Mortgages And Their Effects On REIT Stock Prices

 |  Includes: AGNC, ARR, CIM, CYS, NLY
by: IncomeHunter

At the moment we are experiencing record low mortgage rates across the board. This is really helping REIT stocks, which already offer investors incentives with high dividend returns. Annaly Capital (NYSE:NLY) was already having a strong year and will continue to do so on the back of these mortgage rates. It remains my strongest buy recommendation. Armour Residential (NYSE:ARR) and American Capital Agency (NASDAQ:AGNC) are both doing well, and should have continued success thanks to low rates. They remain buys here, too. CYS Investments (NYSE:CYS) and Chimera Investment (NYSE:CIM) should also benefit, but not as much, as they have struggled a bit more so far this year. They remain holds for now. Let's look at some specifics.

Annaly Capital is a high yielding mortgage REIT that is in great shape at present. Annaly Capital offers strong dividends of $2.20 (13.1%), which is why it has been an attractive option and remains one for future investors. Annaly Capital is already the largest mortgage REIT on the NYSE, with a market cap that stands currently at around $16.5 billion. With the advantages that it can now reap from the major and noticeable decline in mortgage rates across the board, this is a great company to back in the present economic climate. Currently trading around $17, Annaly Capital has seen an increase of more than 8% in the last few months. Annaly has managed to keep its costs low and maintain healthy and stable revenue. It recorded a gross profit of over $720 million, and its profit margin percentage is back near 100% (after dipping down to -100% in the third quarter of 2011.

Armour Residential is another company that will benefit greatly from the current mortgage price situation in that it is a diversified REIT. This means that it can take advantage of the situation to "boost profits and provide high dividends." Since the news reporting the drop in mortgage rates, the stock has improved by close to 6%. As things stand at the moment, the stock is trading at more than $7 per share. It is still recording negatives in gross profits, but its revenue is up substantially from previous quarters. With a 1Q net income of $65 million, Armour may be poised to keep black numbers in the coming quarters. I'd keep an eye on it -- though the dividends should keep investors watching the whole time.

The beginning of July bought with it excellent mortgage rates and American Capital Agency also seemed able to benefit from the situation. The company's stock spiked by nearly 2.5%, an impressive rise that we had not seen for quite some time. With its dividend and yield of $5 (14.90%), and its current price of $34 per share, there's a lot to like here. I like American Capital Agency for its dividend, but its price to book ratio is in-line with other good options like Annaly Capital (1.05x).

Investors have to be very interested in the high dividends offered by mortgage REITS at present. CYS Investment currently has a dividend and yield of $2 (14.3%), marking it as another solid option in an industry of strong dividend stocks.

Perhaps, then, this is one of the companies that will be able to benefit from the record lows that we have seen lately. I think that it is safe to agree with this opinion. CYS is currently trading right at the top of its 52 week range. CYS has remained fairly consistent in recording strong revenues, low costs and high profits and profit margins. Though there was a bit of a dip in 4Q of 2011, the company's 2012 numbers have showed a resurgence of strong numbers. Analyst are predicting revenue increases of at least 10% from last year, with some predicting revenue near $95 million (up from $65 million in the first quarter).

Chimera is another diversified REIT with large dividends to boast about, and is therefore, one of the companies that is likely to benefit significantly from the current mortgage situation. Chimera investment currently has a dividend and yield of $0.36 (15.20%). The company's stock recently increased nearly 1.5%, a significant rise, especially when you consider that it experienced a decline of nearly 10% during the first six months of the year. As things stand now, the company is trading around $2.37 per share, making it a cheaper and perhaps weaker option among the REIT stocks. Its profit margins have been slipping since late 2010, and it could really use the pick-up from mortgage rates.

The announcement of rates is a healthy sign, and REIT stocks have already made some great leaps this year. Of them, Annaly is my buy recommendation, though Armour and American Capital Agency should enjoy success as well soon. Revenues are up and costs are so low here that gross profits should keep piling in. Get in for the dividends and stay for the growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.