The Top Performing Mortgage REITs List

By: , Contributor

Published on: Oct 08, 2019

Mortgage REITs are risky, but they offer big upside potential.

Mortgage real estate investment trusts, or mREITs, invest in mortgage debt. They finance income-producing real estate by purchasing or originating mortgages and mortgage-backed securities (MBS). They earn income from interest on residential or commercial mortgage loans.

Unlike traditional equity REITs that invest in physical properties, mortgage REITs invest in something you can’t see or touch. But that doesn’t mean they’re less desirable.

In fact, many investors prefer mortgage REITs for their high performance during low interest rate cycles.

Mortgage REITs offer high returns, but are risky

Mortgage REITs' high yields come at a potential risk. mREITs invest in mortgages whose credit quality may run the gamut from stellar to problematic. With such a varied credit range, the funds can be risky and unpredictable.

Moreover, mortgage REITs use more leverage than equity REITs. A recent report by the Urban Land Institute says mREITs face higher costs in their own capital stack, compromising their ability to pay out dividends.

If you're willing to accept those risks, however, you can get great returns.

There are 19 mortgage REITs; these are the top five in late 2019. They've performed the best in terms of dividend yield, offering a minimum yield of 12% to date.

REIT Market Capitalization Dividend Yield
New Residential Investment Corp.  (NYSE: NRZ) $6.48 billion 12.97%
Western Asset Mortgage Capital Corp. (NYSE: WMC) $545.55 million 12.38%
Dynex Capital, Inc. (NYSE: DX) $367.85  million 12.16%
Armour Residential Reit (NYSE: ARR) $1.02 billion 12.06%
Colony Credit Real Estate (NYSE: CLNC) $1.99 billion 12.00%

Data source: NAREIT. Market data as of 9/27/19.

New Residential Investment Corp. focuses on investing in and actively managing residential real estate. It invests in excess mortgage servicing rights (MSRs) on residential mortgage loans and in servicer advances, including the basic fee component of the related MSRs. The company recently purchased the forward mortgage servicing assets and originations business of Ditech Financial.

Western Asset Mortgage invests, finances, and manages both commercial and residential MBS, whole loans, and other financial assets. The firm has been actively investing in residential MBS since 1974. It's externally managed by Western Asset Management Company. As of June 30, 2019, the firm had $68 billion in total mortgage exposure.

Dynex Capital manages a diversified, leveraged, fixed-income portfolio. It invests in residential and commercial MBS. The CEO recently noted that challenges in the industry include the inverted yield curve that resulted in higher financing costs and lower mortgage rates driving higher prepayment rates. But he said the long-term prospects for mortgage REITs offer a compelling investment opportunity.

Armour Residential invests primarily in fixed-rate residential, adjustable-rate, and hybrid adjustable-rate RMBS. Armour has paid out $1.5 billion in dividends between its founding in 2008 and Sept. 2019. The REIT occasionally invests in U.S. Treasury Securities and money market instruments.

Colony Credit Real Estate, Inc. is a commercial real estate credit REIT formed in January 2018. The mostly U.S.-based REIT originates, acquires, finances, and manages a diversified portfolio of commercial real estate debt and net lease real estate investments. The firm’s external manager has originated more than $25 billion of commercial real estate credit assets.

Outlook for mortgage REITs

Investors in mortgage REITs appear cautiously optimistic. Risks remain, but mREITs have in their favor a healthy housing market coupled with healthy mortgage credit performance.

As the government’s role in the housing market shrinks, mortgage REITs have become a key source of capital. They've helped finance 1.8 million homes in the United States. As with any type of investment, be sure to do your homework first. Learn more about REITs and the different sectors to find out what type of investment you’re most comfortable with.

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TMFCarisa 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.