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USA Mortgage REITs: Sector Focus
Monday, 29 September 2014 03:56

Mortgage REITs: are also known for their volatility and higher risk composition. Unlike other types of dividend-paying companies which pay the same dividend each quarter, the dividends paid by mortgage REITs are very unstable and are cut often -- sometimes drastically -- when interest rates and / or mortgage defaults rise. Many mortgage REITs, including Annaly Capital Management (NLY), Chimera Investments (CIM), American Capital Agency Corp. (AGNC), and Armour Residential REIT (ARR) are connected to debt-laden deals. That increases the leverage, which in turn adds a high volatility component to a REIT's earnings and dividends. Moreover, since mortgage REITs do not own or control property, judging its financial prospects is more of a guessing game.


In early-2013, the Fed Governor drew attention to the expansion of mortgage REITs (which have amassed almost USD$400bn in debt), during a speech on risky behavior in credit markets influenced by the central bank holding borrowing costs near zero for a 5th year and investors searching for high-yielding assets, and General Re-New England Asset Management said, “We’ve been dealing with the unintended consequences of monetary policy for a long time. We have to be on the lookout for the downside.”


In late-2013 the IMF urged closer regulation of mREITs to minimize their destabilizing effects on the USD$5.2tr repo market because such interest rate sensitive trusts make heavy use of mortgage-bond financing through repurchase agreements, so regulators fear that rising interest rates could decrease the value of the MBS used as collateral, sparking a sell-off by mREITs that could put the entire financial system at risk.


Despite often trading as a discount to book value, whereby the assets could (theoretically) be sold-off for more than the market value, management of mREITs are extremely keen to see them continue their existence as fees eat between 2.5% and 4% of book value annually. So, even if the returns to shareholders are inferior to liquidating the portfolio and giving the cash to shareholders, management has more to lose than individual shareholders, and the management will regularly win.

Last Updated on Thursday, 06 August 2015 01:37