Agency Mortgage REIT Dividends Get Better & Better
Shamefully, I haven't done much with Agency Mortgage REITs here, but the times they are a changing. Agency REITs are killing it on net interest spreads, and that is causing higher net incomes and increased dividends. What else could an investor want, next to a portfolio of government-guaranteed mortgage debt? Not surpringly, many investors screech to a halt on mention of the latter, and that's one of the reasons these REITs deliver high teens yields quarter after quarter.
But those who had been yawning at the mention of an Agency Mortgage REIT are probably taking a closer look now. (AGNC), which is a relatively new Agency REIT, surprised everybody on Tuesday when they announced a quarterly dividend of $1.50 per share, a whopping 76% higher than the previous quarter (the dividend is payable July 27th, and the ex-dividend date is June 30).
AGNC's dividend increase follows dividend increases from Annaly Capital (NLY) last week and Capstead Mortgage (CMO) the week before.
But those who had been yawning at the mention of an Agency Mortgage REIT are probably taking a closer look now. (AGNC), which is a relatively new Agency REIT, surprised everybody on Tuesday when they announced a quarterly dividend of $1.50 per share, a whopping 76% higher than the previous quarter (the dividend is payable July 27th, and the ex-dividend date is June 30).
AGNC's dividend increase follows dividend increases from Annaly Capital (NLY) last week and Capstead Mortgage (CMO) the week before.
What's causing all this? The earnings driver is the so-called "steep yield curve", as it's known in industry speak. In this market, a steep yield curve basically means nobody wants to own anything with a maturity beyond next week, especially if it has a mortgage attached to it. This is resulting in a huge spread between short yields and long yields, and Agency Mortgage REITs are busy collecting the difference. The difference between these Mortgage REITs and others is that Agency REITs are doing it with portfolios of AAA-rated government paper, not a bunch of dodgy TRUPS and CDOs.
In AGNC's case, the weighted average yield on its portfolio last quarter was 5.13%, but its average cost of funds was 2.11%, resulting in a margin of 3.02%. This is pretty good work if you can get it, and last quarter AGNC delivered a 24.1% return on equity for sitting in between.
AGNC is not alone. Annaly Capital Management increased its dividend last week - by 20% to $0.60 per share (payable July 29, ex-date is June 25). NLYs net interest margin went from 1.71% to 2.11%, and they rode the recovery in mortgage bonds with a $5 million gain on sale. Combined, this drove earnings to $0.63 per share, up 19% from the year-ago quarter.
CMO's dividend increase was less spectacular, up 4% to $0.58 per share for the third quarter of 2009, but the story is the same: their net interest margin increased to 2.16%, and they have plenty of cash to invest after participating in the recent frenzy of REIT stock offerings.
Other cashed-up REITs investing in agencies, though not exclusively, include Redwood Trust (RWT) and Chimera (CIM). Incidentally, RWT sold its stock in two separate overnight offerings, the latter at a 10% discount to the previous day's close.
Despite these rich dividends, Agency Mortgage REITs are not for widows and orphans. Concerns over the government losing its AAA rating (which Annaly management calls "gossip"), interest rate wories, news about Asians selling their dollar assets, inflation prospects, high leverage ratios and re-investment risk all amount to a big detour sign for a lot of investors. From my perspective, owning these things right now amounts to a front row seat for the greatest show on earth (at the very least), and it's probably worth the risk.
In AGNC's case, the weighted average yield on its portfolio last quarter was 5.13%, but its average cost of funds was 2.11%, resulting in a margin of 3.02%. This is pretty good work if you can get it, and last quarter AGNC delivered a 24.1% return on equity for sitting in between.
AGNC is not alone. Annaly Capital Management increased its dividend last week - by 20% to $0.60 per share (payable July 29, ex-date is June 25). NLYs net interest margin went from 1.71% to 2.11%, and they rode the recovery in mortgage bonds with a $5 million gain on sale. Combined, this drove earnings to $0.63 per share, up 19% from the year-ago quarter.
CMO's dividend increase was less spectacular, up 4% to $0.58 per share for the third quarter of 2009, but the story is the same: their net interest margin increased to 2.16%, and they have plenty of cash to invest after participating in the recent frenzy of REIT stock offerings.
Other cashed-up REITs investing in agencies, though not exclusively, include Redwood Trust (RWT) and Chimera (CIM). Incidentally, RWT sold its stock in two separate overnight offerings, the latter at a 10% discount to the previous day's close.
Despite these rich dividends, Agency Mortgage REITs are not for widows and orphans. Concerns over the government losing its AAA rating (which Annaly management calls "gossip"), interest rate wories, news about Asians selling their dollar assets, inflation prospects, high leverage ratios and re-investment risk all amount to a big detour sign for a lot of investors. From my perspective, owning these things right now amounts to a front row seat for the greatest show on earth (at the very least), and it's probably worth the risk.
Disclosures: None at the time of publication
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Labels: AGNC, CIM, CMO, High Yield Mortgage REITs, Mortgage REITs, NLY, RWT
posted by REIT Wrecks at
9:30 AM
4 Comments:
Capitalism at its finest.
Great article. It's like shooting fish in a barrel for the agency mREITs given the state of the yield curve.
Couple of points in case you want to submit to Seeking Alpha:
Chimera and Redwood aren't really agency mREITs. Both specialize in owning high quality non-agency MBS.
New York Mortgage Trust (NYMT), another agency mREIT, also pushed its dividend some 28% higher (0.23 /share versus 0.18 / share.) Dynex Capital (DX) kept its distribution at 0.23 / share due to it having NOLs to carryforward.
I'll be interested to see how Anworth Mortgage (ANH) and MFA Financial (MFA) fare when they announce their Q2 dividends in July.
I'm a bit leary of the magic AGNC pulled out of their hat with respect to the $1.50 / share Q2 dividend. I suspect AGNC fully utilized its $0.28/share carryover from 2008 to boost this dividend. Parent sponsor ACAS can use all the cash it can get from AGNC dividends, plus AGNC just filed a S-3 to enable ACAS to sell the AGNC shares that ACAS purchased in the AGNC IPO. Nothing like a big fat dividend to push up the stock price.
Hey Patrick, great to hear from you. Yes, neither CIM nor RWT are pure Agency REITs; thank you for catching that. I did hear them present a few weeks ago, and I will have to check my notes, but I think they were/are buying agency paper, though obviously not at the exclusion of all else like the aforementioned three.
The AGNC dividend was eye catching, but the market doesn't seem to think it will last, so you may be right.
Glad to see the space is finally getting some due on this blog. Perhaps you'll remember my suggestion a few months back to take a closer look into this space.
To clarify, RWT neither owns nor is planning to buy agency paper. For CIM, although they own a few agency hybrids, their last two secondaries were intended to make purchases in the AAA MBS market. (Note that even the notoriously conservative MFA has shifted towards non-agency paper. 20-30% of their portfolio now consists of senior AAA MBS)
Two recent IPOs you should probably watch: Cypress Sharpridge (only Agency mReit trading below BV) and IVR (hybrid mReit like CIM and DX)
And know that the expectation of several years of short term interest rates coupled with stabilization in agency bond prices is driving more capital to this market. More IPOs are coming.
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