It’s time again to update mREIT earnings results. All of the mREITs that I track have now announced Q2 2011 earnings with MFA finishing up the announcements this morning. Instead of doing separate posts for each of the 7 mREITs on my list I decided to do a summary post for the group. For my previous posts on mREITs see here .
First, lets summarize the earnings results for the group. The table below shows my mREIT economic model updated with Q2 2011 numbers. I’ve redone the table to group together the agency REITs and the non-agency REITs for easier comparison.
In general, agency REITs had better results in Q2 than the non-agency REITs. Falling interest rates and credit concerns caused weakness in the non-agency earnings results, in book value and dividend terms. However, as the table shows, all the mREITs continue to generate at least mid teen returns on equities. The general environment continues to be very positive for mREITs and with the recent economic weakness will probably stay positive longer than most investors think. As I’ve said before I uses NLY as the standard in the mREIT sector. So, when I look at the table above I compare all mREITs to NLY. NLY is generating mid 17% ROE on a leverage of 5.7 times. As CEO Mike Farrell said on their earnings call, its the highest returns at this level of leverage in their history. CIM’s returns are also impressive considering their leverage. The highest returns are being generated buy AGNC but with higher leverage.
As far as dividends, book values, and valuations consider the table below.
Book values for the agency REITs increased in the quarter due to falling interest rates. Non agency book values declined during the quarter due to falling interest rates and a rise in credit spreads in the mortgage sector. For the group overall, yields increased from 15.67% to 16.52% and price to book values declined from 1.11 to 1.05 during the quarter. From my experience, buying mREIT below 1.1 times book usually leads to nice positive returns. The trick is knowing when to get out. Again using NLY as the benchmark, the question I ask myself is how much extra return do I need to justify purchasing a different mREIT and at what risk does that extra return come? AGNC and CYS seem to be the only candidates although they come with significantly higher leverage levels. Also, the non-agency REITs are not offering enough extra return, in terms of dividends only, to justify the credit risk of investing in them versus the agency REITs.
In summary, while all the mREITs are doing well with the steep yield curve the agency REITs are doing relatively better than the non-agency REITs. Q2 2011 results definitely showed that. And that relative out performance comes with lower risk in particular in the environment of a weak economy and world wide credit concerns. Also in this weak scenario the outlook for REITs will stay positive for longer than most investors expect. If and when there is turnaround in the economic environment non agency REITs will offer more upside potential.
Disclosure: long NLY, CIM