These REITs Are at Risk

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.

Company Name

Agency Focus?

Dividend Yield

Leverage (Assets/Equity)

Newcastle Investment (NYSE: NCT  ) No.                                                     7.6% 21.8
ARMOUR Residential REIT (NYSE: ARR  ) Yes                                                   19.5% 10.4
Capstead Mortgage (NYSE: CMO  ) Yes                                                   15.1% 9.9
American Capital Agency (Nasdaq: AGNC  ) Yes                                                   20.1% 9.1
CYS Investments (NYSE: CYS  ) Yes                                                   18.4% 9.1
Anworth Mortgage Asset (NYSE: ANH  ) Yes                                                   14.6% 8.6
Hatteras Financial (NYSE: 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.

If you'd like to look at some less complex dividend stocks, many are included in the popular Motley Fool free report "13 High-Yielding Stocks to Buy Today." Get your free copy

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.


Read/Post Comments (9) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On September 12, 2011, at 6:46 PM, GBSFOOL2 wrote:

    Once again a hack job by another Fool. I have used another post from the AGNC message board, but I know the poster won't mind. He worked in the regulatory arena and his post was pretty clear on what the SEC is doing. The SEC is issuing a concept release. Here are the responses to date.

    http://www.sec.gov/comments/s7-34-11/s73411.shtml

    The SEC concept release is not even an ANPR (advanced notice of proposed rulemaking). An agency issues and ANPR to get public comment before it drafts an NPR (Notice of proposed rulemaking)that outlines the proposal and requests public comment. An agency can go straight to the NPR, without an ANPR or concept relase. However, if the agency is unsure of public reaction, or how it should proceed, it may first issue an ANPR. Following the ANPR, and after many changes to the proposed rule, based on public comment, the agency decides if it will change the proposed rule, or possibly not issue it at all.

    It can also change the rule to exclude or grandfather some entities. At each stage the agency must include an detailed financiial impact analysis of the cost of the proposed rule. (Thanks to Ronnie Regan). Then comes the final rule, which outlines the ruling and must also include another financial impact analysis.

    At this stage, the SEC has issued a trial baloon that is not even a proposal.

    According to the same poster, he said it takes about two or three years before it is even close to something that would be enacted.

    So, once again, you are pretty far away from the truth and just posted some garbage that the MREIT's have sorted through already. The article is behind in addition to being inaccurate.

  • Report this Comment On September 12, 2011, at 9:52 PM, TMFBomb wrote:

    @GBSFOOL2,

    I tried to make it clear with this line:

    "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."

    Fool on,

    Anand

  • Report this Comment On September 12, 2011, at 11:54 PM, revealedin71 wrote:

    Please get a new record to play, this one is getting worn out.. I have been hearing this same siren song for nearly 3 years from the Fool...and yet rates stay low and Uncle Ben has already announced he will everything in his power to keep them that way for 2 more years...and the dividends keep marching on.

  • Report this Comment On September 13, 2011, at 7:10 AM, Kafue wrote:

    "I tried to make it clear with this line"

    Your headline about these mreits being at risk is definitely fear-mongering.

  • Report this Comment On September 13, 2011, at 12:15 PM, oilsands wrote:

    Agree with Kafue, the headline is shouting a message; the cover yourself line is hardly a balanced approach. The head line should have been "recent headlines about regulation of mREITs greatly overblown."

  • Report this Comment On September 13, 2011, at 7:59 PM, TMFBomb wrote:

    @Kafue and oilsands,

    As the most leveraged of the mREITs, these seven have more financing risk regardless of what happens with regulation.

    It's just one aspect of analyzing the investment-worthiness of the companies, but it's a real risk.

    -Anand

  • Report this Comment On September 14, 2011, at 10:19 AM, woo131 wrote:

    Give it up Anand, you are just touting some Fool services and you got caught with your facts down.

  • Report this Comment On September 15, 2011, at 3:56 PM, dragonLZ wrote:

    Hi Anand, Hope all is going well for you.

    You might be right these stocks are at risk.

    However, back on August 6, 2011 when I voted NCT the best stock in the world (comment #13 in post: http://caps.fool.com/Blogs/whats-the-best-stock-in-the/42971... ), NCT was at $3.00 - now at $5.89. That's almost 100% return while S&P 500 returned approx. 5% during this same period. Not too bad, don't you think.

    Also, after today's announcement of 50% increase in dividend payements, people who bought NCT at $3.00 are now enyoing 20% yield.

    Good Luck.

  • Report this Comment On September 20, 2011, at 6:11 PM, jm7700229 wrote:

    Not sure why you're getting all the flak, Anand. I caught the headline, considered your comments, and decided not to move on the two of these MREITs that I hold. Isn't that what information is for?

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