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The mortgage REIT sector received another sock in the chops last week as the Fed upgraded its QE3 program to QE4 in its effort to knock the unemployment number from its lofty perch. Now, not only is the Fed fishing in the same pond as the mREITs, but it is planning to more than double its catch -- $85 billion in mortgage-backed securities purchases per month, up from its previous estimate of $40 billion.
Still, the mREIT sector plugs along, even in the face of QE4. Quite a few announced dividend payouts over the past week or so, and I decided to take a look to see how yields are holding up under quantitative easing. Would non-agency trusts pay out better than agency mREITs, for instance? Here's what I found -- including a couple of surprises.
Some gain, some feel the pain
In the current environment, many pure-play mREITs have reduced their per-share payouts. Capstead Mortgage (NYSE: CMO ) dropped its latest dividend to $0.30 from $0.36 last quarter, and Hatteras Financial (UNKNOWN: HTS.DL ) slashed its payout from $0.80 to $0.70 over one quarter's time. Both American Capital Agency (NASDAQ: AGNC ) and Anworth Mortgage (NYSE: ANH ) were able to maintain their dividend payments, but Armour Residential trimmed its dividend to $0.08 from its previous $0.09.
For those who invest in non-agency MBSes as well, things have been a little less dour. New York Mortgage (NASDAQ: NYMT ) and Invesco Mortgage (NYSE: IVR ) also kept dividend payments steady, just as Anworth and American Capital were able to do. Since New York Mortgage and Invesco buy non-agency paper, this status quo on payouts is understandable, as the spread on agency securities is generally tighter than on non-agency paper. How, then, did the other two manage this feat?
The fear with mREITs that buy only MBSes backed by government-sponsored entities is that they may have to sell some of those securities to maintain dividends. With quantitative easing all the rage, these commodities have doubtless increased in price. This is good for the mREIT's book value, and can give some ready money if sold at a premium. Unfortunately, using proceeds to prop up payouts is a temporary fix at best, and can lower book value as mREITs are forced to shell out more money for newer, lower-yielding securities. If prepayment rates increase , these newer MBSes will become even less attractive.
This scenario aptly explains why pure-play agency mREIT Annaly Capital Management (NYSE: NLY ) , which has also just reduced its dividend, has made its recent foray into the commercial paper district. The granddaddy of all mortgage REITs knows storm clouds when it sees them and is taking steps to ameliorate the risk, both short and long term.
One Fool's take
With teeny-tiny interest rate spreads, it is nothing short of a miracle that Anworth and American Capital were able to stay the course on dividends. Neither company is saying where they got the money to accomplish this feat, though, so investors are left to wonder. Long-term investors should keep a close eye on these REITs, looking for signs of self-cannibalization. Only in the mREIT world does not paying a lower dividend get a company in trouble!
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