7 mREITs With Yields Over 15%

by: Zvi Bar

Many investors and trustees are looking for higher yielding equities to include in or supplement a fixed income portfolio. Agency mortgage REITs are a popular option. Most REITs are equity REITs that own and/or manage properties. Mortgage REITs, to the contrary, own mortgages on real estate assets rather than the assets themselves. Some mortgage REITs concentrate on commercial mortgages, while others concentrate on residential property mortgages.

Many of these mREITs have recently performed poorly, largely due to debt ceiling and further real estate weakness risk. Much of this concern may now dissipate now that the President announced a debt deal with Congress, though a vote has not yet occurred. In any event, a debt ceiling deal will likely remove much of the uncertainty risk that has plagued the agency mREITs, which are usually some of the highest yielding equities.

A few mREITs are now yielding over 20%. Though using reasonably high leverage, agency REITs are often viewed as relatively safe investments. Outside of the recent spike down in agency paper, non-agency paper has also performed poorly for the last few months on fear of accelerating defaults when mortgage interest rates reset higher. It, too, should benefit from any debt ceiling compromise, but to a lesser extent than agency paper.

Below are seven mREITs that currently yield over 15%, along with their price to book value, based on their last reported numbers. Updated book valuations should be released by these entities in the coming weeks.

All of these companies are trading at within a 10% range of the last reported book values, with those holding non-agency exposure generally at a discount. These REITs are also well-known for their secondary offerings, and some individuals may now be speculating on coming offerings in addition to possible interest rate changes potentially affecting their spread-margins. Additionally, It is likely that several of these mREITs will announce lower book values in the coming weeks. This industry is likely to remain volatile over this term.

REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. Under the current tax laws, REIT dividends are taxed as ordinary income, and not at the lower corporate dividend rate. Because these REITs are taxed as ordinary income, many investors appreciate holding them in tax-sheltered accounts, such as an IRA.

Disclosure: I am long NLY, CIM.