7 mortgage REITs to emerge from the dumpster fire
Like most of the market, these best mortgage REITs to buy have been beaten. Most of this can be attributed to rising interest rates. After all, higher rates generally reduce net interest margins, reduce the value of mortgage-backed securities, and increase fears that those with variable-rate mortgages won’t be able to make payments. However, do not write off these REITs just yet. Even after substantial price declines, many continue to pay impressive dividend yields.
Plus, these REITs are so out of favor and feared right now that it might be time to start buying when there’s blood in the streets. We must also consider that the Federal Reserve may soon suspend its aggressive rate hikes. Currently, financial institutions, the International Monetary Fund and the United Nations are pressuring the Federal Reserve to slow its rate of rise. Even billionaire Barry Sternlicht believes “the economy will collapse” if rates are not lowered, as Fortune noted.
Moreover, according to FXEmpire.com“A long list of Wall Street banks, from Goldman Sachs, JPMorgan to Bank of America, have warned that overly aggressive Fed tightening, combined with a soaring US dollar, risks shattering global financial markets. and cause dangerous instability in other currencies.”
If the Fed follows this advice, everything, including mortgage REITs, could see higher highs.
|ABR||Arbor Real Estate||$12.30|
|ARI||Apollo Commercial Real Estate||$9.50|
|REM||iShares Mortgage Real Estate ETF||$21.35|
|DEAD||VanEck Mortgage REIT Income ETF$||$10.93|
AGNC Investment (AGNC)
With an impressive dividend yield of 18.6%, AGNC Investment (NASDAQ:AGNC) is definitely one of the best mortgage REITs to buy. This particular REIT focuses on mortgage-backed securities that are backed by the US government. In my opinion, this is one of the best mortgage REITs to buy.
Although these securities are considered to have very little risk of default, they are sensitive to interest rate increases. However, if the Fed signals that it may soon take a break from interest rate hikes, the AGNC could come up. In October, the company declared a cash dividend of $0.12 per share, payable November 9 to common shareholders of record as of October 31.
As noted Motley Fool contributor Brent Nyitray“AGNC Investment is not for the faint of heart. Interest rate volatility remains elevated; however, markets are predicting that the Fed will be done with rate hikes by the end of the year. income investors looking for passive income should put this name on their shopping list.
Chimera Investment (CIM)
With a yield of 16.3%, Investment Chimera (NYSE:CIM) is also one of the most oversold hybrid mortgage REITs to buy. This REIT invests in non-agency and agency mortgage assets. Right now, CIM stock is in oversold territory after falling from around $10 to a double bottom support of around $5 per share.
Since then, CIM has bounced back, but I’d like to see the stock close its bearish gap around $7.50. The company also just declared a third-quarter cash dividend of 23 cents, payable October 31 to shareholders of record as of September 30.
“Despite the challenging market environment of higher interest rates and wider credit spreads, Chimera remained committed to effectively and efficiently managing its liquidity, liabilities and capital structure during the quarter,” said declared Mohit Marria, CEO and Chief Investment Officer in August. “Securitizations and secured funding agreements provide stable, long-term funding for Chimera’s credit assets. Chimera also repurchased 5.4 million shares of its common stock during the period.
Arbor Realty Trust (ABR)
Arbor Realty Trust (NYSE:ABR) has a dividend yield of 12.68% and is also a REIT that I would place in the oversold camp. After moving from around $15.50 to a current price of $12.30, I would like to see the stock initially close its bearish gap around $13.50 per share, in the near term.
Like many other mortgage REITs on this list, the company also increased its cash dividend to 39 cents, its ninth consecutive quarterly increase. In recent years, this REIT’s dividend payout has jumped about 105%, from 19 cents to 39 cents.
Corporate earnings were also strong. In the second quarter, the REIT recorded revenue of $94.261 million, which was well above expectations of $82.38 million. This revenue also provided strong year-over-year growth, compared to $58.77 million in the same quarter last year. Even better, earnings per share came in at 52 cents, beating expectations of 43 cents. It was also above the 45 cents posted last year.
Apollo Commercial Real Estate (ARI)
With a yield of 14.74%, Apollo Commercial Real Estate (NYSE:ARI) is another mortgage REIT to consider adding to your portfolio. After falling from around $11 to $8, the stock began to rebound, last trading at $9.50. From there, I’d like to see him challenge $11 again. The company has also just declared a dividend of 35 cents, payable Oct. 14 to shareholders Sept. 30.
The company is also well positioned for recent interest rate hikes. Indeed, approximately 98% of its portfolio is made up of variable rate loans, which will benefit from higher rates. As noted Putnam.com“With variable rate loans, their coupons adjust increasing towards the higher rate scenario, and the resulting higher income makes the security more valuable.”
Starwood Property (STWD)
With a yield of about 10%, Starwood property (NYSE:STWD) is the largest commercial mortgage REIT in the United States, As noted by Starwood,“The Company’s core business is focused on originating, acquiring, financing and servicing commercial mortgages and other commercial real estate debt investments.”
In September, Starwood declared a dividend of $0.48 per common share for the quarter ending September 30, 2022. This dividend is payable October 14, 2022 to shareholders of record as of September 30, 2022.
The company then discussed its business prospects, which remain promising. “We closed nearly $4 billion in new investments, bringing our portfolio to a record $27 billion. Book value increased again this quarter, largely due to our affordable housing assets which appreciated due to continued robust rental growth. Today, the LTV of our commercial loan portfolio stands at just 61%, a major cushion against potential adverse movements in equity cap rates, and is 99% floating rate, providing an advantage to higher rates, said Barry Sternlicht, Chairman and CEO of Starwood Property Trust.
iShares Mortgage Real Estate ETF (REM)
With an expenditure rate of 0.48%, the iShares Real Estate Mortgage ETF (BATS:REM) tracks an index composed of US REITs that hold US residential and commercial mortgages. This relatively low expense ratio provides access to a diverse portfolio of businesses in this space at very low cost.
Top holdings of this ETF include Annaly Capital Management (NYSE:NLY), Starwood Property, AGNC Investment, Chimera Investment and Investment in two ports (NYSE:OF THEM) to only cite a few. The low-cost diversification profile of this ETF cannot be underestimated. If I wanted to buy 100 shares of REM and gain exposure to dozens of shares, it would cost me around $2,100. Meanwhile, for exposure to 100 shares of say Starwood Property, that would cost me $1,900, and the only exposure I would have would be STWD shares.
Technically, REM is also oversold. After plunging from around $29 to a current price of $21.35, it looks like REM has finally hit bottom. I would like to see REM challenge $26 again, short term.
VanEck Mortgage REIT Income ETF (MORT)
The VanEck Mortgage REIT Income ETF (NYSE:DEAD) is another of the best mortgage REITs to buy. It is also oversold at $10.93 and could test $13 per share in the near term.
The MORT ETF also seeks to replicate the price and yield of the MVIS US Mortgage REITs Index, which aims to track the overall performance of US mortgage real estate investment trusts, according to VanEck. With an expense ratio of 0.41%, the ETF offers even lower priced exposure to stocks such as Annaly Capital, Starwood Property Trust, AGNC Investment, Apollo0 Commercial Real Estate, Arbor Realty, Chimera Investment, Scale Capital (NYSE:LADR) and Loan Capital Corp. (NYSE:RC), to name just a few of the fund’s 26 holdings.
At the date of publication, Ian Cooper had (neither directly nor indirectly) any position in the securities mentioned. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines. InvestorPlace.com contributor Ian Cooper has been analyzing stocks and options for online reviews since 1999.