Recent Performance Review Of 7 High-Yield Mortgage REITs

by: Zvi Bar

Mortgage-backed securities 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. The collapse of MBSs and the many synthetic investments derived from them 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. 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.

Recent weakness within mREITs have been fortified by fear over regulatory changes and rising fears over potential risks associated with interest rates eventually rising. These risks have brought down even the agency-only mREITs, which are normally bond-like in their price activity. These mREITs were also especially sensitive to the debt-ceiling crisis within July, and subsequent interest rate issues generated through new Federal Reserve announcements and policies. The new regulatory risks include some involving tax status and leverage use.

The following is a list of 7 of the highest-yielding mREITs that have reasonably large trading volumes. I have provided their yields as well as their 5-day (1-week), 1-month and 2011-to-date performance rates:

American Capital Agency (NASDAQ:AGNC)

  • Yield: 20.30%
  • 5-day: 0.04%
  • 1-month: 1.24%
  • 2011-to-date: -3.58%

Annaly Capital Management (NYSE:NLY)

  • Yield: 14.20%
  • 5-day: 6.05%
  • 1-month: 1.74%
  • 2011-to-date: -5.25%

Capstead Mortgage Corporation (NYSE:CMO)

  • Yield: 14.40%
  • 5-day: 4.74%
  • 1-month: 3.49%
  • 2011-to-date: -3.49%

Chimera Investment Management (NYSE:CIM)

  • Yield: 17.30%
  • 5-day: 5.19%
  • 1-month: 1.33%
  • 2011-to-date: -26.03%

Hatteras Financial (NYSE:HTS)

  • Yield:
  • 5-day: 4.33%
  • 1-month: 3.75%
  • 2011-to-date: -13.34%

Invesco Mortgage Capital (NYSE:IVR)

  • Yield: 15.40%
  • 5-day: 11.55%
  • 1-month: 11.93%
  • 2011-to-date: -26.14%

MFA Financial (NYSE:MFA)

  • Yield:14.40%
  • 5-day: 8.22%
  • 1-month: -0.28%
  • 2011-to-date: -14.46%

Nonetheless, this last week was exceptionally strong for several mREITs. Shares in all of the above-mentioned mREITs appreciated, including AGNC (0.04%) which was marginally higher for the week even after announcing a $1 billion secondary on Thursday. The strongest performers were IVR (11.55%) and MFA (8.22%). See last week's chart, below. Click to enlarge:

This outperformance appears to be part of a recent trend, where non-agency mREITs have been outperforming agency MREITs. Nonetheless, all of the above-mentioned mREITs’ shares are down within 2011, not counting their dividends. The agency mREITS are positive if you include their payouts. Conversely, including dividends, most of the non-agency and/or hybrid mREITs are down a significant amount within 2011.

Several of these mREITs are yet to announce their Q3 earnings. DIvidend announcements generally follow earnings announcements by about four to eight weeks. Additionally, other mREITs may raise capital through secondaries like AGNC just did.

These mREITs offer significant yield and some real and understandable property-related risks. Exposure to either agency or non-agency mREITs should be limited to a reasonable percentage of a portfolio. Additionally, most REIT dividends are taxed as regular income, and not at the dividend rate, making them considerably superior-performing products when held in tax-free accounts.

Disclosure: I am long CIM, NLY.

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.