I have seen mortgage REITs or mREITs being popular these days due to their high dividend yield which at times can go from 10%-15%. I personally am invested in an mREIT RITM 0.00%β which I have written in past about. However, among all the equity classes mREITs are the most tricky to invest in. While they come with ultra-high dividends, it also comes with high risk.
Overview
π mREITs
π¨ Risks
π€ Invest successfully
π mREITs
mREITS provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities (MBS) and earning income from the interest on these investments. They donβt own any real estate instead they just buy debt and pocket the difference between lending and borrowing.
The high dividend yield is the result of them being legally required to pay out a minimum of 90% of profits to investors as non-qualified dividends in order to avoid paying taxes at a company level.
Some of the popular mREITs are ABR 0.00%β , RITM 0.00%β , AGNC 0.00%β (which I exited recently), IVR 0.00%β.
π¨ Risks
The key to successful investing is understanding the risk associated with security. As mREITs function as unregulated banks on coke, their risk tends to be higher. Here are a few major risks associated with mREITs:
π¦ High leverage: mREITs usually buy MBS on the open market at around 4% to 6% above par value and as the yield is low meaning mREITs need to take higher leverage. With lower home mortgage rates, homeowners refinance the mortgage with a lower interest rate - reducing the monthly payments. If the mortgage is paid early there is a chance that mREITs will lose money on it.
π Volatile: The payouts from mREITs arenβt as consistent as other companies. They also tend to lower their dividend payout depending on earnings. Hence, the stocks tend to be more volatile.
βοΈ Complexity: Itβs difficult to access every mREIT as they operate differently and have different structures (internal, external, residential, commercial). Building a track record and comparison is difficult too as mREITs is a fairly new concept.
π€ Invest successfully
In the world of investing, nothing is wrong or right, itβs all a matter of risk tolerance, time horizon, and whatβs important to an investor. A risky asset class like mREITs can be a strong tool for investors with a long time horizon and high-risk tolerance if the best-managed mREITs are selected.
Even the volatility can be your friend and itβs especially true with mREITs. The high dividend yield and volatility are a good opportunity to DRIP and increase your monthly income.
If mREITs are your type of investment here are a few KPIs to look into:
π Book value per share: Book value of equity per share effectively indicates a firm's net asset value on a per-share basis. As most of the profits generated should be given to investors as dividends, growth must come from debt or equity capital markets. Thus BVPS shows if the management is capable of investing investorsβ capital.
πͺπ½ Core EPS payout ratio: Core EPS is the net per share increase (decrease) in stockholders' equity resulting from operations less realized and unrealized gains and losses. The core EPS payout ratio is the percentage of Core EPS paid to investors. The Core EPS payout ratio is associated with dividend safety.
Other factors to look at are interest rate margin and spread, asset mix, and diversification.
π Conclusion
mREITs are one of the riskiest and trickiest asset classes. DD before investing is a must and is most favorable for investors who like income, have a long time horizon, and are okay with the volatility of the stock. As for me, I have a small position of RITM 0.00%β that I bought at a significant discount. I will sell 50% of my RITM 0.00%β once the dividend per share per quarter is $0.50 (+150% since I bought).