Anworth Mortgage Asset Corporation (ANH) is a mortgage real estate investment trust (mREIT) founded in 1997 that invests primarily in agency residential mortgage backed securities (Agency RMBS) backed Ginnie Mae,, Freddie Mac, Fannie Mae. In this article I want to focus upon Anworth representing the best value in the mREIT sector. I believe they are a hidden dividend value in the mREIT space with a 12.6% dividend yield. In addition the small cap mREIT is trading at a 6% discount to book value per share as of March 30th.
Anworth typically invests in fixed rate, adjustable rate and hybrid residential mortgage backed securities, mortgage pass through certificates, agency floating rate collateralized mortgage obligations and other real-estate securities. Anworth finances its investments using equity and short term debt with payable interest rates that are substantially lower than the average interest yield on its investments, and derives its investment income from this net interest rate spread.
As of December 31, 2011, Anworth's mortgage backed securities (MBS) portfolio had a fair value of $8.8 billion.
Valuation per Book Value Per Share
Anworth had a SEC reported book value per share of $7.17 as of March 30th. The stock is trading at $6.74 on April 30th. This represents a 6% discount to book value per share. Investors should seek agency mREITs trading at book value per share or at a discount to book value per share. Anworth meets this criteria.
As the table above shows, for the fourth quarter ended December 31, 2011 (Q4 2011), Anworth reported net income to common shareholders of $26.9 million, 4.9% higher than the fourth quarter of 2010 (Q4 2010). Earnings per share (to common shareholders) were 20 cents. This increase in net income was broadly in line with the 5.4% increase in net investment income between the two comparable quarters which resulted from lower interest expense in 4Q 2011. For 4Q 2011, there were no asset impairment charges.
For the full year, net investment income rose 8.8% to $134.9 million in 2011 versus $124 million in 2010, primarily from slightly higher interest income but significantly lower interest expense. Full year earnings per share were 90 cents, more or less in line with the 87 cents earned in 2010.
As on December 31, 2011, Anworth had substantially all of its $8.8 billion capital invested in Agency MBS, with Non Agency MBS accounting for only a tiny fraction of the total. Its Agency MBS portfolio grew 13.3% over Q4 2010. Total assets too were up, 13.1%, to $8.8 billion. Stockholders' equity grew in line with asset growth, up 13.1% to $982.3 million from $868.3 million in 2010
Anworth's Portfolio Attributes
81% of Anworth's portfolio consisted of adjustable rate Agency MBS with resets of 0-7 years, 13% was invested in 15 year fixed rate Agency MBS and 6% was tied to 30 year fixed mortgages. This allocation was roughly the same as in the third quarter of 2011.
The average yield on its portfolio, for 4Q 2011, was 3.39%, lower than 3.52% in the prior quarter. By comparison, the average cost of funds was 1.18% for 4Q 2011, giving Anworth a net interest rate spread of 1.42%.
For its first quarter ended March 31, 2012, Anworth declared a dividend of 21 cents per common share. In addition to common dividends, Anworth pays preferred dividends on 8.625% Series A and 6.25% Series B cumulative preferred shares.
Over the past three years, Anworth has regularly paid common dividends but quarterly payouts have ranged from a high of 32 cents in the second quarter of 2009 steadily down to the 21 cent level as of 1Q 2012. The chart below shows dividend payouts from 2009 to 1Q 2012.
At the current rate, Anworth has an annualized dividend of 84 cents and a common dividend yield of 12.6% with shares trading at $6.74 as of April 30, 2012.
As one of a multiple agency mREIT positions, I find Anworth a great hidden treasure with a 12.6% annual dividend yield.
American Capital Agency (AGNC) is trading at a 12% premium to its agency MBS portfolio as of December 31st. A 12% premium only represents an opportunity for management to issue a secondary and cause a temporary price dislocation on the sub $30 price threshold.
Annaly (NLY) is trading at a 1-2% premium to its agency MBS portfolio as of December 31st. My goal in owning Anworth over Annaly is to simple obtain a double digit return in an environment when the 30 year Treasury Bond yields less than 4%. They are small and not widely discussed compared to the $15 billion market cap giant Annaly.
Anworth remains a small cap primarily agency mREIT, with a small non agency MBS position in its portfolio. The stock is under the radar of most mREIT investors. I recommend high yielding income investors consider Anworth due to its discount to book value per share and proven presence in the mREIT space.