American Capital Mortgage Investment (MTGE) offers dividend investors a 16% annual dividend yield. The company announced Monday night that its 1st-quarter dividend will be 90 cents per share. This is a pleasant surprise as many mortgage real estate investment trusts have reduced their quarterly payments. In this article I'll discuss the merits of owning American Capital Mortgage Investment and discuss its peer group. Income investors will appreciate the 16% annual dividend provided by purchasing shares in American Capital Mortgage Investment.
American Capital Mortgage Investment
American Capital Mortgage Investment invests in agency mortgage backed securities, non agency mortgage investments, and alternative mortgage securities. The company has consistently, since its 2011 initial public offering, increased its book value per share. The recent increase in the dividend offers assurance of a mREIT on the right track to provide out performance in the mREIT sector.
Action: I recommend investors accumulate shares to capture the 16% dividend yield.
Annaly Capital Management (NLY)
Annaly Capital Management owns, manages and finances a portfolio of real estate investments, including agency mortgage backed securities and agency debentures. Annaly acquired Fixed Income Discount Advisory Company (FIDAC) in 2004, and Merganser Capital Management Inc (Merganser) in 2008. Annaly also has a subsidiary RCap Securities Inc (RCap), which gained accreditation from Financial Industry Regulatory Authority (FINRA) in 2009. FINRA now functions as a broker dealer for Annaly.
With these companies in tow, Annaly still qualifies as a mortgage real estate investment trust. All the assets of Annaly, including the assets of FIDAC, Merganser and Rcap, fall under the requirements of mREIT status. The purchase of agency mortgage backed securities and agency debentures are financed by net profits from borrowings and equity offerings through repurchase agreements with variable interest rates. Accordingly Annaly's mREIT status gives it all the advantages in federal taxable income. The capital policy of Annaly is that 75% of its total assets must be either short-term investments or premium mortgage backed securities.
NLY has announced dividends for Series A Preferred Stock for the first quarter of 2012, amounting to 49 cents per share of the Series A Preferred Stock, payable on April 2, 2012.
Action: I recommend other agency mREITs that have outperformed Annaly in the past 5 years.
ARMOUR Residential REIT, Inc. (ARR)
ARMOUR Residential REIT, Inc. is externally managed by ARMOUR Residential Management LLC. The ARMOUR Residential REIT portfolio is made up of fixed rate, adjustable rate securities, hybrid fixed securities, and adjustable rate residential mortgage backed securities. These securities have an implicit guarantee from the agencies Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB), and Ginnie Mae. As of the moment, ARMOUR Residential REIT has qualified for real estate investment trust status, and benefits from the advantages of the qualification under federal tax law. As such, ARMOUR Residential REIT is required to distribute 90% of its taxable income to its stockholders.
In an announcement last February 2, 2012, the preliminary results from ARMOUR Residential REIT's performance for the quarter ending December 31, 2011, show an expected GAAP earnings of between $23 million to $25 million. The book value of ARMOUR Residential REIT was $6.63 as of December 31, 2011. ARMOUR Residential Management LLC management has prior experience with another agency mREIT.
Action: I recommend investors avoid ARMOUR. Investors should focus upon agency mREITs with a proven management team, as a prior agency mREIT failure is clearly in the company's background.
Chimera Investment Corporation (CIM)
Chimera Investment Corporation is a hybrid mortgage real estate investment trust, externally managed by Fixed Income Discount Advisory Company (FIDAC), a fixed income management company. Through the experienced portfolio management of FIDAC, Chimera's goal is to sustain profitability through agency residential mortgage backed securities, residential loans, collateralized mortgage obligation, and other securities.
Chimera's book value is under closer investor scrutiny due to the balance sheet's subordinate resecuritized real estate mortgage investment conduits (re-REMIC). These assets are more difficult to price than the typical hybrid mortgage securities. Per Chimera's website, here is the definition of these securities:
The company announced, on March 1, a delay in filing its annual report.
The generally accepted accounting principles (GAAP) book value per share, as of September 30, was $3.27. The estimated economic book value, however, was $3.01 per share as of September 30. The December 31, GAAP book value per share is $2.97. The dividend yield is 14%.
The principal investments of Chimera concentrates on four classifications: residential mortgage backed securities including both agency and non agency backed residential mortgage backed securities, residential mortgage loans both prime and Alt-A, commercial mortgage loans and other asset-backed securities such as commercial mortgage backed securities and collateralized debt obligations for both consumer and non consumer asset-backed securities, investment and non investment grade.
Action: I advise investors to avoid Chimera unless they are knowledgeable on the balance sheet's subordinate resecuritized real estate mortgage investment conduits. The delay in filing the annual report is unusual and must be questioned.
Dynex Capital, Inc. (DX)
Dynex Capital, Inc. is a hybrid mortgage real estate investment trust managed internally. Its earnings come from investments to leveraged mortgage assets. Since its founding in 1987, DX has been focused on manufactured housing loans, commercial mortgage loans and single family mortgage loans. The Dynex strategy is to focus on short durations on investments with high credit quality in both agency and non agency residential mortgage backed securities.
The book value per share, as of December 31, was $9.20. The dividend yield is 11% and is a compelling value in the hybrid space. The company moved from agency residential mortgage backed securities toward commercial mortgage backed securities.
For agency residential mortgage backed securities, the investments are on variable rate securities, mostly adjustable rate mortgages (ARM) and hybrid adjustable rate mortgages. ARMs have scheduled interest rate increments over a span of time, whereas hybrid ARMs initially start out at fixed rates typically for three to 10 years, before following a rate of interest increments similar to ARMs. The ARMs and hybrid ARMS are classified through initial, interim and lifetime caps on the adjustments on the interest rates, to limit the amount the interest rates can reset.
For the fourth quarter ending December 31, 2011, Dynex reported net income of $14.4 million, resulting in a 36 cents per share income. This is an improvement of 49% compared with the previous year's performance.
Action: I recommend Dynex shares to investors. The book value per share is strong. The yield is a compelling 11%.