Mortgage REITs notched a 2% gain last month, extending their average stock gains for the first quarter of 2012 to 9.9%. Not bad, though basically in line with the broader market if we count those big dividends.
REIT investors are generally in it for the high yields these stocks currently pay (13.2% on average), but it doesn't hurt when underlying stocks perform well, too. Here are the 10 best-performing dividend-paying mortgage REITs:
Q1 Price Change
|American Capital Mortgage||14.6%||16.5%|
|Apollo Commercial Real Estate||13.9%||10.3%|
|Two Harbors Investment||11.3%||15.7%|
American Capital Agency
Source: S&P Capital IQ.
In January the Federal Reserve announced that it expected short-term interest rates to remain near zero through 2014. Low short-term rates have been one of the key drivers of the enormous profitability of mortgage REITs in recent years because they reduces REITs' cost of funding, juicing their interest-rate spreads and dividends.
Despite how lucrative this downturn's low rates have been for many REITs, an improving economy can be helpful -- particularly for commercial mortgage REITs and perhaps a few of the exotic residential REITs. Notice how American Capital Agency was the only plain vanilla residential REIT to make the list. Although Fed Chair Bernanke cautioned in late February that job growth may be getting ahead of economic growth, we have seen a string of positive jobs reports (excluding last month's dud) with other, mostly good economic reports mixed in.
Combine good fundamentals with cheap valuations, and you've got rising stocks. As I noted at the end of 2011, valuations had gotten cheap after last year's 16.5% average loss. Commercial REITs and exotic residential REITs like Chimera, Invesco, and Two Harbors were especially cheap due to the market turmoil in late 2011. Even following the run-up, the 10 stocks listed above trade at a median price-to-book multiple of just 1.01. And some, like Chimera and NorthStar Realty, still trade substantially below book value. Except for Newcastle, each of the others trades for close to book value.
Some risks on the horizon for residential REITs could include an improving economy that cuts short their low-short-term-rate gravy train or a deteriorating economy that causes the Fed to take more aggressive action to push down long-term rates or fix the refinance logjam. It's a similar story for exotic residential REITs, but some, like Invesco and Chimera, could have some room to maneuver. A deteriorating economy would obviously be bad for commercial REITs.
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