People who buy mortgage real estate investment trusts (mREITs) are typically attracted to their yields, which generally run much higher than your average REIT. But mREITs themselves vary widely in their portfolios and investment strategies, having in common basically primarily the fact that instead of investing in properties -- as do equity REITs -- they invest in the financing of those properties.
So, let’s compare two of them. For one, it may not have been the best of times, but it could have been worse. For the other, well, it was close to the worst of times, but it’s still standing.
Some basics about Annaly Capital Management and MFA Financial
Annaly Capital Management (NYSE: NLY) invests in agency mortgage-backed securities, residential and commercial real estate, and middle-market lending. It uses short-term borrowings to invest in mortgage-backed securities (MBS), especially from Fannie Mae (OTCMKTS: FNMA) or Freddie Mac (OTCMKTS: FMCC), as well as nonagency residential credit.
MFA Financial (NYSE: MFA) lays out its investment strategy in detail on this web page, but in a thumbnail, it’s this: borrowing money to buy MBS and residential whole loans, and making money on the difference between the interest paid and interest received. Basically, subtract operating costs, and that’s the profit.
MFA Financial in particular buys a lot of delinquent mortgages against residential properties that are underwater (the borrower owns more than the property’s worth) with the intent to make money on the eventual sale of the property.
Both REITs are based in New York City, have been around since the late '90s, and have thrived through various housing and lending market conditions, although nothing like the coronavirus pummeling all markets took last spring. But Annaly and MFA Financial experienced quite different results.
A tale of two ticker tapes: Annaly down, MFA Financial nearly out
Annaly stock closed on March 12 at $8.74 per share after hitting a 52-week high of $8.87 earlier in the day, completing its recovery from the $3.51 it dipped to last March 18 as the pandemic convulsed the housing market.
Annaly was hardly immune. The company cut its dividend by 12% last June to $0.22 per share and repeated that level through the next two quarters to the end of the year. That’s still good for a yield of 10.7%, based on an annual dividend payout of $0.88 per share.
It’s a different story for MFA Financial, which closed on March 12 at $4.28 per share. That’s still 18.78% off its 52-week high of $5.27 per share from last March 24, giving it a yield of 7.01%. Its stock had dipped to an alarming low of $0.32 per share a mere two weeks earlier on March 12.
That collapse was largely because of margin calls that forced MFA Financial into forbearance and forced it to halve the size of its portfolio, as Motley Fool’s Brent Nyitray explains here.
The company has since recovered enough to restore its dividend, pay off some key borrowings that helped keep it afloat, and take advantage of a robust housing market to sell more than 1,000 real-estate owned (REO) properties in 2020, 250% more than it did the year before,
After paying $0.20 per share per quarter since 2013, MFA Financial paid no dividend in second quarter 2020 and then $0.05 in the third quarter, $0.075 in the fourth quarter, and $0.075 again in the first quarter of this year.
Portfolios and size also are big differences
As implied above, there are big differences between Annaly and MFA Financial in the size and composition of their portfolios. In its fourth-quarter report, MFA Financial's assets sheet showed about $5.6 billion in residential whole loans and REO and $161 million in residential mortgage securities.
Annaly had year-end total assets of $101.6 billion, of which $94.6 billion is in a highly liquid portfolio of agency securities.
The Millionacres bottom line
Annaly is a particularly popular mortgage REIT, but even that has its limitations, for reasons stock pickers Matt Frankel and Brian Feroldi explain in this Nov. 25 Fool Live video clip.
If you’re looking at just yield and stock price, MFA Financial is yielding 7.1% and still appears to be in recovery mode. So its stock price may well recover now that it’s put the immediate crisis in the rearview mirror, and it’s worth a consideration.
Of course, that would lower the yield, except the dividend may well return to historical levels, too, since MFA Financial is bound by law to pay out at least 90% of its taxable income. That, after all, is what makes it a REIT.
Annaly, meanwhile, is trading at its 52-week high and still yielding nearly 11% even after significantly lowering its dividend last year. Its portfolio is far more a proxy for the MBS market, too, than MFA Financial, which is far more heavily tied to leveraging its stake in individual, often troubled, mortgage loans.
They’re really two different animals. If inflation forces interest rates up, that could prompt a slowdown in the mortgage market that would affect both portfolios, just perhaps in different ways. If interest rates stay at or near historic lows, same thing.
So, all things being equal, I’d go with Annaly Capital Management if choosing between the two. In fact, I already have. I’ve owned a bit of its stock for a while now. But interest rate volatility and an uber-hot housing market right now make me hesitant to commit a whole lot more.