I primarily author articles for SA that fall into the "Retirement" category. My goal is to help those folks that do not have the magical "One Million Dollars Plus" in retirement savings. Instead, I target those I call the "Mid-Rangers", folks who have $400K to $600K to invest and live off of for their remaining days. Hence I have developed what I term the Protected Principal Retirement Strategy - a strategy that focuses on managing risk, yet striving for around an eight percent yield on their portfolios. The majority of portfolio investments include master limited partnerships, a few royalty trusts, some foreign stocks, closed-end funds, business development companies and real estate investment trusts [REITs].
When I use the term REITs, I mean equity REITs, and not mortgage REITs, which brings me to the topic of this article.
Beginning around the end of 2012, I began to notice similarities between the mREITs of 2012 and the mREITs of 2008 - 2009. Most were stretched a little too thinly, spreads were tightening, book values were decreasing, and dividends were looking toppy in comparison with earnings. I was not the only SA author noticing this; Regarded Solutions, Brad Thomas and a few others also began to warn mREIT holders of what was to come.
I cannot begin to recap some of the scathing replies I received to some of my negative (but now so true) comments I posted to some of the pro-mREIT articles appearing on SA. It seems that the mREIT crowd gets more offended at anything negative than does the Apple (NASDAQ:AAPL) crowd. Unfortunately, I suffered through a good portion of the mREIT debacle of the last bear market before sucking it up and cutting my losses. Today, when I see folks writing articles about how they recommend averaging down on the mREITs I cringe. The reason is that regardless of the type of mREIT (MBS, agency etc.), and how good it seems, when the sector crashes, they all crash.
Are There Any Good mREITs Out There?
I do not closely follow any of the mREITs other than PennyMac (NYSE:PMT). I do however follow earnings, book value and dividends for several of the more popular ones, such as Anworth (NYSE:ANH), American Capital Agency (NASDAQ:AGNC), Annaly (NYSE:NLY), MFA Financial (NYSE:MFA), Redwood Trust (NYSE:RWT), New York Mortgage Trust (NASDAQ:NYMT), Javelin (NYSE:JMI), and PennyMac. I compare each specifically based upon price change, historic dividend trends, and earnings coverage of the dividend. Arguably, the mREIT sector began to decline in earnest around May 1 of this year. The following summaries are taken from my notes on each of these mREITs.
Anworth - Invests in agency and collateralized mortgages.
- Since May 1, 2013, the price has declined from approximately $6.30 to a low of $4.40
- Historically, the dividend has declined from a high of $.28/Q to it's present level of $.12/Q
- Most recent quarter earnings were $.12
American Capital Agency - Invests in collateralized mortgages that are guaranteed by government agencies.
- Since May 1, 2013, the stock price has declined from $33.00 to a low of around $20.50
- Historically, the dividend has been cut from a high of $1.40/Q to it's present level of $.80/Q, with a further cut anticipated
- Most recent quarter earnings were $.45
Annaly - Invests in a variety of mortgage loans, including those issued by U.S. government agencies.
- Since May 1, 2013, the stock price has declined from $16.00 to a low of $10.50
- Historically, the dividend has declined from a high of $.75/Q to its present level of $.35, with another cut possibly in the offing
- Most recent quarter earnings were $.28
MFA Financial - Invests in agency and non-agency mortgage backed securities.
- Since May 1, 2013 its stock has declined from $9.30 to the $7.00 level
- The dividend has varied from around a high of $.27/Q to it's present level of $.22/Q
- Most recent quarter earnings were $.18
Redwood Trust - More diversified than most, RWT invests in a range of both residential and commercial mortgages and financing vehicles.
- Since May 1, 2013, RWT's stock price has declined from $23.00 to a low around $17.00
- The dividend has dropped from a high of $.75/Q to a low of $.25/Q, but has been increased a few quarters ago to its present level of $.28/Q
- Earnings for the most recent quarter were $.25
New York Mortgage Trust - Invests in adjustable rate, fixed rate and interest only residential mortgages.
- Price has declined from around $7.40 on May 1, 2013 to a low of $5.50
- The historic dividend has varied from a high of $2.50/Q in 2005 to a more stable rate in the range of $.18/Q to it's recent level of $.27/Q
- Most recent quarter earnings were $.27
Javelin - Invests in mortgage backed securities (sparse information on their website).
- Since May 1, 2013, the stock price has declined from around the $20.00 level to a low of $11.00
- Until recently, the dividend has been $.23/M; however, it has recently been cut to $.15/M
- For the recent quarter, earnings did not cover the dividend
PennyMac - Invests primarily in residential mortgages.
- Since May 1, 2013, the stock price has declined from $25.00 to a low around $20.50
- The quarterly dividend has increased from an historic low of $.35/Q to its present level of $.57/Q
- Earnings for the most recent quarter were $.57
If you look closely at the aforementioned data, you will note that the stock price of every mREIT has declined, and most have declined significantly. Only RWT and NYMT have shown any increases in their dividend; however, RWT's most recent earnings do not provide adequate coverage, and NYMT's earnings provide the bare minimum coverage. PMT has shown the most consistent rate of dividend increases and earnings do provide coverage (although just barely).
Readers know that I have a basic bias against the entire mREIT sector. It is also true that last year I authored a more positive article on PMT (here).
I do not believe that the near term outlook for mREITs is anything close to favorable for the following reasons:
- Many economists are predicting that the housing market is about to roll over once again
- While some of the operating spreads are improving, any decline in the housing market will result in renewed tightening
- Additional dividend cuts are in the offing for many of the mREITs
- Book values continue to drop, and buying below the net asset value seems to only be a good tactic when investing in closed-end funds
- Finally, it does not matter what type of mREIT one holds - when the sector turns south, they all turn south
I believe that if an investor is under the age of 55, a small mREIT allocation (maybe some PMT) is probably worth the risk (and the risk of losing a substantial portion of your principal is a big one). For those of us over the age of 55 - look elsewhere, the yields are not worth the risk level. It is much safer going with midstream master limited partnerships, a few of the business development companies, and some of the closed-end funds trading at, or near historic high discounts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: This article does not constitute either a buy or sell recommendation for any of the stocks mentioned.