Uncle Gary asks, “Which REIT Should I Buy? CIM or NLY”
After reviewing several fundamentals, including those listed below, NLY would be the way I would go. Here’s why:
1. NLY is a large fund with a longer track record.
2. CIM has a very short 4 year track record.
3. NLY was rated ‘Most-Watched” REIT from Motley Fool. (See detail below).
4. NLY is not as exposed to the Consumer as CIM and the higher market cap is also seen as a plus.
5. Although the PEG for NLY is over 1, it has a low PE of 9.
6. NLY has a safer dividend.
7. NLY is less subject to Institutional Selling and has a broader base of ownership. Extra safety.
How safe is the dividend?
CIM paid out more dividends in the past 12 months than it earned making CIM a much riskier buy. NLY pays out less than it earns, preserving some capital for a larger margin of safety.
Graph: CIM Consumer Financial Services industry
Graph: NLY Real Estate Operations industry
Some Criteria used:
CIM executive pay not disclosed. (negative)
NLY executive pay $57M for top 5 executives. (seems high, top 2 guys make $20m ea)
CIM market cap 4.41B
NLY market cap 11.2B
CIM enterprise value 8.4B
NLY enterprise value 77.20B
Why is there such a disparity in enterprise value 8x vs market cap 1.5x? Enterprise value is total assets. The companies do not invest in identical assets. CIM was originally set up as a vulture fund, but switched to mortgage backed securities. NLY has almost always been exclusively in mortgages. At present, CIM is leveraged about 1 to one, ie., debt about equals equity. NLY is leveraged about 8 to 1. -Uncle Gary
CIM -PE 6.5 very good
NLY -PE 9.3 good
CIM PEG .80 – very good
NLY PEG 3.09x -High
CIM Revenue – 580M
NLY Revenue – 1.47B
CIM – Operating Margin 70.64% Very Good
NLY – Operating Margin 48.55% Good
CIM – Net Margin 70.54% Very Good
NLY – Net Margin 47.23 Good
CIM – Dividend .68 Yields 15.93% -BAD Over the past 12 months the company paid more in dividends than it earned. Over time this cannot continue.
NLY – Dividend $2.56 yields 14.34% Very Good
CIM – Owned By Institutions 53.03%
NLY – Owned by Institutions 37.75 %
CIM – Short Interest 3.7%
NLY – Short Interest 4.75%
CIM – Information 9 Stories this month
NLY – Information 15 stories this month
The most-watched REIT runner-up is CIM
The next most-watched REIT is Annaly-managed Chimera Investments (NYSE: CIM), which is a little bit of a riskier stock in terms of its investment portfolio. Chimera invests mostly in residential mortgage-backed securities and asset-backed securities, some of which are agency and some of which are not. It also invests in whole mortgage loans which can be comprised of jumbo loans or Alt-A mortgage loans. Currently, Chimera pays a sweet 16% dividend. However, the company was incorporated in 2007, so it only has a short track record on which to judge its success. Source
The most-watched REIT is NLY
Using the aggregate data, we see that Annaly Capital Management (NYSE: NLY) is the clear leader in terms of the percentage of people who are actively watching real estate investment trusts. Source The company issues shares to raise capital, which it levers up with short-term financing. It uses this capital to buy longer-term mortgage-backed securities (MBS’s), collects the interest on these securities or sells them, and then repays its lenders.
Notes from Credit Suisse
We are raising our 2011 and 2012 core EPS estimates to $2.45 (from $2.40) and $2.25 (from $2.20) following Annaly’s recent capital raise. We expect the company to maintain its current $0.64 quarterly dividend. We expect that a wider net interest spread will lead to higher sequential earnings in the first quarter. We expect the spread to increase as a result of a decline in premium amortization and from the wider spreads on new purchases from the recent capital raise. We expect Annaly to generate a mid-teens ROE, and dividend yields, through 2012 on our new estimate. It is this dividend yield that will provide the majority of the total return and keeps us with an Outperform rating.
Notes from The Street
We rate ANNALY CAPITAL MANAGEMENT (NLY) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company’s strengths can be seen in multiple areas, such as its attractive valuation levels, expanding profit margins, growth in earnings per share and increase in net income. We feel these strengths outweigh the fact that the company has had generally poor debt management on most measures that we evaluated.
Notes from S&P
Although NLY funds its assets with short-term repurchase agreements, we view the balance sheet as
healthy and well within its peer group range in terms of debt-to-equity. We believe the government backing of NLY’s agency-backed mortgage-backed securities provides confidence to NLY’s lenders. Compared to many of NLY’s mortgage REIT peers that retain substantial credit risk, we view NLY’s leverage levels as conservative. NLY generally expects to maintain a ratio of debt-to-equity of between 8:1 and 12:1, but it had de-leveraged to about 6:7X as of 2010 year end amid market uncertainties. Going forward, we expect NLY to increase leverage moderately to help offset the recent narrowing in interest rate spreads.
My Target Price for NLY is $17.50, I will buy 250 shares if NLY hits my strike price, I may add up to 750 shares total if this REIT continues to perform well. With such a high dividend rate, this will go into my IRA for long term hold.