MREITs Provide Significant Cash Dividends

Includes: AGNC, HTS, NLY
by: Todd Johnson

Let's admit it. What's working today? MREITs. The agency MREIT business model shines in today's economic backdrop. Until it's not working, let's play this business model out. We have the Federal Reserve as our personal guardian, as the Fed wants low interest rates and economic recovery.

When the facts change, then we can change our view on MREITs. MREITs are clearly different than a Coca-Cola (NYSE:KO) or a Pepsi (NYSE:PEP). Coca-Cola or Pepsi can be owned for 100 years. These blue-chips are not intensely interest rate-sensitive stocks. Since we are in the season of MREIT glory, let's play the market that is offered to us. For the short-term, we can obtain greater than 2-3% dividend yields, as most common U.S. blue chip stocks offer.

I am looking at exploiting the capital market discrepancy between Annaly Capital Management (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC). In the back of my mind, ceteris paribus, I am looking to short NLY and remain long AGNC if the U.S. Treasury Bond market changes or the MREIT sector has a sense of weakness. At this point, I remain long AGNC. I look to exploit any market weakness or buy into any secondary offerings which cause a short-term equity drop.

Investors and dividend-capture players may want to consider implementing mortgage reits (MREITs) in their portfolios. Names of interest include the major pure-agency MREITs: AGNC, Hatteras (NYSE:HTS), and NLY.

There are several positive MREIT-sector factors in play:

  1. The economy does not appear to be going anywhere fast. Mortgage rates continue to be at recent lows. The U.S. Treasury Bond yields continue to favor the status quo success of agency-backed MREITs. As of Friday, May 27, the two-year yield was 0.48% and the 10-year yield was 3.07%. The housing market and job market do not indicate any change is in the immediate future. The U.S. dollar continues, for now, to be the premiere reserve currency.
  2. The MREITs' quarterly dividend news will soon be released, which should confirm a continued strong MREIT-wide dividend. The opportunity exists for those on the sidelines to capture this dividend. At the very least, an investor can consider placing a specific portfolio allocation to this winning-side sector. Investors can also sell call options at strategic price points: AGNC $30 calls; NLY $18 calls; and HTS $30 calls.
  3. The astute investor can wait for MREIT secondaries to be announced to exploit a strong MREIT back wind, rising MREIT book values, and temporary stock drops due to stock offerings.

American Capital Agency

AGNC has provided investors a 15.5% closing annualized rate of return, or ROR, since its 2008 inception, and a 28.9% total annualized ROR thru May 27. These figures dwarf the -1.9% and -0.1% SP500 RORs during the same time frame. AGNC began trading on May 15, 2008.

AGNC Market Cap: $3.9 Billion
Book Value per Share: $25.96.
Approximate Ex-Dividend Date (unannounced as of May 30): June 21. This is 90 days after the last ex-dividend date of March 21.
Expected Quarterly Dividend: $1.40.

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Annaly Capital Management

NLY is the grandaddy of the MREITs, with Michael Farrell at the helm. NLY has provided investors a -0.2% closing annualized ROR over the past four years, and a 9.9% total annualized ROR thru May 27. These figures dwarf the -2.9% and -1.3% SP500 RORs during the same time frame. NLY has been trading longer than the thoughts of an AGNC IPO ever existed in the market place.

It is worth noting Mr. Farrell's May 4 commentary on the MREIT space:

We expect market conditions to continue to reflect the uncertainty of regulatory, fiscal and monetary policy outcomes, as well as overall domestic and global economic conditions.

A. NLY Market Cap: $14.70 Billion.
B. Book Value: $15.75 per share as of March 31, 2011.
C. Approximate Ex-Dividend Date (unannounced as of May 30): June 29.
D. Expected Quarterly Dividend: 62 cents. This is approximate, as NLY does not have a a "target" dividend distribution based upon recognized and unrecognized earnings and gains.

Hatteras Financial

HTS has provided investors a 15.9% closing annualized ROR since its 2008 inception, and a 15.9% total annualized ROR thru May 27. These figures dwarf the -1.4% and .4% SP500 RORs during the same time frame. HTS began trading on April 30, 2008.

A. HTS Market Cap: $2.2 Billion.
B. Book Value per share: $26.11-includes unrealized gains as of March 31.
C. Approximate Ex-Dividend Date (unannounced as of May 30): June 16. This date is based upon 90 days from the prior ex-dividend announcement of March 16. This news was released on March 8, indicating we should hear HTS news in the next 10 days.
D. Expected Quarterly Dividend: $1.00.

Sources: SEC filings, AGNC website, NLY website, HTS website,

Disclosure: I am long AGNC, KO, PEP.

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