We think the massacre that took place from October 5-October 15th with regards to the mREIT sector was a bit overdone. During that time period, mREITs as represented by the Market Vectors Mortgage REIT ETF (MORT), the iShares FTSE NAREIT Mortgage REITs Index ETF (REM) and industry leading mREIT American Capital Agency (AGNC). While the salad days of 15%+ annual yields and capital appreciation on mREITs aren’t coming back, we have counseled investors interested in mREITs to view mREITs within a prudent perspective in that these are primarily income driven vehicles, you don’t to pay too high a price for them, you don’t want mREITs that have high prepayment rates on the portfolio and that you should not currently expect much in the way of dividend increases. We also believe that a prudent and disciplined investor should expect a median annual dividend yield of 10% though, which exceeds what they can get on bonds.
American Capital Agency used to be our favorite mREIT and is still one of our favorite mREITs, even though we do not currently have a position in the company. While we were cautious on the company’s investment prospects during the summer due to its high market price premium to book value of 12-17% it was still one of our favorite mREITs because of the outstanding performance of CIO Gary Kain and his team. Based on the increase in book value that AGNC enjoys due to the unrealized gains on its MBS portfolio and due to the $.79/share spread income generated during the quarter, we can see that mREITs are capable of paying 10% annualized dividend yields even with the narrowing interest spreads due to central bank interventions. Considering that AGNC, American Mortgage Capital (MTGE) and Annaly Capital Management (NLY) have announced share buyback plans, we believe that this should establish a floor under mREIT shares.