In the past few months, we have seen several mergers in the mortgage real estate investment trust industry.
Annaly Capital Management, Inc. (NLY) — one of the largest mortgage REITs — just announced it was buying smaller competitor Hatteras Financial Corp. (HTS).
Likewise, Apollo Commercial Real Est. Finance Inc (ARI) is buying Apollo Residential Mortgage Inc (AMTG) and Armour Residential REIT, Inc. (ARR) intends to buy Javelin Mortgage Investment Corp (JMI).
These are just a few of the latest mergers in the REIT industry.
The industry has seen selling pressure from investors concerned about rising rates and narrow spreads. This means many of the REITs now trade at a discount to their net asset value. Larger REITs can dramatically expand their assets under management and fees earned by snapping up competitors at a discount.
The following are three of the best REIT buyout candidates.
REIT Buyout Candidates to Keep an Eye On: AG Mortgage Investment Trust Inc (MITT)
Dividend Yield: 14.2%
The smallest mortgage REIT that has not yet received an offer is AG Mortgage Investment Trust Inc (MITT).
AG Mortgage focuses on investing in, acquiring and managing a portfolio of residential mortgage assets, other real estate-related securities and other financial assets. The shares currently yield over 14% and trade at just 75% of book value.
The firm has been taking advantage of the low price to buy back stock, and in the fourth quarter of fiscal year 2015, it bought 126,715 shares or $1.7 million of common stock at an average purchase price of $13.19 per share. AG Mortgage has more than $23 million left on their current buyback program, so I expect to see that they continued to repurchase shares when the next earnings report is released in early May.
REIT Buyout Candidates to Keep an Eye On: Anworth Mortgage Asset Corporation (ANH)
Dividend Yield: %12.7
With a market capitalization of $459 million, Anworth Mortgage Asset Corporation (ANH) is also small enough to attract the attention of another mortgage REIT looking to grow via acquisition.
This REIT invests in a leveraged portfolio of residential mortgages, many of which are backed by a government agency such as Fannie Mae and Freddie Mac. Notably, the shares are trading at 75% of book value and are yielding more than 12% right now.
Anworth has also been buying back stock while prices are below asset value, and in the last quarter of FY 2015, it repurchased 2,571,600 shares of its common stock at a weighted average price of $4.79 per share.
REIT Buyout Candidates to Keep an Eye On: American Capital Mortgage Investment Crp (MTGE)
Dividend Yield: 10.7%
At $711 million in market cap, American Capital Mortgage Investment Crp (MTGE) could also catch the eye of a growth-seeking larger mortgage REIT.
American Capital Mortgage invests in, finances and manages a portfolio of real estate-related investments, such as agency residential mortgage-backed securities, non-agency mortgage investments, other mortgage-related investments and other real estate investments.
The stock is trading at 76% of its book value and yields over 10% at the current price. Like its competitors, is has been taking advantage of low asset prices by buying back stock in the first quarter of 2016. It made open market purchases of approximately 2 million shares, and the shares were purchased at an average price of $13.19 per share.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.