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3 Top Mortgage REITs to Buy Right Now

[Updated: Oct 07, 2020] Sep 10, 2019 by Liz Brumer
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Mortgage real estate investment trusts (mREITs) are known for producing high dividend returns. These top three, currently paying dividends from 10%–13%, are no exception. But, while high dividend returns are nice, they come with a higher level of risk.

Learn more about each company to determine if they may be a good addition to your investment portfolio.

What is a mortgage REIT?

Unlike equity REITs, where the company owns and manages properties, mortgage REITs invest in the debt securing the asset.

Mortgage REITs typically buy mortgage-backed securities or originate mortgages on real estate. Then they earn income from the interest. Many mREITs leverage their capital to buy or originate more mortgages, increasing their profits. This lets them pay higher dividend returns.

What are the risks of investing in mortgage REITs?

Fluctuations in interest rates have the largest effect on mortgage REITs. Increases in interest rates can affect the net interest margin, which is a large source of income for mREITs. Interest rate changes can also affect the value of their holdings, adversely affecting a company’s net worth.

Additionally, economic conditions can affect this sector's profitability. During economic recessions, default rates tend to increase, which can hinder a mortgage REIT’s bottom line. Mortgage REITs use hedging strategies to mitigate risk as much as possible, but this is a volatile market that presents a substantial risk.

Top three mortgage REITs to buy right now

Company Market Capitalization Dividend Yield
New Residential Investment Corp. (NYSE: NRZ) $5.9 billion 13.9%
New York Mortgage Trust Inc. (NYSE: NYMT) $1.5 billion 12.8%
Ready Capital Corp. (NYSE: RC) $666 million 10.7%

Market data as of 9/9/2019.

1. New Residential Investment Corp.

New Residential Investment Corp. (NYSE: NRZ) invests primarily in mortgage-servicing products, such as mortgage servicing rights, as well as residential mortgage-backed securities. As of June 2019, the REIT has $37 billion in assets. Their focus is on long-term, stable cash flow.

The corporation recently bought shares of Guardian Asset Management, a field services and property management company for government agencies, financial services, and asset management. This brings hope for continued growth.

It's important to note that this is a volatile stock. While it produces a high dividend, it's best for those who have a higher risk threshold.

2. New York Mortgage Trust

New York Mortgage Trust (NYSE: NYMT) invests in and manages mezzanine securities and mortgage loans secured by residential and commercial assets. Most of their assets are from the distressed market.

To date, their annualized return is 17.7%. Just over 50% of New York Mortgage Trust is owned by institutional investors such as hedge funds. This gives many investors confidence in the company’s holdings and potential growth.

Their leverage ratio is 1.8 to 1, far below March 2018's median leverage ratio of 3.6.

3. Ready Capital Corp.

Ready Capital Corporation (NYSE: RC) acquires, originates, manages, and finances commercial real estate loans and real-estate-related securities. It has performed well in the past and shows growth potential for the future.

In Q2 2019, Ready Capital Corp acquired $835 million worth of small-balance commercial loans. This acquisition resulted in a 15% portfolio growth, and there's more in the Q3 pipeline. The return on stockholders' equity increased 80 basis points in Q2 2019 to 8.8%. This is closer to the corporation's goal of 10% return on equity (ROE). Its gross leverage ratio is higher than the industry average at 3.9 to one, which poses a concern for some.

When considering these top three mortgage REITs, make sure you review each company and determine if the volatility or risk potential involved makes sense for you. Changes in economic conditions and increases in interest rates can affect any of these companies at any moment.

Always conduct your own due diligence and make sure your investments align with your risk tolerance.

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Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.