7 Mortgage REITs to Dig Out of the Dumpster Fire

Along with most of the market, these top mortgage REITs to buy have been trounced. Most of this can be traced back to rising interest rates. After all, higher rates typically reduce net interest margins, reduce the value of mortgage-backed securities, and increase concerns that those with variable-rate mortgages won’t be able to make payments. However, don’t write off these REITs just yet. Even after substantial price declines, many are still paying out impressive dividend yields.

Additionally, these REITs are so out of favor and feared right now that it may be time to start buying when there’s blood in the streets. We also have to consider the Federal Reserve may soon pause its aggressive rate hikes. At the moment, financial institutions, the International Monetary Fund, and the United Nations are pressuring the Federal Reserve to cool its hiking pace. Even billionaire Barry Sternlicht believes “the economy will crumble” if rates aren’t lowered, as noted by Fortune.

Furthermore, according to FXEmpire.com: “A long list of Wall Street banks from Goldman Sachs, JPMorgan to Bank of America have warned that an overly aggressive Fed tightening policy, combined with a surging U.S dollar, risks breaking the global financial markets and causing dangerous instability in other currencies.”

If the Fed takes this advice, everything, including mortgage REITs could see higher highs.

AGNC AGNC Investment $7.74
CIM Chimera Investment $5.81
ABR Arbor Realty $12.30
ARI Apollo Commercial Real Estate $9.50
STWD Starwood Property $19.21
REM iShares Mortgage Real Estate ETF $21.35
MORT VanEck Mortgage REIT Income ETF$ $10.93

AGNC Investment (AGNC)

With an impressive dividend yield of 18.6%, AGNC Investment (NASDAQ:AGNC) is certainly one of the top mortgage REITs to buy. This particular REIT focuses on mortgage-backed securities that are guaranteed by the U.S. government.  In my view, it’s one of the top mortgage REITs to buy.

While these securities are considered to have very little risk of default, they are susceptible to interest rate hikes. However, if the Fed signals it may soon hit pause on interest rate hikes, AGNC could run. In October, the company declared a cash dividend of $0.12 per share, payable on Nov. 9 to common stockholders of record as of Oct. 31.

Aas noted by Motley Fool contributor Brent Nyitray, “AGNC Investment is not for the faint of heart. Interest rate volatility remains high; however, the markets are predicting that the Fed will be done with rate hikes by the end of the year. Income investors looking for passive income should put this name on their shopping list.”

Chimera Investment (CIM)

With a yield of 16.3%, Chimera Investment (NYSE:CIM) is also one of the most oversold hybrid mortgage REITs to buy. This REIT invests in both non-agency and agency mortgage assets. At the moment, CIM stock is in oversold territory after slipping from about $10 to double-bottom support around $5 a share.

Since then, CIM has rebounded, but I’d like to see the stock refill its bearish gap around $7.50. The company also just declared a third quarter cash dividend of 23 cents, payable Oct. 31 to shareholders of record as of Sept. 30.

“Despite the challenging market environment of higher interest rates and wider credit spreads, Chimera remained committed to effectively and efficiently managing its liquidity, liabilities and capital structure during the quarter,” said Mohit Marria, CEO and Chief Investment Officer in August. “Securitizations and secured financing agreements provide stable, long-term financing for Chimera’s credit assets. Chimera also repurchased 5.4 million shares of its common stock over the period.”

Arbor Realty Trust (ABR)

Arbor Realty Trust (NYSE:ABR) carries a dividend yield of 12.68%, and is also a REIT I’d put in the oversold camp. After falling from about $15.50 to a current price of $12.30, I’d like to see the stock initially refill its bearish gap around $13.50 a share, in the near-term.

Like many other mortgage REITs on this list, the company also raised its cash dividend to 39 cents, its ninth-consecutive quarterly increase. Over the last few years, this REIT’s dividend distribution has jumped about 105% from 19 cents to 39 cents.

