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A Mortgage Real Estate Investment Trust (mREIT) is a great vehicle for an investor who wants exposure to real estate assets, while earning a significant dividend. Unlike traditional REITs, mREITs own mortgages and/or mortgage backed securities in real estate. There are many different kinds of mREITs with varying risk levels. When you are looking for a high yield dividend mREIT, it is important to ask two questions regarding your prospects:

  1. What additional risks am I accepting to earn a higher yield?
  2. Am I comfortable with the risks that accompany the higher yield?

Below is a process to help answer the first question. The second question can only be answered by the investor.

Analyzing an mREIT starts with asking the following questions about its ongoing investment strategy and its current portfolio.

  1. What type of securities are being purchased by the mREIT? If the mREIT only invests in Agency debt then default risk is extremely low, while if the primary assets being purchased are non-agency debt, then default risk is higher.
  2. How much leverage is being used to purchase the assets? This question is answered by calculating the debt to equity ratio (D/E). A high D/E ratio could indicate that management is accepting too much risk and could face a significant drop in asset value when interest rates begin to rise.
  3. What is the book value of the assets? Book value for an mREIT is calculated by subtracting its liabilities from its portfolio assets. It should be noted that the book value of an mREIT is calculated on a mark-to-market basis.
  4. Does the portfolio own floating-rate securities, fixed-rate securities or a combination?
  5. Am I comfortable with the portfolio's interest rate risk? The fifth question is the most important question an investor needs to answer before buying an mREIT. Interest rate exposure can only be determined after questions one through four have been completed. Remember that a rise in short-term interest rates will increase the mREITs financing costs, i.e. roll-over risk, while an increase in long-term rates will decrease the book value of the portfolio.

Look at the two following mREITs where the analysis has already been started for you. Both mREITs have 15%-plus dividends and short interests below 5%. There has also been an increase in institutional buying in both stocks.

1. Apollo Residential Mortgage (NYSE:AMTG)

IndustryREIT - Residential
Market Capitalization$532.93M
Dividend15.43%
Type of Securities PurchasedBoth Agency And Non-Agency
Debt to Equity Ratio35.67
Book Value (per share)$19.65
Owns Floating or Fixed Rate AssetsBoth Floating and Fixed Assets

Apollo Residential Mortgage, Inc. operates as a residential real estate finance company that invests in residential mortgage assets in the United States. It offers agency and non-agency residential mortgage-backed securities. The company is based in New York, New York.

Apollo Residential Mortgage, Inc has seen institutional buying increase 144% during the last three months, while total institutional ownership is currently 57.09% of shares outstanding. Short interest remains low at 3.68% of the total number of shares, while operating margin is 65%.

2. New York Mortgage Trust, Inc. (NASDAQ:NYMT)

IndustryREIT - Residential
Market Capitalization$229.41M
Dividend15.32%
Type of Securities PurchasedPrimarily Agency Issued
Debt to Equity Ratio35.67
Book Value (per share)$6.51
Owns Floating or Fixed Rate AssetsBoth Floating and Fixed Assets

New York Mortgage Trust, Inc., a real estate investment trust, engages in acquiring, investing in, financing, and managing mortgage-related and financial assets in the Untied States. It primarily invests in agency residential adjustable-rate, hybrid adjustable-rate, fixed-rate, interest only and inverse interest only, and principal only mortgage-backed securities; and multi family commercial mortgage-backed securities.

The company qualifies as a REIT for federal income tax purposes. It generally would not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its stockholders. The company was founded in 1989 and is headquartered in New York, New York.

During the last three months, institutional buying has increased 44%, however, only 19.3% of the float is currently owned by them. The increase in buying activity could indicate that financial institutions are starting to build a position in the stock and will continue to add to their position in the future. It should also be noted that short interest remains low at 4.85% of the float.

Financial data and graphs sourced from finviz.com and Yahoo Finance.

Source: 2 mREITs With 15% Dividends And Low Short Interest