mortgage Capital (IVR)

68.53%

Annaly Capital Management (NLY)

50.3%

Resource Capital Corp. (RSO)

50.4%

Hatteras Financial (HTS)

95.04%

Anworth Mortgage Asset Corp. (ANH)

50.27%

MFA Financial (MFA)

46.39%

EBITD stands for Earnings before Interest, Tax and Depreciation. Hatteras Financial snagged away the first prize here, no doubt. It excludes depreciation and tax (REIT doesn’t pay federal or state income tax anyway), which gives us a somewhat proximate picture of the REIT’s operations. But it excludes interest paid.

For this reason, let’s look at the debt-to-equity ratio.

Mortgage REIT

Debt-to-equity ratio

American Capital Agency (AGNC)

752.62x

Cypress Sharpridge Investments (CYS)

negligible

Chimera Investment Corp. (CIM)

110.35x

Invesco Mortgage Capital (IVR)

negligible

Annaly Capital Management (NLY)

669.88x

Resource Capital Corp. (RSO)

443.05x

Hatteras Financial (HTS)

764.11x

Anworth Mortgage Asset Corp. (ANH)

4.18x

MFA Financial (MFA)

276.09x

In addition to all these, most of these mortgage REITs deal in agency backed securities, except some such as Chimera. But, above all, we are looking for stability and growth, right?

And looking at the above charts, I will propose these 3 mortgage REIT stocks:

  1. Invesco Mortgage Capital
  1. Resource Capital
  1. CYS Investments

What do you say about it? Please weigh in with your comments.

Source: REIT Roundup