On Wednesday, June 27, numerous mortgage REITs go ex-dividend, including Annaly Capital Management (NLY), the largest mREIT and an agency only mREIT. Investors should be wary of buying immediately following mREIT ex-dividends, as secondary offerings are common events following ex-div dates.
While there is certainly no guarantee that a secondary offering will occur in any particular mREIT shortly after this mass ex-div date, investors should know that the risk is there. Investors may prefer to wait for he dust to settle from the generally substantial tectonic shift in price that occurs after an ex-dividend, as the aftershock of a secondary offering may aggravate the new investor by offering a superior entry point, or possibly a reason to not invest, depending upon your point of view.
Agency mREITs, like Annaly, hold exclusively leveraged portfolios of residential mortgage backed securities, RMBSs, which are backed by U.S. government agencies. Other than Annaly, several other agency mREITs go ex-dividend on June 27, including Capstead Mortgage Corp (CMO) and Hatteras Financial Corp (HTS). All three of these agency mREITs were marginally down going into the ex-div dates. The second largest agency mREIT, American Capital Agency (AGNC), went ex-dividend last week and issued a secondary earlier this year, as did HTS, but these agency mREITs often have multiple secondaries within a year.
In addition to the above-mentioned agency mREITs, Chimera (CIM) will also go ex-dividend on June 27. Chimera is a hybrid non-agency mortgage REIT, which owns both agency and non-agency mortgage paper. Chimera is related to Annaly the largest mREIT, and is managed by FIDAC, a wholly owned subsidiary of Annaly.
Of all the mortgage REITs in the market, Chimera may be the one least likely to now issue a secondary offering. Chimera's relative improbability of issuing a secondary is mostly based upon the company's failure to issue financial reports over the last two quarters, without which the foundation for a secondary offering would be suspicious. Chimera is also one of the worst performing mREITs, and largely due to its accounting issues.
Over the last several months, mREITs have generally outperformed the market. Most mREITs appreciated more than the broader market so far into 2012, even though many investors purchased them more-so for their hefty dividends. For example, the NAREIT Mortgage REIT ETF (REM), which broadly invests in mREITs, yields 14.18%, compared to a yield of about 2% for the S&P 500. Further, REM shares have appreciated nearly 10% through the first half of 2012. See the year-to-date comparison chart between REM and the S&P 500 ETF (SPY). (click to enlarge)
With an average yield of 14.18%, that would work out to about a 3.55% quarterly dividend. On an ex-dividend date, a company's shares will be reset down to reflect that dividend exiting the share, with the prior shareholder's slated to receive that dividend on its future pay date.
Investors must understand that these popular mREITs will not be on sale on Wednesday, but instead be revalued to reflect a lack of the built-in cash value of the companies dividend. Moreover, there is the potential that a subsequent secondary offering could further reduce the share price of any of these mREITs by another few percent.
Historically, investing in agency mREITs after secondary offerings has been a profitable time to allocate into the industry, but a secondary can be one of the most annoying things to see after you just bought some shares in a company. You may want to take a wait and see approach on this industry over the next two weeks, and it may save you some short-term pain.