Investment in mREITs has been extremely fruitful for investors over the past year. Most of the mREITs are currently yielding between 4 to 7 times the rates on treasuries. As a result, investors have been attracted to these investments. The nature and structure of mREITs make them especially attractive investments as mREITs pay over 90% of annual earnings to shareholders. As a result of low interest rates prevailing in the economy, mREITs are able to borrow at lower rates and receive higher rates on mortgages. The interest rate spread then becomes the income of these mREITs.
Interest rates are still low and are expected to remain low in the near future. However, more recently, mortgage rates have come down due to some government programs, and spreads have tightened. Nonetheless, there are still some mREITs available in the market with juicy yields and attractive valuations. Some of these mREITs are discussed in the following paragraphs.
Anworth Mortgage Asset Corporation
Anworth (ANH) mainly invests in agency mortgage-backed securities issued or guaranteed by United States government sponsored entities. The investment instruments include mortgage pass-through certificates, collateralized mortgage obligations, and other real estate securities, on a leveraged basis. Anworth's portfolio includes adjustable-rate mortgage-backed securities, agency hybrid adjustable-rate mortgage-backed securities, agency fixed-rate mortgage-backed securities and agency floating-rate collateralized mortgage obligations.
Current quarterly common dividends of Anworth stand at $0.15 per share, yielding 10.01%. The quarterly payments have been gradually coming down for the company. However, Anworth is not the only mREIT to decrease dividends. It is currently a common trend in the segment. Most of the mREITs are decreasing dividend payments gradually due to a decrease in the spread. Low interest rates have allowed the customers to refinance their mortgages at lower rates. There was a decrease of over $28 million in interest income for the company during the last year. However, interest expense only decreased by $3 million. Net income came down by about $22 million, showing a clear impact of a decrease in spread.
At the moment, the biggest investment (45% of the total portfolio) of the company is in 2-5 years maturity asset classes, followed by less than one year maturity class at 21% of the total portfolio. Anworth stock is currently trading at a P/E ratio of 8.9, and P/B ratio of 0.8. The company offers an attractive dividend reinvestment plan, currently offering a discount of 2%.
Apollo Residential Mortgage
Apollo Residential Mortgage, Inc. (AMTG) is a real estate investment trust that invests in, finances and manages residential mortgage-backed securities, residential mortgage loans and other residential mortgage assets throughout the United States. Apollo mainly invests in residential mortgage assets, and currently its portfolio comprises of agency RMBS, including pass-through securities, agency IOs and agency Inverse IOs, and non-Agency RMBS.
In December 2012, the company announced quarterly dividend of $0.70 per share along with a special cash dividend of $0.35 per share. Over the past year, Apollo's dividends have been above $0.70 per share. In fact, the last dividend payment was the lowest during 2012. At the moment, dividend yield of the company stands at 12.58%. Investment in Apollo gave investors a total return of 56% during 2012. At the end of the last year, the total portfolio was worth $4.23 billion, and mainly consisted of agency RMBS. Net spread for Apollo is still significantly high at 2.7%; as a result, the company is able to maintain high cash dividends.
Furthermore, the company announced the pricing of a public offering of 6,800,000 million shares of common stock, which includes an option for the underwriter to buy 1,020,000 million additional shares. At the moment, Apollo's shares are trading at a P/E ratio of 2.7, and P/B ratio of 0.8.
Low interest rates have had a two way impact on mREITs while borrowing costs have remained low, bond prices have gone up. I believe mREITs will be an attractive investment for at least another year. At the moment, the economic recovery is slow, and interest rates are expected to remain low in the short-term. If the Fed slows down quantitative easing, then there could be trouble for mREITs. As I said above, bond prices have gone up due to low interest rates, if the interest rates go up, bond prices can come down substantially. In the event of a decline in bond prices, any company with a weak hedge for its portfolio can face heavy losses. These risks should be kept in mind while investing in mREITs. However, despite these risks, I believe mREITs can be a good investment for a year.