Lower Leverage Will Mean Lower Yields For Agency Mortgage REITs

Includes: AGNC, ANH, CMO, HTS, NLY
by: Parsimony Investment Research

The Securities and Exchange Commission is currently seeking comment on whether it should change the exemption status of mortgage REITs. As highlighted in our recent article, this would change the game for mortgage REITs.

A big concern for mortgage REITs is they will lose their ability to employ high levels of leverage if they are subject to the Investment Act. Mortgage REITs have high dividend yields partly because the managers use high leverage, which can boost returns. The REITs also use low-rate, short-term debt to finance their bond purchases.

We estimate that if agency mortgage REITs were forced to reduce their leverage from seven times debt-to-equity to two times, their dividend yield would fall from about 16% to 5%.

The table below highlights the current leverage and dividend yields the largest agency-focused mortgage REITs.

Investors should remain cautious on sector until the comments period is over. The binary nature of the decision could potentially have an adverse impact on mortgage REIT investments, We will do our best to keep readers apprised of the situation.

Disclosure: I am long AGNC, NLY.