Why Mortgage REITs Are Bouncing Back
On March 24, it looked like the country’s largest mortgage real estate investment trusts (mREITs) were headed for catastrophe. The five largest mREITs had dropped in a range from around 45% to 82% as the federal government and the Federal Reserve came to grips with the COVID-19 outbreak.
These trusts take out short-term loans that they then use to buy longer-term mortgage-backed securities (MBS). Most of their profits, which come from the difference between their short-term borrowing costs and the interest they earn on the mortgages they own, get paid out in dividends. Their dividend yields are typically high, making them popular with income investors.
When an mREIT cannot meet calls for cash from its lenders, the resulting liquidity crunch forces the mREITs to sell mortgages at well below value in order to meet demands for cash.
When the Fed announced on March 23 an open-ended purchase program for Treasury securities and MBS, the mREITs bounced off a bottom but weren’t out of danger yet.
Another issue was the mREITs’ repurchase (repo) deals. Typically, these trusts lend their securities in the repo market and while those assets are on loan, a margin call could find the mREITs short of cash. The effect of the CARES Act mortgage payment holiday for homeowners meant that liquidity was even more constrained.
When the Fed began buying agency-backed MBS on March 24, mREIT shares got a short-lived boost before sinking again. Finally, on Wednesday, the Fed announced more buying programs totaling $850 billion, including on to provide credit support for term asset-backed securities like mREITs. As a result, shares of the five largest mREITs jumped by 10% to 20% on Thursday.
Here’s a quick look at the top five. For all these stocks, the 52-week high was posted in late February of this year.
Annaly Capital Management Inc. (NYSE: NLY) had added nearly 13% by the late morning Thursday to trade at around $6.50, in a 52-week range of $3.51 to $10.50. The current market cap is $9.3 billion, and the dividend yield is 23.53%.
In a statement released Tuesday, the company said it has maintained liquidity comprised of cash and unencumbered agency MBS of $4.6 billion and total unencumbered assets of $7.2 billion, as of March 31, 2020. The firm’s repo operations have been “orderly” with no collateral or margin issues. The firm also has declared its usual $0.25 dividend for the first quarter.
AGNC Investment Corp. (NASDAQ: AGNC) stock added about 9% in Thursday trading and was changing hands for $12.22. The stock’s 52-week range is $6.25 to $19.65, and its market cap is $6.6 billion. The annual dividend of $1.92 represents a yield of 17.04%.
On Wednesday, AGNC announced that it is cutting its quarterly dividend from $0.48 per share to $0.12. At the end of March, AGNC estimated that cash and unencumbered agency MBS totaled $3.5 billion.
Blackstone Mortgage Trust Inc. (NYSE: BXMT) traded up more than 9%, at $22.95 in a 52-week range of $12.67 to $40.62. The company’s market cap is $3.1 billion, and the annual dividend of $2.48 offers a yield of 11.8%. Blackstone declared its quarterly dividend on March 13.
New Residential Investment Corp. (NYSE: NRZ) added nearly 18% on Thursday to trade at $6.01, in a 52-week range of $2.91 to $17.66. The market cap is $2.5 billion, and the dividend yield is 3.91%. The company cut its dividend from $0.50 per quarter to $0.05 on March 30.
Earlier this week, Moody’s downgraded the company’s corporate family rating from Ba3 (junk) to B1 (junkier). The Fed’s Wednesday announcement has provided the company with a solid boost.
Two Harbors Investment Corp. (NYSE: TWO) traded up about 6.3% Thursday, at $5.07 in a 52-week range of $2.25 to $5.96. The company’s market cap is $1.4 billion, and the dividend yield is 4.19% ($0.05 per quarter). The dividend payment is a penny higher than the fourth-quarter dividend.
But Thursday’s big winner among the mREITs appears to be New York Mortgage Trust Inc. (NASDAQ: NYMT). The stock traded up nearly 40% earlier in the morning, at $2.79 in a 52-week range of $0.98 to $6.47. The market cap is $892.2 million, and the firm does not pay a dividend. The prior quarterly dividend was $0.20 per share.
On Tuesday, the company announced that it had reduced its outstanding repo agreement finance for MBS to around $150 million with one counterparty. The firm said that the deal “significantly” lowers its exposure to margin calls, a “primary factor in the reduction of liquidity to mortgage REITs in recent weeks.”