Real estate investment trusts (REITs) are a great source of passive income, as they are required by law to distribute at least 90% of their taxable income in the form of dividends. As a result, REITs typically have higher yields than the broader market.
Of course, along with high yields can come high risk. This is especially true for mortgage REITs. These trusts purchase mortgages and then use the monthly mortgage payments to distribute dividends. Mortgage REITs typically borrow money to acquire mortgages, which makes them highly leveraged. As a result, their 10%+ dividends should be considered highly risky.
For investors willing to take the risk, these three mortgage REITs have high yields and could generate strong total returns.
AGNC Investment Corp (AGNC)
AGNC Investment Corp (NASDAQ:AGNC) was founded in 2008. It is a mortgage real estate investment trust that invests primarily in agency mortgage-backed securities ( ) on a leveraged basis. The firm’s asset portfolio is comprised of residential mortgage pass-through securities, collateralized mortgage obligations ( ), and non-agency MBS. Many of these are guaranteed by government-sponsored enterprises.
The majority of AGNC’s investments are fixed-rate agency MBS. Most of these are MBS with a 30-year maturity period. The counterparties to most of its assets are located in North America. Counterparties in Europe also represent a significant percentage of the trust’s total portfolio. American Capital derives nearly all its revenue in the form of interest income. It currently trades at a market capitalization of $5.5 billion.
AGNC reported its Q1 2023 results on April 24. It reporting a comprehensive loss of 7 cents per common share, including a net loss of 31 cents per common share and 70 cents net spread and dollar roll income per common share. The company also declared 36-cent dividends per common share for the quarter. The investment portfolio as of March 31 was $56.8 billion. The tangible net book value per common share was $9.41. AGNC issued 17.1 million common shares through at-the-market offerings, raising $171 million.
Its record thus far has been fairly strong, with industry-leading total economic return (NAV-based) and total stock return (share-price-based). This outperformance has been driven by its highly efficient operating cost structure and the competitive advantage that it enjoys through economies of scale as one of the largest residential mortgage REITs. AGNC stock yields 14.2%.
Annaly Capital Management (NLY)
Annaly Capital Management (NYSE:NLY) invests in and finances residential and commercial assets, including agency MBS, non-agency residential mortgage assets, and residential mortgage loans. It is one of the larger mortgage REITs in the industry, with a $10 billion market capitalization. Annaly invests in and finances residential and commercial assets.
The trust invests in various types of agency mortgage-backed securities, non-agency residential mortgage assets, and residential mortgage loans. It also originates and invests in commercial mortgage loans, securities, and other commercial real estate investments. Annaly provides financing to private equity-backed middle market businesses and operates as a broker-dealer.
On April 26, NLY announced its financial results for the first quarter. Annaly Capital Management reported a GAAP net loss of $1.79 per average common share in Q1 2023. The company generated earnings available for distribution of 81 cents per average common share. Annaly had an economic return of 3% for the quarter and book value per common share of $20.77.
Its total assets were $85.5 billion, including $77.6 billion in highly liquid Agency portfolio. Annaly’s GAAP leverage was 5.9x and economic leverage was 6.4x. The company also priced four whole loan securitizations totaling $1.5 billion in proceeds.
Unlike most mortgage REITs, Annaly has a variety of other income sources besides the interest on mortgages. The trust is involved in loan origination, commercial real estate and securities. In addition, Annaly is in the business of providing financing to private equity-backed middle market companies and acts as a broker dealer. This level of diversification is beyond what most other names in the industry have, which should help to protect the trust’s business when interest rates are raised. NLY shares yield 12.5% currently.
ARMOUR Residential REIT (ARR)
ARMOUR Residential (NYSE:ARR) was formed in 2008. The trust invests primarily in residential mortgage-backed securities that are guaranteed or issued by a U.S. government entity including Fannie Mae, Freddie Mac and Ginnie Mae. ARMOUR has a $1 billion market capitalization. ARMOUR reported Q1 results on April 26. The book value per common share was $5.44. The liquidity as of March 31, was approximately $550 million, which comprised $135 million in cash and $415 million of unlevered Agency and U.S. Treasury securities.
ARMOUR pays dividends on a monthly basis and has previously announced a May common stock dividend of 8 cents per share, payable on May 30 to holders of record on May 15. Since its inception in November 2009, ARMOUR has paid out $2 billion in dividends. Since 2013, it has returned $280 million to common shareholders through share repurchases.
ARMOUR’s quality metrics have been volatile given the performance of the trust as rates have moved around over the years. Gross margins have moved down since short-term rates began to rise meaningfully a couple of years ago, although it appears most of that damage has been done. Balance sheet leverage had been moving down slightly, but it saw an uptick again this past quarter. However, we do not forecast significant movement in either direction from this point. Interest coverage has declined with spreads but also appears to have stabilized.
ARR has an extremely high dividend yield of 18%. Such high yields are often a sign of elevated risk, and ARR is no different. Investors should forecast this risk of a dividend reduction into their due diligence. But for investors comfortable with ARR’s high risk, and the risks of all mortgage REITs, the high yields could be appealing for income.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.