The second stock is a Real Estate Investment Trust instead of an ETF. Western Asset Mortgage Capital Corp (NYSE:WMC) is a brand new company, founded on May 11, 2012. At 6.19 Western Asset Mortgage Capital Corp (NYSE:WMC) has a price/earnings ratio lower than 81% of peer companies in the real estate industry.
With a net asset value of more than 10 times its market cap, even its shareholders equity of $495 million eclipses the market cap of $433 million. This tells us right off the bat that Western Asset Mortgage Capital Corp (NYSE:WMC) is a bargain because if the company were to liquidate and pay all liabilities, the cash left over would still be more than the market value the company is currently trading at.
In addition to the low market capitalization, Western Asset Mortgage Capital Corp (NYSE:WMC) pays out a ridiculous 22.26% dividend. Even if investors don’t realize that the stock is undervalued and the share price stays flat, you get a 22.26% return on your investment!
For the cautious investor, there are also REITs whose real estate holdings are backed by government organizations such as Fannie Mae or Freddie Mac.
MFA Financial, Inc. (NYSE:MFA) operates mainly residential Agency Mortgage Backed Securities (Agency MBS). Agency MBS are MBS’s which issued or guaranteed by a a federal or government agency. 56% of MFA’s holdings are backed by either Fannie, Freddie or Ginnie Mae, and MFA is increasing this percentage every year.
MFA Financial, Inc. (NYSE:MFA) uses leverage and repo agreements to purchase its real estate holdings with spreads between the interest paid on loans and the interest received from renters, although the leverage is small at 3.1 times as of March 2013. MFA Financial, Inc. (NYSE:MFA) offers a dividend yield of a cool 10.29%. MFA Financial, Inc. (NYSE:MFA)’s market capitalization of $3.1 billion is significantly lower than its total asset value of $13.5 billion as well as shareholder’s equity of $3.3 billion. According to Etrade, MFA’s Price/Earnings (P/E) ratio is 10.27, which is lower than 74% of peer companies.
Conclusion
All three of these companies are trading far below their equity value, making them a bargain to investors, especially as we see a rebound in the housing market. If the market does not catch on and share prices remain stagnant, healthy dividend payments will make up for whatever income not gained.
Either way you slice it, REITs at their current prices can make very lucrative investments.
The article Real Estate Is a Bargain originally appeared on Fool.com.
Jake Pompeo owns shares of IShares FTSE EPRA/NARIET Developed Real Estate Ex-US Index Fund. The Motley Fool has no position in any of the stocks mentioned. Jake is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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