Strong Correlations Between mREIT Dividend Policy And Share Performance Continue

 |  Includes: AGNC, CIM, CMO, HTS, IVR, MFA, NLY
by: Zvi Bar

Mortgage REITs ("mREITs") specialize in holding mortgage backed securities ("MBSs") and generally provide a high yield. Most mREITs borrow money and try to hold MBSs that offer a higher yield than the borrowing costs. The difference between those costs is the mREIT's spread, or margin. Most mREITs produce high yield returns by multiplying the spread through leverage.

Over the past year, many mREITs have been forced to lower their dividends due to reduced spreads. These spread reductions were caused by the low interest rate environment for agency backed MBSs and non-payments and/or pre-payments affecting the non-agency paper. Most hybrid or non-agency mREITs have devalued considerably due to the lesser performance of their MBSs and a decline in the underlying non-agency MBS asset value hitting the mREIT's book value.

On Monday, December 19, 2011, after the markets closed, both Annaly Capital Management (NYSE:NLY) and Chimera Investment Corporation (NYSE:CIM) announced their quarterly dividends. Chimera is managed by FIDAC, a subsidiary of Annaly Capital Management. Annaly is an agency mREIT and the largest publicly traded mREIT, while Chimera is the largest hybrid/non-agency mREIT. Most other mREITs already announced their Q4 dividends.

Annaly cut its dividend by 10.93% and its shares have fallen by 10.33% over the last twelve months. Similarly, Chimera cut its dividend by 35.29% and its shares have fallen by 35.11% over the last twelve months. One can immediately recognize that the reduction in yield and reduction in share value are somewhat highly correlated, with their respective dividend and share performances falling within less than one percent of one another. This indicates the market was likely anticipating most of the dividend reductions.

Below are the present dividends for agency mREITs Annaly, American Capital Agency (NASDAQ:AGNC), Capstead Mortgage (NYSE:CMO) and Hatteras Financial (NYSE:HTS), and for non-agency/hybrid mREITs Chimera, Invesco Mortgage Capital (NYSE:IVR) and MFA Financial (NYSE:MFA). I have also provided each mREITs change in dividend compared to last quarter and last year, as well as their share price change compared to last year.

Click to enlarge

Please note, MFA announced a 2-cent special dividend this quarter, and I provided performance both including and excluding that special dividend.

Most of these mREITs lowered their dividends, while Capstead and MFA have actually increased theirs, and Capstead is the only listed mREIT to appreciate over the last 12 months. MFA's shares likely depreciated due to devaluation of their non-agency MBS assets, despite its dividend strength. Additionally, MFA started 2011 with a yield below the average compared to these other mREITs and now appears within range of the group.

American Capital maintained its $1.40 quarterly payout through the year, and now for 10 consecutive quarters. Like its dividend, American Capital shares are essentially flat from 1 year ago, though the mREIT considerably increased its leverage in an effort to maintain that payout. This increased leverage could make American Capital more sensitive to future interest rate spikes, should interest rates ever again increase.

Generally, those mREITs that lowered their dividends saw their shares drop by a comparable rate. The difference between the reduction to dividends and the share price decline for both Annaly and Chimera is minimal. Additionally, Invesco and Hatteras have both declined to a similar level to their dividends. Future share valuations will likely continue to follow the growth or reduction of these mREITs' payouts.

REITs offer real and understandable property-related benefits and risks. Exposure to REITs 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. As a result, mREITs are far-better performing assets when held in tax-deferred accounts, such as an IRA.

Disclosure: I am long NLY, CIM.

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.