There are 212 real estate investment trusts, or REITs, currently included in the FTSE Nareit all-REIT index, and 174 of them trade on the New York Stock Exchange. Those 174 have a market cap of about $1.35 trillion. That is just a bit more than half Apple’s $2.42 trillion market cap.
A comparison with the world’s now second-most valuable company is instructive. Apple’s free cash flow over the past four quarters was $105.79 billion. The company paid $14.73 billion in dividends, and its dividend yield for that period was 0.61%. The 212 listed REITs paid about $51.7 billion in dividends, for a dividend yield of 3.29%. The S&P 500’s average yield was 1.44%.
The downside to REITs is that investors gain little in the way of share price appreciation. Apple stock has added nearly 18% to its share price over the past 12 months. The largest mortgage REIT saw its share price decline by 21.4% over the same period. Apple’s total shareholder yield for the past year was 4.4%, while the largest mortgage REIT’s total shareholder yield over the period was 53.7%. Much of that huge yield came from paying down debt, while the largest portion of Apple’s shareholder yield was share buybacks.
REITs are required by law to pay 90% of their taxable income to shareholders, and those shareholders pay the taxes due. Mortgage REITs (mREITs) do not own real estate. Instead, they invest in mortgages and earn income from the interest paid on those mortgages, along with other services they provide.
With interest rates rising and home price increases expected to decline, are mREITs that pay these huge dividends still a good option? Generally, when interest rates are rising, net interest margins (and profits that are paid as dividends to shareholders) decline.
What does the housing and mortgage market look like for the next year? Home prices in March were 20% higher than they were in March of 2021. Month over month, home prices increased by 3.3%. In March of next year, home prices are forecast to be 5.9% higher than they were two months ago and just 1.2% higher than they are forecast to be in February of 2023.
A standard 30-year fixed-rate mortgage carried an average interest rate of 3.16% a year ago. That same mortgage carried an interest rate of 5.45% on Tuesday. Depending on the Federal Reserve’s coming decisions on interest rate increases, that mortgage could come with a rate of more than 7% next year.
Mortgage REITs attempt to manage and mitigate interest rate risk using short-term borrowing to hedge their investments and, sometimes, to provide operating cash. When profits fall, dividends generally have to be cut as well. In some cases, dividends are suspended. Thirty mREITs suspended dividends in 2020 due to the coronavirus pandemic. Those dividends were quickly restored in 2021, and 20 mREITs increased their dividends last year.
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