As we approach the end of a tumultuous 2011, it's time to look back at the biggest winners and losers.
So in this series, that's exactly what we're doing, sector by sector. Today, let's take a look at the 10 biggest losers in the mortgage REIT industry. First, the backstory, then the results.
This year, we saw U.S. Treasuries get downgraded from AAA status while Congress played politics instead of fixing the budget, a domestic economy that has been recovering from its financial crisis in fits and starts, big trouble in Europe, and a Chinese economy that doesn't seem so bulletproof.
The daily volatility in the financial industry has been tremendous, but mortgage REITs haven't been swinging around as wildly as banks. Part of that is European debt fears manifesting in bank stock volatility, but the mortgage REITs have also been less volatile because of the massive, frequently double-digit dividend yields in the industry.
Since REITs have to pay out most of their profits, high dividends imply high profits. Mortgage REITs make their money off the interest-rate spreads between their generally longer-term mortgage debt holdings and their generally shorter-term borrowings. Since the Federal Reserve has kept short-term interest rates near zero, the mortgage REITs have feasted on the resulting spread.
The danger lies in any interest-rate compression, regulatory changes, and the risk inherent in individual REIT portfolios. On the latter point, REITs differ markedly in their holdings (e.g., agency vs. non-agency residential debt, commercial vs. residential) and strategies (e.g., the amount of leverage).
The 10 worst mortgage REIT stocks of 2011
For context, the S&P 500 has returned 2.7% after dividends this year. In other words, the market has been basically flat, but these 10 mortgage REITs have gotten slammed, despite often huge dividend yields.
2011 Dividend-Adjusted Return
Price-to-Tangible Book Value
Invesco Mortgage Capital
|Apollo Commercial Real Estate Finance||(4.8%)||0.9|
Starwood Property Trust
Source: S&P Capital IQ.
Not surprisingly, a non-dividend-payer was the worst performer. iStar Financial, like No. 3 loser Redwood Trust, owns a number of properties rather than just existing as a loan portfolio. However, the market is quite down on it. While the great majority of mortgage REITs are trading near book value, iStar is trading at just a third of tangible book. In fact, it's captured the attention of value investor Eddie Lampert.
Perhaps more surprisingly, the No. 2 REIT on the list, Chimera, with a 19.1% current dividend yield, still lost a quarter of shareholder value after dividends. I like looking at the losers for possible opportunities, but be warned that even the high-yielding REITs can lose you money if you're not careful. This list is proof of that.
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