American Capital Slams mREIT ETFs

ETF Trends

Already one of this year’s more embattled asset classes, mortgage real estate investment trusts and the exchange traded funds that hold mREIT shares are being taken to the woodshed again Tuesday.

Shares of the iShares Mortgage Real Estate Capped ETF (REM) are off 3.4% on volume that is already more than triple the daily average. The rival Market Vectors Mortgage REIT ETF (MORT) is off 3.3%. [Mortgage REIT ETFs in Focus Again]

News that American Capital Agency (AGNC) reported a 24-cent decline in book value when it delivered third-quarter results Monday after the close is inflicting damage on that stock (it is down 8.5% on more than double the average volume) as well as REM and MORT. American Capital Agency is the second-largest holding in REM, the larger of the two ETFs, with a weight of 14.2%. The stock is also MORT’s second-largest holding at 12.7%.

Not surprisingly, sell-side analysts are not impressed with what American Capital has to say.

“We are reducing our EPS 2013 and 2014 EPS estimates from $3.45 and $3.50 to $3.10 and $2.00 to reflect lower investment levels and the higher cost of funds that are likely to be seen in 2014. We are reducing our 2015 estimate from $3.60 to $2.05 as well. We expect to see AGNC reduce its quarterly dividend from $0.80 per share to a level more in line with its actual earnings potential of $0.50 per quarter,” said Sterne Agee in a note posted by Michael Aneiro of Barron’s.

Keefe, Bruyette & Woods was a bit more enthusiastic, maintaining an outpeform rating on American Capital, though the research firm lowered its price target on the stock to $25.50 from $27, according to Barron’s.

With American Capital currently trading below $22, $25.50 would mean significant upside. Still, dividend cuts are becoming the rule rather than the exception for mREITs. American Capital’s third-quarter dividend was 80 cents a share, down from $1.05 a year earlier.

Two Harbors Investment (TWO) delivered a third-quarter dividend 22.2% below what it paid in the same quarter a year ago. Invesco Mortgage Capital’s (IVR) dividend has tumbled 23.1% year-over-year. Annaly Capital (NLY), REM and MORT’s largest holding, paid 35 cents a share in the most recent quarter after paying 50 cents a share last year.

Annaly, Two Harbors an Invesco Mortgage combine for 26.4% of REM’s weight and 25.2% of MORT’s weight. It has been speculated that dividend yields on REM and MORT are due to come in and that may be true, but those lower yields may come by way of reduced payouts, not capital appreciation. [mREIT ETFs may not Enjoy 15% Yields for Long]

iShares Mortgage Real Estate Capped ETF

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Tom Lydon’s clients own shares of REM.

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