How safe are mREIT's? Do they ever go bankrupt?
There are three main types of REIT's: Mortgage, Equity, and a Hybrid of each.
I spotlight and propose that mREIT's are a relatively safe vehicle for preferred investment.
The fact that mREIT's utilize high leverage is concerning and in need of discussion.
Having presented my case, it's time for the SA members to offer comment and criticism.
I'm presenting this as a different type of SA article; one meant to stimulate thoughtful and intelligent conversation, with the end result that contributor and commenter alike equally share and benefit from the resultant forum. Where my function will be to provide a basis for the conversation, and then act as, sort of, a glorified moderator; adding information when I am confidently able to, and keeping silent when I can't.
Had you read my previous posts and articles, it's obvious I'm admittedly not the greatest trader, nor am I the most qualified to competently decipher complicated financial statements and other company reports that, more often than not, are spun to present the company in the most favorable light. My skill and expertise, what I pride myself on, and what allows me the confidence to function as a SA contributor is that I have extensively studied, learned, and utilized that knowledge to successfully and lucratively invest in a broad variety of preferred, fixed income, equities.
Before I continue, it's important you understand what my definition of safety really means. As a preferred investor I am not overly concerned about the price gyrations of the common stocks of the companies whose preferreds I want to invest in. However, during times of extreme volatility, either of the individual company, its sector, or the general market, I make certain to monitor price movement and volume of the common shares (companies I am interested in making an investment) traded during each day. In fact on my trading platform, I have opened a page dedicated exclusively to the commons of the companies whose preferreds I am interested in investing in. I do this because volume of their common shares usually trades in million as opposed to mere thousands of their preferred counterparts. This tells me how a larger number of the investors feel about a particular company rather than a view of the very few. I've often moved a particular preferred position with the sale or purchase of just a few shares. Consequently, this is a terrible way to get a feel for the general sentiment of that particular company.
I have chosen to open Part I of this forum with an in-depth study of the Mortgage REIT's or mREIT's, one of the three basic REIT sub-sectors. The other two are the Equity REIT and a combination of the two, a Hybrid REIT,which holds mortgages and actual hard Real Estate assets. Why REIT's? Primarily because they offer a higher than average percent yield return, and rightly or wrongly, I have always considered them a relatively safe bet, as discussed above.
According to Investopedia:
3 Main Kinds of REITs in the U.S.
Although there are a large number of mREIT's, for obvious reasons I am only concerned with those that offer preferred equities. Those that don't, as listed here, are of no concern for this discussion. Two examples of these are: Chimera Investment Corp. (NYSE:CIM) and Ellington Residential Mortgage (NYSE:EARN).
For this forum, and to keep our focus narrow, of the many, I have chosen to select no more than five mREIT's to review. They are: Armour Residential (NYSE:ARR), Apollo Residential Mortgage (NYSE:AMTG), AG Mortgage Investment Trust (NYSE:MITT), Invesco Mortgage Capital (NYSE:IVR), and CYS Investments (NYSE:CYS). Each are pure-play mortgage REIT's, as above-described in Section 2. And, as a rule, they are less highly leveraged and, consequently, potentially less sensitive to interest rate hikes, which, I believe makes them less risky for possible bankruptcy, the bane of my investing existence.
Armour Residential is a large cap stock, which it is valued over $1 billion, which I like because usually larger is safer, although not always. Although its common stock price has trended down for the past year, I am not overly concerned because during this time I was able to secure several thousand (ARR-A) preferreds, at, what I consider,, bargain-basement prices averaging $21.62/share. Furthermore, the yearly dividend is 2.0625, which means the effective yield for this investment is 2.0625/21.62 = 9.54%, a nice return for what I consider a safe, fixed income investment.
I invite you to examine an outline of its prospectus at Quantum Onlinecued for you reading pleasure. Notice, I try to be an opportunity investor, targeting my purchases during times of volatility when prices are relatively low and yields accordingly high.
For the overly cautious and savvy investor, I have provided a link toArmour's web page where, if you please, you are free to do additional due diligence. I am presenting it this way particularly because I am no expert on this business model, which I don't entirely understand considering all the moving parts: Interest variations, derivative trading, premium and discount buying, etc. I intend this as a forum, whereby, I will learn along with my audience, many of which know a heck-of-a-lot more about this class of investments than I do. I simply want to know if I am correct in assuming that these enterprises may lose value, and cut the common dividends, but they rarely go bankrupt. At least that's my belief. Am I right or wrong?
Apollo Residential Mortgage is a small cap stock valued at just under a half billion dollars, which along with most of its sector has faced a difficult year. Notice, its common stock was at $15.80, March 2015, now at $13.14, although has moved higher since February 11, when it hit a low of $9.51.