Company earnings have also been solid. In its second quarter, the REIT saw revenue of $94.261 million, which was much better than expectations of $82.38 million. This top-line number also provided strong year-over-year growth, from $58.77 million during the same quarter last year. Even better, earnings per share came in at 52 cents, which beat expectations of 43 cents. That was also above the 45 cents posted last year.

Apollo Commercial Real Estate (ARI)

With a yield of 14.74%, Apollo Commercial Real Estate (NYSE:ARI) is another mortgage REIT to consider adding to your portfolio. After falling from about $11 to $8, the stock has started to rebound, last trading at $9.50. From here, I’d like to see it again challenge $11. The company also just declared a dividend of 35 cents, payable Oct. 14 to shareholders on Sept. 30.

The company is also well positioned for recent interest rate hikes. That’s because about 98% of its portfolio is made up of floating rate loans, which will take advantage of higher rates. As noted by Putnam.com, “With floating-rate loans, their coupons adjust by increasing to the higher-rate scenario, and the resulting higher income makes the security more valuable.”

Starwood Property (STWD)

With a yield of about 10%, Starwood Property (NYSE:STWD) is the largest commercial mortgage REIT in U.S., As noted by Starwood,“The company’s core business focuses on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments.”

In September, Starwood declared a dividend of $0.48 per share of common stock for the quarter ending Sept. 30, 2022. This dividend is payable on Oct. 14, 2022 to stockholders of record as of Sept. 30, 2022.

The company went on to discuss its business prospects, which remain bright. “We closed on nearly $4 billion of new investments, growing our portfolio to a record of $27 billion. Book value increased again this quarter, driven in large part by our affordable housing assets which appreciated due to continued robust rent growth. Today, our commercial loan portfolio LTV stands at just 61%, a major cushion to possible adverse movements in equity cap rates, and is 99% floating rate, providing upside to higher rates,” said Barry Sternlicht, Chairman and CEO of Starwood Property Trust.

iShares Mortgage Real Estate ETF (REM)

With an expense ratio of 0.48%, the iShares Mortgage real Estate ETF (BATS:REM) tracks an index composed of U.S. REITs that hold U.S. residential and commercial mortgages. This relatively low expense ratio provides access to a diversified portfolio of companies in this space at very low cost.

This ETF’s top holdings include Annaly Capital Management (NYSE:NLY), Starwood Property, AGNC Investment, Chimera Investment, and Two Harbors Investment (NYSE:TWO) to name a few. This ETF’s low-cost diversification profile can’t be understated. If I wanted to buy 100 shares of REM and gain exposure to dozens of stocks, it would cost me about $2,100. Meanwhile, for exposure to 100 shares of let’s say Starwood Property, it would cost me $1,900, and the only exposure I’d have would be to STWD shares.

Technically, REM is also oversold. After plunging from about $29 to a current price of $21.35, it appears REM has finally bottomed out. I’d like to see REM challenge $26 again, near-term.

VanEck Mortgage REIT Income ETF (MORT)

The VanEck Mortgage REIT Income ETF (NYSE:MORT) is another one of the top mortgage REITs to buy. It’s also oversold at $10.93 and could test $13 a share, near-term.

The MORT ETF also seeks to replicate the price and yield performance of the MVIS US Mortgage REITs Index, which is intended to track the overall performance of U.S. mortgage real estate investment trusts, according to VanEck. With an expense ratio of 0.41%, the ETF offers even lower-priced exposure to stocks such as Annaly Capital, Starwood Property Trust, AGNC Investment, Apolllo0 Commercial Real Estate, Arbor Realty, Chimera Investment, Ladder Capital (NYSE:LADR) and Ready Capital Corp. (NYSE:RC), to name a few of the fund’s 26 holdings.

On the date of publication, Ian Cooper did not have (either directly or indirectly) any positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. Ian Cooper, a contributor to InvestorPlace.com, has been analyzing stocks and options for web-based advisories since 1999.

Ian Cooper, a contributor to InvestorPlace.com, has been analyzing stocks and options for web-based advisories since 1999.

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