mREIT Results Looking Good – For Now

Mortgage REITs (mREIT) are releasing earnings and at least on the surface earnings are fairly stellar–although one needs to drill down a bit into the various special gains and losses within the earnings statements.

On Tuesday giant mREIT AGNC (AGNC) reported earnings and reported book values that were $1.30/share above those reported at Q1 end.

Today much smaller mREIT Dynex Capital (DX) reported earnings which were bolstered by large gains on sale of investments, although the company’s book value per share fell by $1.32/share

Of course these 2 company’s have preferred stock issues outstanding with current yields in the 7-8% area. We have a page of the mREIT preferreds here.

Later today we will have sector giant Annaly Capital (NLY) announce earnings.

For those investors with a tolerance for higher risk these are the best current yields in the preferred stock world (excepting some lodging REITs, which may not be around in a year). Maybe a small ‘taste’ of some of these preferreds is in order?

AGNC’s earnings release can be read here.

The Dynex earnings can be read about here.

18 thoughts on “mREIT Results Looking Good – For Now”

  1. MREITS have an inherently flawed business model IMO. All of them have the same strategy of holding long term debt leveraged up 5X to 10X by borrowing short term debt. This works as long as the yield curve is “steep” or “normal.” The problem comes when the curve inverts and short term rates go above long term rates. This happens on a fairly regular basis on the last few decades. And when that happens, the MREIT blows up.

    To mitigate this and several other risks, the MREITS use different hedging strategies. And each of them will work for one specific scenario, but when a different scenario occurs, good luck.

    Many MREITS did not survive the 2008 GFC. The graveyard is full of tombstones. You can argue that many of them went under because of mortgage paper downgrades/defaults. And that is true. But all of them at the time claimed to have that hedged also. And all of them had proponents pushing them as great investment vehicles based on mostly dividend yields. See how those dividends worked out when the MREIT went bankrupt.

    As an asset class, I think it fine for “trading” but am not convinced it should be part of any long term holdings.

    1. No pure agency mREIT has ever missed a preferred dividend payment. The issue are with the ones that take credit risk.

      1. L.I., that’s exactly the reason why I only buy preferreds from NLY & AGNC. The preferreds account for less than 10% of net income. ATB.

  2. Looks not bad, but I’d rather wait for the next crash and buy more reliable stuff at a better prices )

  3. Tim – what do you mean tolerance for higher risk? How old fashioned are you anyway? Don’t you know there’s no such thing as high risk anymore???? Everything’s riskless, just buy it…. no one cares about risk… that’s something that used to be considered in investing… no more…. it’s such an antiquated concept…………… famous last words…..

    1. 2wr–pretty old fashion–I guess I should get with it and just willy nilly buy a bunch of crap and then wait for my bailout when it doesn’t work out.

  4. I am holding some of the preferred issues of NLY, AGNC and ARR — as these hold nearly 100% AGENCY securities. Agency effectively means close to zero credit risk. NAV and profitability can fluctuate widely based on mark to markets, interest rates, repo rates, etc. but bankruptcy risk is negligible in my view given the Agency holdings. Preferred stock is thus low risk as I see it, despite the volatility in their prices. Watch out for fixed-to-float features, many are trading down on fears that when they float the new dividend yield will be much lower with LIBOR so low. But this could change. At the same time I am avoiding issues that have credit risk exposure — essentially anything non-Agency has credit risk and is vulnerable in this economy.

    1. Larry–yes that is the key–agency. I just reviewed Chimera and they have quite a bit of non agency paper–so its a no go for me.

  5. I dont understand this space much. But what do you think about NLY preferreds?

    That one seems a big elephant in the room with a lot of series in play

    1. Jay–it is quite a baliwick to try to figure out–Annaly has been around a long time (since 1996) and they are a giant–seems like the one to own–of course they have the lowest coupon. I started nibbling AGNC today and will review NLY earnings and maybe take a taste of theirs. This is beyond my risk tolerance but maybe a hundred or two would be ok.

      1. NLY preferreds are my largest holding. Safer than most in a downturn, they survived the 2008 crash very well because of their defensive strategies. But then that’s why the payment is lower. If you call 7.5% low? Their founder has since died and it’s debatable whether they are still the superstar.
        I boost my return by trading between their preferred issues. They don’t always move in tandem so you can gain a few cents by selling one to buy another then vice versa when the prices flip. A strategy that’s not for everyone.

  6. Only REIT I am holding is MNR-C. They claim to be 99% leased. Hopefully the lessors are paying their rents. A bit too FedEx heavy, but that may not be a bad thing right now with so much online shopping.

    1. I also own this one and have owned the common as well. I think the preferred is pretty safe and has finally climbed above par…..

      The only other REIT preferred I own is SRC-A.

  7. I think the real action is just starting in the mortgage arena. We’ll see what the government offers now that the 600 is ending and the lower income/hourly jobs don’t seem to be coming back. Couple that with schools staying virtual which prevents many people from going back to work and I think it’s going to get ugly. I dumped umh this week because of that thought, but I’m usually wrong. 😄

    1. Eoz3106–yes and that is a good reason to potentially only by those mREIT preferreds of company’s that hold ‘agency’ mortgages so you have a government backstop (for what that is worth).

  8. Have been holding some Brookfield, DX, NLY, and TWO preferreds- but won’t buy more until the coming drop.

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