Mortgage REITs (mREITs) are a different animal from other real estate investment trusts (REITs). That's because rather than property itself, mREITs invest in the money behind those income-producing properties.
These REITs typically make their living by originating and investing in mortgage-backed securities (MBSs) and related assets and investing in mortgages themselves. In doing so, mREITs make their money off the spread between the interest they pay when borrowing for those investments and the interest they're paid for lending to other borrowers.
These specialized REITs play a significant role in the housing and commercial real estate markets, injecting liquidity and credit to help finance millions of homes and businesses.
This kind of investing is not for novices. As Nareit says, "mREITs rely on a variety of funding sources, including common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities."
Judging mREITs by yield or stock price
It's a complicated game, and each mREIT has its own mix of strategies and assets, but in general, they're a yield play. So, while their stock prices certainly do go up and down, more attention is often paid to their payout, much like buying other interest rate-sensitive investments (like bonds).
While publicly traded mREITs offer an easy way for individual investors to buy into the MBS market, they do carry both interest rate and stock price risk. That risk comes with reward, though. Stock Market MBA follows a list of 40 mREITs that as of Dec. 23 were yielding from 1.54% to 40.61% and averaging 9.61%.
The FTSE Nareit Mortgage REITs Index closed on Dec. 24 down 27.37% from where it was a year ago. But keep in mind, that's just the stock price. mREITs are judged by their yield as well, and a lagging stock price drives up that vital metric.
But if you're looking for an mREIT that has performed well this year both in terms of yield and stock price, here are three to consider from the family of 20 mREITs tracked by Nareit. In fact, they're the only three on that list that have a positive one-year total return as of market close on Dec. 23.
They are Dynex Capital (NYSE: DX), iStar Financial (NYSE: STAR), and Arbor Realty Trust (NYSE: ABR). Here's a bit more on each.
Dynex Capital leads the list with a one-year total return of 17.36% as of Dec. 23. Its most recent dividend of $0.13 a share and stock price of $17.62 give it a respectable yield of 8.85%.
Dynex Capital's stock had dipped as low as $8.54 per share but now is well on its way back toward its 52-week high of $20.17 and its market cap is now about $423 million.
Virginia-based Dynex Capital says it strives to provide shareholders with "attractive, risk-adjusted returns over the long term" through a diversified portfolio of leveraged, fixed-income assets.
In its third-quarter report, Dynex reported net income of $1.62 per share and says it now has 83% of its assets allocated to agency residential mortgage-backed securities (RMBS) after selling off more than $380 million in agency commercial mortgage-backed securities (CBMS), so it's deeply committed to the housing market.
iStar Financial's one-year total return was 10.60% as of market close on Dec. 23. Its most recent dividend of $0.11 per share and its Dec. 23 closing price of $14.74 gave it a yield of 2.99%. iStar stock had dipped as low as $6.10 per share and its 52-week high is $16.94 with a market cap of $1.1 billion.
New York-based iStar is a different kind of mREIT, having heavily moved from mezzanine and structured financing options into development and management of commercial real estate, net leases, and ground leases through its Safehold (NYSE: SAFE) subsidiary.
iStar reported a net loss of $0.03 per share for the third quarter but also an unrealized gain of more than $1 billion in its Safehold investment, and it has kept its dividend steady at $0.11 per share for the past three quarters after paying out $0.10 per share since the first quarter of 2019.
Arbor Realty Trust
Arbor Realty Trust's one-year total return was 9.35% as of market close on Dec. 23. Its most recent dividend of $0.32 per share and its Dec. 23 closing price of $14.11 gave it a yield of 8.82% with a market cap of $1.8 billion. Arbor's stock had plunged as low as $4.06 per share, and its 52-week high is $15.53.
Arbor is based in Uniondale, New York, and is a provider and servicer of Fannie Mae, Freddie Mac, and Federal Housing Administration (FHA) loans as well as bridge, mezzanine, and preferred equity financing for senior housing, healthcare businesses, and multifamily investors.In its third-quarter report, Arbor raised its cash dividend for the second quarter in a row and 6.7% for the year while reporting net income jumping from $34 million or $0.35 per share to $82 million or $0.72 per share from the year-ago quarter.
The Millionacres bottom line
These REITs have very different business models. If you're interested strictly in a traditional mREIT, for instance, Dynex looks appealing but has a portfolio that would seem to be more prone to interest rate risk and the kinds of convulsions seen during the housing market crash of now more than a decade ago. (Let's hope that stays unlikely. At the least, sharply rising interest rates don't seem to be on anyone's radar right now.)
iStar, meanwhile, has diversified more into leasing and development as opposed to MBS work, and Arbor has its own particular niche of borrowers that you may or may not find appealing going forward.
That said, each of these three REITs could be a good investment and have been during their histories so far.