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 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.
Mortgage REIT risk has been fortified by the growing fear of regulatory changes and the looming risks associated with interest rates rising. The new regulatory risks include some involving tax status and leverage use.
The following is a list of seven 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: 19.9%
- 5-day: 0.36%
- 1-month: 1.62%
- 2011-to-date: -2.02%
Annaly Capital Management (NYSE:NLY)
- Yield: 15.1%
- 5-day: -1.73%
- 1-month: -6.54%
- 2011-to-date: -11.43%
Capstead Mortgage Corporation (NYSE:CMO)
- Yield: 14.5%
- 5-day: -1.70%
- 1-month: 0.57%
- 2011-to-date: -3.81%
Chimera Investment Management (NYSE:CIM)
- Yield: 19.8%
- 5-day: -2.23%
- 1-month: -9.31%
- 2011-to-date: -36.00%
Hatteras Financial (NYSE:HTS)
- Yield: 15.5%
- 5-day: 0.19%
- 1-month: -0.15%
- 2011-to-date: -14.00%
Invesco Mortgage Capital (NYSE:IVR)
- Yield: 21.6%
- 5-day: -0.07%
- 1-month: -2.43%
- 2011-to-date: -30.44%
MFA Financial (NYSE:MFA)
- Yield: 15.2%
- 5-day: -1.19%
- 1-month: -3.24%
- 2011-to-date: -19.48%
Below is a 1-month comparison chart for the above-mentioned mREITs.
Click to enlarge
By far, over the last month, the worst performing mREIT of the group was Chimera, which announced that it had to re-characterize some of its long-term non-agency holdings and that the accounting re-calculations caused it to delay its third quarter report.
Chimera was late to provide a thorough explanation of the process, and shares of the mREIT suffered. One Chimera insider, Paul Donlin, the company’s chairman of the board, purchased 100,000 shares on November 22, increasing his position in the company by about 20%.
Interestingly, Annaly was the second worst performing listed mREIT over the last four weeks. Some of Annaly’s recent underperformance may be predicated on its association with Chimera and minority interest in the hybrid mREIT, or, alternatively, due to its interest in reducing leverage at a time that most other agency mREITs appear to be leveraging up.
Most of these mREITs are expected to announce dividends within the next two to four weeks. Some dividend reductions are expected, though exceptionally large changes to distributions may cause weakness in particular mREITs or the group more broadly.
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 lower corporate dividend rate.
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.