Please ensure Javascript is enabled for purposes of website accessibility

These REITs Are at Risk

By Anand Chokkavelu, CFA - Updated Apr 6, 2017 at 7:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The most highly leveraged mortgage REITs.

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) Yes                                                   20.1% 9.1
CYS Investments (NYSE: CYS) Yes                                                   18.4% 9.1
Anworth Mortgage Asset (NYSE: ANH) Yes                                                   14.6% 8.6
Hatteras Financial (NYSE: HTS) Yes                                                   15.1% 8.5

Source: Capital IQ, a division of Standard & Poor's.

Except for Newcastle, this table isn't that surprising. Mortgage REITs that focus on agency securities can leverage up more than their non-agency-focused counterparts can because the default risk on their investments is basically that of the federal government. The leverage adds to their profitability, with the direct result that at least 90% of that profitability is paid out as dividends -- huge ones.

Still, the leverage employed is risky not just because of possible regulation, but also because, like the Wall Street banks, these REITs are beholden to short-term credit markets. If they lose their ability to re-up their borrowings, trouble ensues. And that's not even considering interest-rate risk.

For the flip side, I'll be back soon with the mortgage REITs that have the lowest leverage.

If you'd like to look at some less complex dividend stocks, many are included in the popular Motley Fool free report "13 High-Yielding Stocks to Buy Today." Get your free copy

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

ARMOUR Residential REIT, Inc. Stock Quote
ARMOUR Residential REIT, Inc.
$7.33 (0.14%) $0.01
AGNC Investment Corp. Stock Quote
AGNC Investment Corp.
$11.76 (0.34%) $0.04
Drive Shack Inc. Stock Quote
Drive Shack Inc.
$1.50 (0.00%) $0.00
Capstead Mortgage Corporation Stock Quote
Capstead Mortgage Corporation
Anworth Mortgage Asset Corporation Stock Quote
Anworth Mortgage Asset Corporation

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.