High Yield mREIT Investors Are Missing Out On The Alpha

by: Tim Plaehn

The term Seeking Alpha describes the investment goal of striving for higher investment returns without taking on a higher level of risk. The high level of interest in the high yield mortgage REIT stocks prompted me to calculate the returns of all of the stocks in the REIT universe and determine how the mREIT stocks ranked against the other REIT sectors. My results show that investors give up a lot of potential alpha for the "safety" of high dividend yields.

My Methodology

For this article, the 3-year total return was calculated using a spreadsheet and the adjusted historic price data from Yahoo Finance. Yahoo publishes a historic price adjusted for dividends and splits and that price can be used to calculate total returns. For more info on the adjusted price calculation, read this article.

The REIT database includes 127 stocks which have been in existences for three years. Total returns range from a 228% gain by Extra Space Storage (NYSE:EXR) to an approximate 30% loss of value from St. Joe Company (NYSE:JOE), RAIT Financial Trust (NYSE:RAS) and Commonwealth REIT (NYSE:CWH). The average 3-year return was 58.8% and the median return was 53%.

Mortgage REITs Were Below Average

Only 2 out of 12 mortgage REITs in the database produced above the average returns over the last three years. American Capital Agency (NASDAQ:AGNC) was at number 55 on the list with a 63% total return and 35-month old Two Harbors Investment (NYSE:TWO) has provided a 57% return to investors. Dynex Capital (NYSE:DX) is the median return producing REIT.

Eight of the remaining nine mREITs are bunched in a 25 stock range from number 85 to 110 on the list with total returns of 20% to 44%. Hatteras Financial (NYSE:HTS), Annaly Capital Management (NYSE:NLY) and Capstead Mortgage (NYSE:CMO) were bunched right together at a 27% total return number.

Above the seven REITs which have put up negative total returns, Chimera Investment Corp. (NYSE:CIM) sits two spots off the bottom of stocks with positive total returns - or at 118 out of 127 REITs. CIM produced a total return of 6% over the last three years.

Conclusions and Recommendations

Compared to the rest of the REIT sectors, investors give up a lot of potential return by sticking with the high dividend yields and implied safety of agency MBS securities. Over the last three years, mREITs have owned the bottom third of the performance results ranking.

There does not seem to be a valid reason to own more than two mREIT stocks. Returns for the group are more bunched together than other REIT sectors. If you pick two, hopefully one will produce above average returns.

Most of the top performing REIT stocks have relatively low dividend yields and the returns have come from share price appreciation. There are a few high yielding REITs near the top of the list including Newcastle Investment (NCT), One Liberty Properties (NYSE:OLP), NorthStar Realty Finance (NRF) and Omega Healthcare Investors (NYSE:OHI).

Past results may not indicate future returns, but one investment theme which may produce dividends - pun intended - is to find those REIT stocks with current high yields and a history of dividend increases. This seems to be a better alternative than the mREITs with very high yields and histories of dividend decreases.

Finally, do not avoid the fast growing REIT companies just because they have low yields. Simon Property Group (NYSE:SPG) sports a 2.5% yield because the stock has appreciated by 130% in three years. That is what happens when the dividend increases by 25% per year.

Note: If you want to know where a specific REIT ranks on my list, leave a comment and I will make every effort to post an answer.

Disclosure: I am long OHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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