I am buying Western Asset Mortgage Capital (WMC) shares as the agency mortgage real estate investment trust (mREIT) offers an enticing peer to peer mREIT valuation. Western Asset Mortgage is currently yielding a 15% dividend yield. This is based upon the upstart's stub dividend of 38 cents for 47 days of invested initial public offering (IPO) capital. I have recommended to accumulate Western Asset Mortgage Capital shares due to selling under book value per share. As of August 10th, the mREIT closed at $19.98. When opportunity knocks, investors have to act.
Western Asset Mortgage Capital
The company's first trading day was May 11th, 2012. The company is focused upon agency Government Sponsored Entity (GSE) Mortgage Backed Securities (MBS). The company is, however, a mREIT and will purchase non agency MBS on an opportunistic basis. Western Asset Mortgage Capital's 2nd quarter book value was $20.17. A 2-3% premium to book is a solid value.
Book Value Per Share's Importance
Book value represents the quarter ending valuation per share. An income investors' goal is to buy an effectively managed mREIT at a compelling valuation to the book value.
Western Asset Mortgage Capital has a June 30th ending leverage rate of 8.3x. This is the highest of companies profiled in this article.
Western Asset Mortgage Capital is externally managed and advised by Western Asset Management Company. Western Asset Management Company is a wholly owned subsidiary of Legg Mason, Inc. Legg Mason is a respected and successful financial entity on its own merits.
The 38 cent stub dividend, an 8.3x leverage ratio, and a hybrid mREIT business model, all suggest the annual dividend should be enticing. Based upon the numbers I have been reviewed, a 15% annual dividend should be achieved by the Legg Mason external management team.
American Capital Agency (AGNC)
American Capital Agency is offering income investors a 14.90% dividend yield. The stock is trading at a 14.86% premium to book value per share. Under most scenarios, this would be time to sell. The CIO, Gary Kain, purchased 20,000 shares on August 7th at $32.75. This was a net cash outlay of $655,000. The mREIT also had an accretive secondary to book value.
American Capital Agency has provided shareholders a 293% return since its IPO. The company's 14.90% dividend is stable. The management team has outperformed its peers. I have to stick with the winning jockey.
This agency mREIT continues to pay $1.25 per share per quarter. The company has $1.61, as of the 2012 2nd quarter 10Q, in udistributed taxable income per common share. This $1.61 should ensure a $1.25 dividend per quarter is available for the rest of 2012.
Mr. Kain has proven excellent agency mREIT results since its IPO. A 14.9% dividend is a reason to stick with this position.
Annaly Capital Management (NLY)
Annaly Capital Management had a 19% Constant Prepayment Rate (CPR) for the 2nd quarter. This compares to the 10% CPR for American Capital Agency.
Two Harbors Investment (TWO)
Two Harbors is trading at an unacceptable book value per share rate of 13% premium to book value. I had to sell my shares due to the 13% premium book value to share. A 2.93% premium is available with Western Asset Mortgage Capital.
American Capital Mortgage
American Capital Mortgage (MTGE) is a hybrid mREIT I believe has plenty of upside. This is due to Gary Kain managing the agency mortgage backed securities (MBS). Mr. Kain's team will select the non agency MBS. Due to the tightening GSE yield spreads, the non agency MBS sector offers higher profit margins with astute asset selection.
The 4.7% CPR was impressive. Management has stated a 9.5% CPR is forecast into future earnings projections. The 2nd quarter 10Q did show a 94% GSE MBS portfolio. If the agency MBS remains at this level, I believe management will need to decrease the dividend by 5 -10 cents per quarter.
The 2 Year Treasury Bond increased by 2 basis points week over week. The 10 Year Treasury Bond increased by 16 basis points week over week. This is positive news for the agency mREIT's net yield margin. Although mREITs don't own Treasury Bonds, the Treasury Bond markets provide a guide to the direction of GSE yields.
An income investor must be opportunistic. If a recommended dividend stock is on page 1 of major finance publications, then it's likely a time to sell versus buy. Successful investors buy prior to public awareness. Trend following (e.g., "acting like a lemming") can have a negative end result. I prefer to buy companies discussed on page 16 versus page 1. Opportunity knocks when lemmings are not buying the stock because of media hype.