In this article, I attempt to screen out undervalued high yielding US mortgage REITs for which analysts have a consensus buy recommendation. For this purpose, I examined their daily trading volumes, discount to book values, dividend yields and consensus recommendation of the analysts covering the stock. The specific criteria are as follows:
- Each of the companies must possess an average daily volume of over 200,000.
- Each of the companies must offer a dividend yield above 8%.
- Each banking companies must trade at least 10% below its book value.
- For each of the banking companies under consideration, analysts must have a consensus mean buy recommendation.
The results show Anworth Mortgage Asset Corporation (NYSE:ANH), Capstead Mortgage Corporation (NYSE:CMO) and Apollo Commercial Real Est. Finance Inc (NYSE:ARI) to have satisfied the criteria. The remainder of the investment thesis will touch each of the short-listed stocks briefly.
Anworth Mortgage Asset Corporation started its operations in 1998 as a mortgage REIT with an objective of providing its shareholders with elevated returns primarily through dividends. For this purpose, the company seeks to invest primarily in mortgage backed securities for which the principal and interest payments are guaranteed by any of the government Agencies like Fannie Mae or Freddie Mac. Traditionally, the company had concentration in adjustable rate mortgages (ARMs). At the end of the fourth quarter, 45% of the company’s investment portfolio was adjustable rate Agency MBS with a 2-5 year reset period. The company earned a net interest rate spread of 0.94% during the fourth quarter, down 15 basis points from the linked quarter. The company earned net interest income of $22.7 million, down from $31.3 million from a year ago and reported prepayment speed of 26% for its entire MBS portfolio.
From a fundamental perspective, Anworth Mortgage trades on volume of roughly 825,000 shares per day and possessed a book value per share of $7.14 at the end of the fourth quarter of 2012, down 4.2% versus the prior year end. Based on Friday’s close of $6.25/share, shares of Anworth Mortgage are trading at a 12.5% discount to their current BVPS. Analysts covering the stock have a consensus outperform recommendation for Anworth Mortgage, with 22.2% of them recommending their investors buy the stock, while another 22.2% rate the stock outperform. Only one analyst rates the stock underperform.
Capstead Mortgage Corporation
Capstead Mortgage is another mortgage REIT that invests largely in adjustable rate Agency residential mortgage backed securities. This large concentration of adjustable rate securities in the company’s asset portfolio gives Capstead Mortgage the advantage of recovering financing spreads diminished during periods of rising interest rates; it allows for only smaller fluctuations in the portfolio value from changes in interest rates compared to portfolios with a concentration in fixed rate securities. At the end of the most recent quarter, Capstead reported to hold 42% current –reset ARMs, while the rest were longer- reset ARMs. The interest rate spread for the fourth quarter of 2012 averaged 1.13%, down 17 basis points from the spread earned during the linked quarter.