Although it mildly concerns me, I feel my preferred investment at the average price of $21.45 is still relatively safe; simply because I do not envision enterprises such as these going bankrupt. However, this forum is designed for you, the reader, to disabuse me of this notion if you consider it incorrect. Recall, my investment parameters, if they don't go bankrupt, my investment is safe even if, for a time, the preferred price is below what I paid for it; which at present is not. To the math: Purchase price 21.45, yearly dividend $2.00 (today's price which really doesn't overly matter), hovering around $21.80. Consequently:
2.00/21.45 = 9.32% yield, which I have earned for 2 years and one month, which equals $8.50 in already collected dividends.
A link to Apollo's web site might be useful if you want to do further company research.
AG Mortgage Investment Trust a REIT that invests in, acquires, and manages a diversified portfolio of residential mortgages and other real estate related securities. It is a small cap stock with a market cap of $362 million. Small for a mREIT. As with its mREIT peers, it has not had a good year; although, its common share price jogged up recently in lockstep with many of its peers.
Notice how the above effective yields mirrors the fact that these preferreds, in my opinion, are of low to moderate risk, which offer a nice, yet not overly excessive percent yield. Its risk/reward is certainly within reasonable balance. Another indication that my risk assessment of mREIT's is one of comfortable safety. I feel this lends proof to this fact that in spite of the negative trend experienced by this company individually and this sector as a whole, its preferred prices have held up remarkably well, not terribly below their IPO $25.00 per share offering.
Additional information about its available preferreds can be found atQuantum Online. Simply click on the find related securities link, which will take you to both. And, if you want to further study this company, this link will take you to its web page.
Invesco Mortgage Capital is a large cap company with an over $2 billion market cap, which is primarily focused on financing and managing residential and commercial mortgage-backed securities and mortgage loans, which are government backed. Another, what I consider, a risk-free preferred investment. IVR offers two preferreds as outlined below:
Of course, because both the above are virtually identical, best buy option will change constantly with price gyrations. However, considering the size and relative safety, a preferred investment in this company, in my opinion, is a no-brainer, and coupled with a respectably high yield, a home run. As requested, I beg your comments in agreement or opposition to my claims.
As always, I invite you to do your own due diligence, first by visiting IVR's preferred page on Quantum Online, then click on finding related securities. Additionally, Invesco's web site might be helpful if you want to dig further into the numbers. Not my strong suit. I am a wildly successful investor because following Shakespearean advice, "To thine own self, I'm true," which I decided after facing my market-knowledge limitation after spending time studying SA articles shortly after I returned to the market in early 2009. I realized there were a whole lot of investor's smarter than I, especially when it came to digesting a financial statement or interpreting a well-spun conference call. At that moment of realization, I decided either I would leave the market, bruised and battered by its catastrophic fall during 2008, or I could figure out how to play it on my terms, concentrating on becoming, not a jack of all trades, but an ace at one. Preferred investing became my ace.
CYS Investments Concentrates their investments in mortgage pass-through securities, which are federally guaranteed. Another large cap with over a $2 billion market value. As far as I'm concerned and safe vehicle for preferred investment.
Best yield and best upside potential. If called, the B Series will earn you .97 more per share and a .08% ongoing yield upside. Of course, I like higher yields because I tend to be greedy, and given my circumstance, I can afford to take greater risk. For the risk adverse, this is a nice investment, one you can safely leverage. I have already gotten prior approval to tackle leverage and margin in a later article. I promise, it will be a must read.
Finally, and this might be a fly in the ointment, one in which I don't feel competent to competently evaluate, although, I know it's important I add it to the discussion. Hopefully, it will be thoroughly discussed and determined whether or not we need be concerned at all. The problem is that the leverage I just wrote about, is apparently a normal practice for mREIT's, who leverage on the average of 8:1; which I find a bit frightening. I am listing the reported leverage D/E (Debt/Equity) of each of the five companies discussed below:
Obviously, ARR utilizes the highest leverage and might be the most at risk should the market turn against it. And to muddy up the waters further, I am quoting a relevant article, in its entirety, submitted in 2012 by a fellow SA contributor, Jack Rice:
Now it's time for audience participation. I invite your comments and any useful information you care to add to this discussion. This way we will all profit from the experience. Remember, I am virtually exclusively invest in preferred fixed income, long-term-hold instruments. I rarely invest in common stocks, and the safety, or lack of safety, is entirely from the prospective of a preferred investor.This article is tagged with: Dividend Investing Strategy
Disclosure: I am/we are long MITT-B, ARR-A, IVR-A, CYS-B.