7 mREITS With Liquidity Yielding Over 14%

by: Zvi Bar

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.

The following list is 7 of the higher yielding mREITs that also have reasonably high trading volumes, here listed in alphabetical order:

American Capital Agency (NASDAQ:AGNC)

  • Yield: 19.7%
  • 1-month: -0.45%
  • 2011-to-date: 0.84%

Annaly Capital Management (NYSE:NLY)

  • Yield: 14.6%
  • 1-month: 0.39%
  • 2011-to-date: 0.17%

Capstead Mortgage Corporation (NYSE:CMO)

  • Yield: 15.1%
  • 1-month: -0.62%
  • 2011-to-date: 1.83%

Chimera Investment Management (NYSE:CIM)

  • Yield: 18.3%
  • 1-month: -8.39%
  • 2011-to-date: -30.89%

Cypress Sharpridge Investments (NYSE:CYS)

  • Yield: 18.5%
  • 1-month: -0.30%
  • 2011-to-date: 2.0%

Hatteras Financial (NYSE:HTS)

  • Yield: 15.2%
  • 1-month: -4.82%
  • 2011-to-date: -12.61%

Invesco Mortgage Capital (NYSE:IVR)

  • Yield: 23.8%
  • 1-month: -12.98%
  • 2011-to-date: -25.73%

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.

As the five week chart, below, shows, agency mREITs have continued to outperform the non-agency and/or hybrid types:

Click to enlarge
(Click to enlarge)

Most agency mREITs are now approximately even so far within 2011, before counting dividends. Conversely, most of the non-agency and/or hybrid mREITs are down double digits within 2011, and in many instances down more than their sizable dividend payouts. 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.