What Is A Good Alternative To Mortgage REITs?

Includes: CXS, MNDO, NLY, NMM, SFL
by: Richard Evans

The last 40 days have been rough on Mortgage REITs. On September 13, the Federal Reserve committed to purchase agency Mortgage Backed Securities (MBS) at a pace of $ 40 billion per month. Added to another $40 billion in (MBS) purchased under other government programs that means $80 billion in added demand in the market where mREITs buy income producing assets. Good investors should not be caught with their pants down. It is wise to keep a list of alternative investments at hand if indeed the mREIT market goes south.

Are other high-yielding companies a better alternative to mREITs right now? First, it is important to understand the problems REITs are immediately facing. Increased demand for MBS drives prices higher, raising the cost for mREITs at the same time, while lowering the yield paid by the MBS. This effectively pressures the REIT's net interest margin.

Since the Fed's latest quantitative easing announcement; the shares of major mREITs have produced mixed results. The shares of several are down by nearly 10%. Here is a look at two of the most popular mREITs:

AGNC Chart

AGNC data by YCharts

Down over 10%, with another eerily similar chart:

NLY Chart

NLY data by YCharts

It is important to note that Annaly Capital Management (NYSE:NLY) has had the additional turmoil of announcing the death of its co-CEO Michael A.J. Farrell due to cancer. Management of Annaly has taken the remarkable step (for a mREIT) of announcing a $1.5 Billion share buyback plan to protect shareholder value.

I looked at four companies that could offer high yields as an option to mREITs. Are they any safer?

Mind CTI Ltd

Founded in 1995, Mind CTI Ltd (NASDAQ:MNDO) is a software and service provider of billing, customer care and call accounting solutions for organizations and large multinational corporations. The company's stock had a recent closing price of $1.92 within a 52-week range of $1.64-$2.83. It offers a $0.24 annual dividend for a 12.50% yield off a 120.00% payout ratio. A high current ratio of 3.6 indicates the company's ability to comfortably meet its short-term obligations. The company has a return on assets (ROA) of 9.07% and a return on Equity (ROE) of 18.47%.

MNDO Chart

MNDO data by YCharts

The company also reported cash flow from Operating Activities of $1.6 million for the 2Q 2012. Revenue was reported at $5.29 million, compared with $4.55 million in 2Q 2011 and $5.26 million in 1Q 2012. The company's gross profit was $2.51 million, slightly lower compared with $2.88 million reported in 2Q 2011.

So we see a great ROE, cash flow and then there is that juicy yield, but two problems scream out from these numbers. First Mind CTI's low share price tends to make for thinly traded, erratic price performance, while the payout ratio indicates the dividend is completely unsustainable at current levels. In fact, the dividend has been anything but reliable:























Source: Yahoo Finance and Author Calculations.

On August 1st, the company's Board of Directors reactivated a plan for the repurchase of its ordinary shares of up to $1.8 million. This action should buck up share price although it will not do anything for the shaky payout ratio and irregular dividends.

Mind CTI needs to be passed up for now.

Navios Maritime Partners L.P

Navios Maritime Partners LP (NYSE:NMM) owns and operates dry cargo vessels with primarily long term, staggered expiration charters. Its fleet consists of 21 vessels, making for a relatively stable revenue stream. The company's stock had a recent closing price of $15.11 within a 52-week range of $11.53-$17.10. It offers a $1.77 annual dividend paid quarterly for a 11.70% yield off a 147.50% payout ratio. A current ratio of 1.3 indicates the company's ability to meet its short-term obligations. The company has a ROA of 5.24% and a ROE of 11.61%.

NMM Chart

NMM data by YCharts

The company reported a 15.6% increase in quarterly Revenue to $55.5 million, a 33.1% increase in quarterly Net Income to $22.1 million, a 21.5% and 19.4% increase in quarterly Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to $43.0 million.

The board declared a cash distribution for 3Q 2012 of $0.4425 per unit. The dividend is payable on November 13, 2012, to unit holders of record on November 8, 2012. The payout ratio is still scary, indicating the company may have problems maintaining the yield.

Navios is another pass.

Ship Finance International Limited

Another wet shipper, Ship Finance International Limited (NYSE:SFL) is a major vessel owning company with an operating fleet of 62 vessels and rigs. The company's stock had a recent closing price of $15.59 within a 52-week range of $8.62-$17.94. It offers a $1.56 annual dividend paid quarterly for a 10.00% yield off a 80.83% payout ratio. A current ratio of 1.04 indicates the company's ability to meet its short-term obligations. The company has a ROA of 2.96% and a ROE of 17.88%.

SFL Chart

SFL data by YCharts

Ship Finance has decent numbers and a maintainable payout ratio. However, the company announced a new public offering of 6,000,000 common shares. The company intends to use the net proceeds of this offering to invest in new assets within the shipping and offshore sectors and for general corporate purposes, including working capital. This will have the unfortunate affect of diluting current shareholder value. So it would be wise to wait until the price adjusts for the PO before taking a position.

I am putting Ship Finance on my watch list for now.

CreXus Investment Corp

CreXus Investment Corp (NYSE:CXS) is more of a hybrid REIT that invests in commercial mortgage loans and other commercial real estate debt, commercial real property, commercial mortgage-backed securities, and other real estate-related assets.

CreXus had a recent closing price of $11.26 within a 52-week range of $9.02-$11.50. It offers a $1.28 annual dividend paid quarterly for a 11.40% yield off a 87.67% payout ratio. The company has a very high current ratio of 30.92, indicating a large cash position. It has a ROA of 11.25% and a ROE of 12.01%.

CXS Chart

CXS data by YCharts

Share price has been recovering steadily since June 2012, but the yield has been advancing faster. This is a great sign for CreXus.

In today's macro environment I like REITs involved in commercial paper. They work under the same type of model as mREITs in that they borrow money at low rates, invest in notes and profit on the difference. Here the commercial paper spread is not squeezed by Fed action. So long as a Zero Interest policy is being followed by the Fed, Hybrid REITs can practically print money. Even better, for investors loyal to Annaly, CreXus is externally managed by Fixed Income Discount Advisory Company (FIDAC), a wholly owned subsidiary of Annaly.

So in my mind, right now the best back-up option for mREIT investors is just across the hall to Hybrid REITs like CreXus.

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.