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These REITs Are at Risk

Anand Chokkavelu, CFA
September 12, 2011

Recently, an underconsidered threat to the mortgage REIT industry surfaced -- specifically, 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.

As I've written, there are too few details to tell how credible or far-reaching potential regulation is, but we can at least see the mortgage REITs most at risk from a leverage standpoint. We should also look at whether these REITs mainly buy agency securities or non-agency securities. The former are guaranteed by government-ish entities like Fannie Mae and Freddie Mac and may get different (read: more favorable) regulatory treatment.

Here are the sizeable mortgage REITs (those with more than $200 million in market capitalization) with the highest leverage.  I've also included their dividend yields and mentioned whether they're focused on agency securities.

Company Name

Agency Focus?

Dividend Yield

Leverage (Assets/Equity)

Newcastle Investment (NYSE: NCT  ) No.                                                     7.6% 21.8
ARMOUR Residential REIT (NYSE: ARR  ) Yes                                                   19.5% 10.4
Capstead Mortgage (NYSE: CMO  ) Yes                                                   15.1% 9.9
American Capital Agency (Nasdaq: AGNC