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Who’s Ahead in the mREIT Dividend Contest?

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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!

Annaly Capital Management has a history of paying huge dividends to shareholders, though present circumstances have put super-sized payouts on the back burner. Because of the current economic climate, there are some crucial issues investors have to understand about Annaly's business model before buying the stock. In this brand-new premium research report on the company, our analyst runs through these absolute must-know topics, as well as the future opportunities and pitfalls of their strategy. Click here now to claim your copy.

Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 20, 2012, at 7:35 PM, DocReits wrote:

    Hard to keep silent with so many errors in your article. First your opening premise is wrong. Here is your staement:

    "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."

    No, about half of the 85B is going to be MBS the other half are Treasuries.

    You next posit:

    "How, then, did the other two manage this feat"

    Your answer:

    "Unfortunately, using proceeds to prop up payouts is a temporary fix at best,"

    You first wonder how AGNC maintained their dividend and then assume it was from selling their assets. How can you so forcefully assume this when you said you had no idea where the money came from? You might have digged deeper and seen that AGNC had enough in UTI to cover the dividend , let alone the small amount they made in earnings.

    Your thesis is based upon Agency mReits "canabalizing" their assets while, in the same breath, stating you don't know where they got the money from. Great thought process!

    How about focusing upon the tangibles like low CPR's based upon low loan to value assets? Why not focus upon hedge income? But to base your rant upon a guess on your part about admittedly not knowing and then fabricating a guess to the location of the hidden moola, is ridiculous.

    Maybe your horizon should spread to companies like WMC and MTGE, both 98% Agency, which raised their dividend(WMC) and added a bonus dividend to distribute their extra earnings(wow, must have sold a lot of assets, right?) and MTGE maintaining their dividend, once again.

    Might focus next time, how management might make a difference. AGNC and MTGE both headed by Gary Kain, and WMC run by Legg Mason, would be a start..compared to NLY(Agency) run into the ground and now floundering under the same CEO who has her relatives on the board and running their offspring CIM, which is under investigation by the SEC.

    I wonder if that will have a bearing on future performance? Might start by comparing the CPR's between these companies. Like WMC's 3.8 annualized rate compared to AGNC @ 9% to NLY at almost 20% annualized.

    Speculating about what you don't know and then using that(asset sales funding dividends) as a basis in fact for your conclusions is bad science.


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