These REITs Are at Risk
Sep 12th 2011 4:49PM
Updated Sep 12th 2011 4:50PM
Recently, an underconsidered threat to the mortgage REIT industry surfaced -- specifically, regulation that could threaten mortgage REIT returns by either restricting the massive amounts of debt used to boost returns or eliminating their tax-exempt status.
As I've written, there are too few details to tell how credible or far-reaching potential regulation is, but we can at least see the mortgage REITs most at risk from a leverage standpoint. We should also look at whether these REITs mainly buy agency securities or non-agency securities. The former are guaranteed by government-ish entities like Fannie Mae and Freddie Mac and may get different (read: more favorable) regulatory treatment.
Here are the sizeable mortgage REITs (those with more than $200 million in market capitalization) with the highest leverage. I've also included their dividend yields and mentioned whether they're focused on agency securities.
|Newcastle Investment (NYS: NCT)||No.||7.6%||21.8|
|ARMOUR Residential REIT (NYS: ARR)||Yes||19.5%||10.4|
|Capstead Mortgage (NYS: CMO)||Yes||15.1%||9.9|
|American Capital Agency (NAS: AGNC)||Yes||20.1%||9.1|
|CYS Investments (NYS: CYS)||Yes||18.4%||9.1|
|Anworth Mortgage Asset (NYS: ANH)||Yes||14.6%||8.6|
|Hatteras Financial (NYS: HTS)||Yes||15.1%||8.5|
Source: Capital IQ, a division of Standard & Poor's.
Except for Newcastle, this table isn't that surprising. Mortgage REITs that focus on agency securities can leverage up more than their non-agency-focused counterparts can because the default risk on their investments is basically that of the federal government. The leverage adds to their profitability, with the direct result that at least 90% of that profitability is paid out as dividends -- huge ones.
Still, the leverage employed is risky not just because of possible regulation, but also because, like the Wall Street banks, these REITs are beholden to short-term credit markets. If they lose their ability to re-up their borrowings, trouble ensues. And that's not even considering interest-rate risk.
For the flip side, I'll be back soon with the mortgage REITs that have the lowest leverage.
At the time this article was published Anand Chokkavelu owns no shares of any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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