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:
- Invesco Mortgage Capital
- Resource Capital
- CYS Investments
What do you say about it? Please weigh in with your comments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
