Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC), Invesco Mortgage Capital Inc (IVR): How to Make the Fed Pay You

The valuation

For any REIT, the preferred plot is price as a function of FFO (Funds from Operations). FFO is close kin to operating cash flow, from which the book value is derived. Earnings per share mean little to mREITs. Cash is king. Consensus Wall Street analysts forecast Annaly Capital Management, Inc. (NYSE:NLY)’s future cash flows to increase in the low single digits. If so, the price-to-FFO line should not retreat. Therefore, unless the historical trends are now somehow broken, the price will eventually follow. Even at a P / FFO multiple of 6, this year’s projected FFO indicates a 2013 price of nearly $19 a share. Applying the same calculation to American and Invesco Mortgage Capital Inc (NYSE:IVR) result in share prices of $33 and $25, respectively. That’s roughly a 30% upside from today’s current prices.

Another way to value mREITs is to calculate their book value per share. For example, Annaly Capital Management, Inc. (NYSE:NLY)’s book value per share is currently $15.20. With shares trading hands at $13.36, we are looking at a discount of 13% to book value. Keep in mind that whenever shares traded at a 10% discount-to-book in the past, they have always tended to regress back to the mean, that is – to their book value within a year. That means that if history is any guide, by buying now you are potentially securing a 13% return (plus dividends) on your invested capital. That’s impressive. Even American Capital Agency Corp. (NASDAQ:AGNC) and Invesco Mortgage Capital Inc (NYSE:IVR) are trading at large discounts of 11% and 12% to book value. Opportunity is abound.

The Foolish conclusion

I strongly believe that after the strong sell-off that the mREIT sector has experienced, it’s finally on the verge of a fierce rebound. A higher spread will eventually lead to bigger profits for all mREITs. Make sure your’e on board.

Shmulik Karpf has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article How to Make the Fed Pay You originally appeared on

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.