Recent Performance And Yield Review For 7 mREITS Yielding At Least 15%

by: Zvi Bar

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. Their consequent collapse brought down almost everything else, including interest rates. Now, the companies that hold these securitized mortgages occupy the highest yielding corner of the market 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. These businesses were especially sensitive to the debt-ceiling crisis within July. More recently, new regulatory risks have emerged, including those dealing with their tax status and leverage usage. The following is a review of the short-term performance of 7 high-yielding mREITs that have reasonably large trading volumes. I have provided their present yields, as well as their 5-day, 1-month and 2011-to-date performances.
American Capital Agency (NASDAQ:AGNC)
  • Yield: 20.6%
  • 5-day: 0.18%
  • 1-month: -4.37%
  • 2011-to-date: -5.53%
Annaly Capital Management (NYSE:NLY)
  • Yield: 15%
  • 5-day: -3.91%
  • 1-month: -10.27%
  • 2011-to-date: -10.83%
Capstead Mortgage Corporation (NYSE:CMO)
  • Yield: 15%
  • 5-day: 1.82%
  • 1-month: -7.33%
  • 2011-to-date: -6.67%
Chimera Investment Management (NYSE:CIM)
  • Yield: 18.7%
  • 5-day: 0%
  • 1-month: -2.46%
  • 2011-to-date: -32.60%
Cypress Sharpridge Investments (NYSE:CYS)
  • Yield: 18.3%
  • 5-day: -0.66%
  • 1-month: -7.33%
  • 2011-to-date: -6.96%
Hatteras Financial (NYSE:HTS)
  • Yield: 16%
  • 5-day: -1.23%
  • 1-month: -5.41%
  • 2011-to-date: -17.91%
Invesco Mortgage Capital (NYSE:IVR)
  • Yield: 22.6%
  • 5-day: -0%
  • 1-month: -13.21%
  • 2011-to-date: -35.29%
Recent weakness within mREITs has been fortified by fear over regulatory changes and rising fears over potential risks associated with interest rates eventually rising. These risks have brought down even the agency-only mREITs, which are normally bonk-like in their market activity. Over the last month, the share values for all of these mREITs are negative, though a recent upward trend is apparent within the industry and the broader market. The best performorming listed mREIT over the last month has been CIM, though it is still one of the worst performing ones so far in 2011. See the 1-month comparison chart, below - (click to enlarge):
Currently, all of the above-mentioned mREITs’ shares are down within 2011, not counting their dividends, though the agency mREITS are positive if you include their payouts (especially, generally, if you did not reinvest them). Conversely, most of the non-agency and/or hybrid mREITs are down a significant amount within 2011, and in many instances down about fifty percent more than their sizable dividend payouts. Most are now trading between 5 and 20 percent below their book value. 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, REIT dividends are taxed as regular income, and not at the dividend rate, making them considerably superior-performing products when held in tax-free accounts.
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.