Mortgage real estate investment trusts (mREITs) are a different kind of investment than the rest of the real estate investment trust (REIT) universe, known as equity REITs.
The latter invest primarily in commercial and residential real estate. The former, primarily in mortgages and mortgage-backed securities (MBS), providing the capital needed to finance millions of homes and businesses.
One of the major attractions of mREITs is their yield. For instance, Nareit pegs the average dividend yield of the 33 real estate stocks it classifies as mREITs at 8.05% as of Aug. 31, with a year-to-date total return of 19.67%. Compare that to the 2.05% yield and 31.60% YTD total return for the 13 industrial REITs tracked by Nareit.
So, clearly the main attraction for mREITs is yield. There are two factors to keep an eye on if you already have invested in mREITs or plan to: interest rate movement and the Fed’s pace of MBS purchases.
mREITs can be particularly sensitive to interest rate hikes, because higher rates push down the value of the bonds they hold. That can push down their share price and perhaps threaten the size of the dividend.
However, short- and long-term rates rise and fall at different rates, so a lot of the impact depends on the portfolio composition. mREITs make their money on the spread between what they pay to borrow and what they earn from what they buy: that is, paying for short-term loans and buying longer-term investments.
Meanwhile, the Fed underpins the bond market with its huge MBS purchases from the likes of Freddie Mac, Fannie Mae, and Ginnie Mae. The Dallas Fed does a nice job explaining that here, and investors need to be aware of predicted tapering.
Then there’s inflation, a growing concern for which the typical antidote is making money more expensive: raising interest rates. Here’s a Motley Fool article that explains how and why that works.
All that said, here are two mREITs to consider for an October purchase.
Ladder Capital (NYSE: LADR) is a major provider of commercial real estate capital, founded in 2009 as an underwriter, originator, and investor in a diverse portfolio of commercial real estate and real estate-related assets.As of 2Q21, New York-based Ladder Capital had $5.6 billion in assets -- 79% of which are senior secured or investment grade -- including $2.6 billion in loans, $948 million in real estate equity, and $719 million in securities. Fully 82% of its loans are floating-rate notes, which indicates they can be less wracked by rising interest rates.
Ladder Capital most recently declared a 3Q21 dividend of $0.20 per share, a level it’s been paying since dropping the payout from $0.34 in 2Q20. At an Oct. 1 closing price of $11.47 -- 9.33% below its 52-week high of $12.65 on June 9 -- that was good for a yield of 6.97% and a market cap of $1.47 billion.
AGNC Investment (NASDAQ: AGNC) is a polar opposite of Ladder Capital among mREITs.
Founded in 2008, AGNC reported a 2Q21 investment portfolio of $87.5 billion, nearly all of it in mortgage-backed securities from the government-sponsored enterprises (GSEs) and other agencies that package and/or sell guaranteed residential loans.
For factors that included a drop in prepayment rates that didn’t materialize, the agency MBS market underperformed in recent months, AGNC president/CEO Peter Federico said in its 2Q earnings release. This caused a negative quarterly economic return of -5.5%.
But the company adjusted its short-term and TBA dollar roll positions and, along with stable hedging costs, countered that negative return, it said. If mortgage rates rise as expected next year and beyond, that also can bode well for mREITs like AGNC.
AGNC pays its dividends out monthly, at the rate of $0.12 per month since April 2020 after dropping it from $0.16. That’s still good for a yield of 9.06% based on an Oct. 1 closing price of $15.90. That price gave it a market cap of $8.3 billion and is 16.23% off its 52-week low of $13.68 from Oct. 2, 2020.
The Millionacres bottom line
One of the standard caveats about mREIT investing is to be aware of chasing yield. Especially for long-term investors, growth matters more than dividend payouts, something that can become painfully clear if a company pays out more than it can sustain.
But for income investors, and other investors willing and able to keep up with these stocks’ reaction to interest rate and market changes, mREITs like Ladder Capital and AGNC can be good choices, even in the potentially troublesome times that could be coming (some might say already here). If you agree, October seems like a good time to go ahead and send some investment bucks their way.