Current Leverage Rates for 5 Multi-Billion Dollar Mortgage REITs

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 |  Includes: AGNC, CIM, HTS, MFA, NLY, REM
by: Zvi Bar

Differences exist among Mortgage REITs (mREITs), such as whether they hold agency or non-agency paper, the rate at which they borrow money, the spread rate and the level of leverage used.

Most REITs that specialize in agency backed mortgage securities use a high level of leverage to increase the yield. These REITs produce high yield returns by multiplying the spread or margin they can achieve between the interest rate on the money they borrow and the rate paid by the mortgage paper they hold. For example, if a company can borrow at 3% and buy paper that yields 5%, the spread is 2%. The level of leverage used by the REIT then multiplies that spread payout. Most mREITs that hold low-risk paper use higher leverage
Below is a list of five mREITs that have market valuations above $2 billion, along with their present yields, book value, agency composition and level of leverage used according to their most recently filed quarterly reports.
Symbol
Name
Market Cap
Price to Book Value
Leverage as Liabilities to Equity
Yield
American Capital Agency Corp.
$3.7 B
1.1
8.7x
19.40%
Annaly Capital Management, Inc.
$14.58 B
1.13
6.65x
13.90%
Chimera Investment Corporation
$3.58 B
1
1.89x
14.70%
Hatteras Financial Corp.
$2.08 B
1.07
6.27x
14.30%
MFA Financial, Inc.
$2.85 B
0.99
2.96x
13.90%
Click to enlarge
Leverage may be calculated in several ways. Some prefer to use debt to market valuation, but many accounting and finance conservatives argue that current market price has nothing to do with the actual equity and that market pricing introduces irrelevant volatility.
Where spreads narrow, an mREIT with a higher level of leverage will recognize a reduction in yield times the leverage multiple. Some of these companies attempt to maintain their spreads by holding adjustable rate mortgages or utilizing hedging strategies.
Should you be interested in investing broadly in this sector, iShares has created an Exchange Traded Fund, the FTSE NAREIT Mortgage REITs Index, (NYSEARCA:REM), that tracks the performance of the index of residential and commercial mortgage real estate, mortgage finance and savings associations sectors. The five above-mentioned mREITs are within REM’s top 10 holdings, and the ETF has a 9.57% yield.

Disclosure: I am long NLY, CIM.