7 mREITs With Liquidity, Currently Yielding Over 15%

by: Zvi Bar

The fall of mortgage-backed securities (MBSs) caused a major financial crisis three years ago. The low-rate environment that followed the bursting of the Internet bubble, combined with lax mortgage practices by a historically strict group, fueled the ballistic rise of MBSs. Their consequent collapse brought down almost everything else, including interest rates. Now, the companies that hold these securitized mortgages occupy the highest yielding corner of the market U.S. equity markets.

There are many REITs that manage portfolios of these securitized mortgages (mREITs). These companies buy the mortgage paper as an investment, or in order to re-securitize them and sell them to another REIT or some other entity that is investing in real estate loans. Many of these mortgage REITs that have a longer track record performed very poorly through and following the real estate collapse, largely due to their using leverage to purchase paper and make money off the spread, due to their low borrowing costs.

These mREITs have recently been hit by a series of fears beyond the concern that foreclosures will continue for the coming years and that housing prices may continue to drop. These businesses were especially sensitive to the debt-ceiling crisis within July. More recently, new regulatory risks have emerged, including those dealing with their tax status and leverage usage.

The following list is of 7 mREITs that now yield over 15%, with reasonably high trading volumes and market valuations of at least $1 billion, listed in alphabetical order:

American Capital Agency (AGNC)

  • Yield: 20.5%
  • 1-month: -6.29%
  • 2011-to-date: -5.11%
  • 1-year: -3.87%

Annaly Capital Management (NLY)

  • Yield: 15%
  • 1-month: -3.12%
  • 2011-to-date: -3.06%
  • 1-year: -1.53%

Capstead Mortgage Corporation (NYSE:CMO)

  • Yield: 15.3
  • 1-month: -2.56%
  • 2011-to-date: -0.40%
  • 1-year: 6%

Chimera Investment Management (CIM)

  • Yield: 18%
  • 1-month: -10.25%
  • 2011-to-date: -29.67%
  • 1-year: -27.57%

Cypress Sharpridge Investments (NYSE:CYS)

  • Yield: 19.2%
  • 1-month: -3.70%
  • 2011-to-date: -3.10%
  • 1-year: -9.01%

Hatteras Financial (HTS)

  • Yield: 15.3%
  • 1-month: -5.01%
  • 2011-to-date: -10.06%
  • 1-year: -12.91%

Invesco Mortgage Capital (IVR)

  • Yield: 23.6%
  • 1-month: -16.69%
  • 2011-to-date: -24.82%
  • 1-year: -22.66%

These mREITs were under significant pressure at the end of last week due to the mREIT regulatory risk that emerged Wednesday via the SEC. (See last week’s chart, below)

At these current prices, mREITs such as IVR and AGNC are now yielding north of 20 percent. Be that as it may, late Friday the FHFA sued several large banks alleging fraud in the selling of MBSs prior to their collapse. This development should become recognized as a potential gain for these MBS holding REITs, many of which could have claims as strong as Fannie Mae and Freddie Mac, and possibly far stronger for the non-agency mREITs holding MBSs composed of more questionable subprime and Alt-A mortgages.

One must note that these REIT dividends will be taxed as regular income, and not at the dividend rate, making them considerably superior performing products when held in tax-free accounts.

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.