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I recently listed the most highly leveraged mortgage REITs, or mREITs. I did this because there's at least some uncertainty about the industry's ability to avoid onerous 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." But even if no negative regulation surfaces, it's important to know the financing strategies being used.
Today, I want to look at the other end of the spectrum -- the mortgage REITs that get it done with low debt levels.
The highly leveraged mREITs mostly deal in agency securities, which are guaranteed by government-ish entities like Fannie Mae and Freddie Mac. The lower credit risk of the agency securities allow for this debt-stacking.
Meanwhile, on the lower-leveraged end, we see mREITs that are focused on commercial mortgages and non-agency-guaranteed residential mortgages.
Below are the sizable mortgage REITs (over $200 million in market capitalization) with the lowest leverage. I've also included their focus and dividend yields.
|Colony Financial (NYSE: CLNY )||Commercial||8.5%||1.1|
|CreXus (NYSE: CXS )||Commercial||11.6%||1.1|
|Starwood Property Trust (NYSE: STWD )||Commercial||9.9%||1.5|
|PennyMac Mortgage Investment Trust (NYSE: PMT )||Non-agency residential||12.2%||1.7|
|Chimera (NYSE: CIM )||Non-agency residential||18.3%||2.9|
|Apollo Commercial Real Estate Finance (NYSE: ARI )||Commercial||11.2%||3.1|
|NorthStar Realty Finance (NYSE: NRF )||Commercial||12.0%||4.3|
Source: Capital IQ, a division of Standard & Poor's.
Like their highly leveraged counterparts, we see the less-leveraged REITs also achieve high returns that (as required) get paid out as high dividend yields. While the former juice their returns by taking on high amounts of debt, the latter do so by investing in riskier loans and securities (and thus earning higher interest rates). Broadly speaking, the difference is between more financing risk on the one hand, and more portfolio risk on the other.