Assessing Leverage Rates for Large Mortgage REITs

Most REITs that specialize in mortgage backed securities ("MBSs"), and especially agency MBSs 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 MBSs 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, and most higher risk mREITs use lower 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	Current Yield
AGNC	American Capital Agency Corp.	$5.34 B	1.1	8.14x	19.70%
NLY	Annaly Capital Management, Inc.	$17.83B	1.1	6.22x	14.50%
CIM	Chimera Investment Corporation	$3.31 B	0.96	1.94x	16.70%
HTS	Hatteras Financial Corp.	$2.13 B	1.05	7.51x	13.90%
MFA	MFA Financial, Inc.	$2.71 B	0.98	3.33x	12.80%

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.

If spreads narrow, mREITs will recognize a reduction in yield based upon spread reduction times leverage. 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 offers Exchange the FTSE NAREIT Mortgage REITs Index ETF (REM), and Van Eck offers the Marker Vectors Mortgage REIT Income ETF (MORT). The five above-mentioned mREITs are within both ETF's top 10 holdings

Disclaimer: This article is intended to be informative and should not be construed as personalized advice, as it does not take into account your specific situation or objectives.

Disclosure: I am long NLY, CIM.