In the search for rich dividend yields, mortgage REITs (mREITs) are in a class all their own.
These are companies are structured as real estate investment trusts (REITs), but they own interest-bearing assets like mortgages and mortgage-backed securities rather than physical real estate.
One of the biggest reasons to own mortgage REITs is their exceptional yields, currently averaging around 8% to 9%, according to Nareit – the leading global producer on REIT investment research – more than four times the yield available on the S&P 500. These outsized yields are enticing, but investors should approach these stocks with caution and hold them only as one part of a larger, more diversified portfolio.
One reason for this is their sensitivity to changes in interest rates. When interest rates rise, mortgage REIT earnings generally decline. The Federal Reserve is signaling plans for multiple rate hikes in 2022 that could create headwinds for these stocks.
And increasing interest rates hurt mREITs because these businesses borrow money to fund their operations. Their borrowing costs rise with interest rates, but the interest payments they collect from mortgages remain the same, causing profit margins to compress. Some of this risk can be managed with hedging tools, but mortgage REITs can't eliminate interest-rate risk altogether.
Another caveat is that mortgage REITs frequently cut dividends when times are tough. During the height of the COVID-19 pandemic in 2020, 30 of this sector's 40 companies either cut or suspended dividends. On the flip side, dividends were quickly restored in 2021, with 20 mREITs raising dividends.
We searched the mortgage REIT universe for stocks whose dividends appear safe this year.
Read on as we explore five of the best mREITs for 2022. A few of these REITs are reducing interest-rate risk via acquisitions or an unusual lending focus, while others have strong balance sheets or outstanding track records for raising dividends. And all of them offer exceptional yields for investors.
Data is as of Jan. 12. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks are listed in order of lowest to highest dividend yield.
Hannon Armstrong Sustainable Infrastructure Capital
- Market value: $4.1 billion
- Dividend yield: 2.9%
Hannon Armstrong Sustainable Infrastructure Capital (HASI (opens in new tab), $48.56) is a bit of an oddball for a mortgage REIT in that it specializes in clean energy and infrastructure rather than pure real estate. Specifically, the real estate investment trust invests in wind, solar, storage, energy efficiency and environmental remediation projects – making it not only one of the best mREITs, but also one of the best green energy stocks to own.
Its loan portfolio encompasses 260 projects and is valued at $3.2 billion. In addition to its own loans, Hannon Armstrong manages roughly $8 billion of other assets, mainly for public sector clients.
This mREIT boasts a $3 billion pipeline and is ideally positioned to capture some portion of the spending from the $1.2 trillion infrastructure bill that was passed by Congress in late 2021.
Over the last three years, Hannon Armstrong has generated 7% annual earnings per share (EPS) gains and 1% yearly dividend growth. Over the next three years, HASI is targeting accelerated gains of 7% to 10% yearly earnings per share growth and 3% to 5% in dividend hikes. Future earnings growth should be enhanced by the firm's prudent 1.6 times debt-to-equity ratio.
Hannon Armstrong produced exceptional September-quarter results, showing 45% year-over-year loan portfolio growth and a 14% increase in distributable earnings per share.
Analysts expect earnings of $1.83 per share this year and $1.91 per share next year – more than enough to cover the REIT's $1.40 per share annual dividend.
HASI is well-liked by Wall Street analysts, with five of the six that are tracking the stock calling it a Buy or Strong Buy.
Starwood Property Trust
- Market value: $7.7 billion
- Dividend yield: 7.6%
Starwood Property Trust (STWD (opens in new tab), $25.44) has a $21 billion loan portfolio, making it the largest mortgage REIT in the U.S. The company is affiliated with Starwood Capital Group, one of the world's biggest private investment firms.
STWD is considered a mortgage real estate investment trust, but it operates more like a hybrid by owning physical properties as well as mortgages and real estate securities. Its portfolio comprises 61% commercial loans, but the REIT also has sizable footholds in residential loans (11%), properties (12%) and infrastructure lending (9%), a relatively new focus for the company.
The mREIT benefits from access to the databases of Starwood Capital Group, which makes over $100 billion in real estate transactions annually and has a portfolio consisting of 96% floating-rate debt. This high percentage of floating-rate debt and unusually short loan durations – averaging just 3.3 years – minimizes Starwood's risk from rising interest rates.
STWD is also one of the nation's largest servicers of commercial mortgage-backed securities (CMBS) loans; sizable, reliable loan servicing fees help mitigate risk if loan credit quality deteriorates.
Starwood Property Trust closed $3.8 billion of new loans during the September quarter and generated distributable earnings of 52 cents per share – up sequentially from June and slightly above analysts' consensus estimate. After the September quarter closed, the mREIT booked a huge $1.1 billion gain on the sale of a 20% stake in an affordable housing real estate portfolio.
The company has made 12 consecutive years of quarterly dividend payments, and unlike many other mortgage REITs, held its ground in 2020 by maintaining an unchanged dividend.
Of the seven Wall Street pros following STWD, one says it's a Strong Buy, five call it a Buy and just one says Hold. Adding fuel to the bullish fire, CNBC analyst Jon Najarian recently tapped Starwood as one of his top stocks to watch, given its impressive 7.6% dividend yield.
Arbor Realty Trust
- Market value: $2.8 billion
- Dividend yield: 7.7%
Arbor Realty Trust (ABR (opens in new tab), $18.70) stands out as one of the best mREITS given its six straight quarters of dividend hikes and a compound annual growth rate (CAGR) of nearly 18% for dividend growth over the past five years.
What's more, Arbor Realty Trust has delivered 10 straight years of dividend growth while maintaining the industry's lowest dividend payout rate.
This mortgage REIT is able to steadily grow dividends thanks to the diversity of its operating platform, which generates income from agency and non-agency loans, physical real estate (including rentals) and servicing fees.
Agency loan originations and the servicing portfolio have grown at a 16% CAGR over five years. And during the first nine months of 2021, Arbor Realty Trust set a new record with balance sheet loan originations, coming in at $7.2 billion – 2.5 times its previous record. Loan volume rose 45% over its previous record to total $13.2 billion over the nine-month period.
While September EPS declined year-over-year due to a reduced contribution from equity affiliates, earnings for the first nine months of the year were up 164% from the year prior to $1.56 per share.
Arbor Realty Trust earns Buy ratings from two of the three Wall Street analysts following the stock, and Zacks Research recently named ABR one of its top income picks for 2022.
Valued at only 10 times forward earnings – which is 15.4% below industry peers – ABR shares appear bargain-priced at the moment.
- Market value: $2.1 billion
- Dividend yield: 8.2%
MFA Financial (MFA (opens in new tab), $4.68) just closed an impactful acquisition that reduces its exposure to interest-rate changes and accelerates loan growth. This REIT was already hedging its bets by investing in both agency and non-agency mortgage securities.
Agency securities are guaranteed by the U.S. government and tend to be safer, lower-yielding and more sensitive to interest rates than non-agency securities. By combining these in one portfolio, MFA Financial generates nice returns while reducing the impact of changes in interest rates and prepayments on the portfolio.
Through the July acquisition of Lima One, MFA Financial becomes a major player in business purpose lending (BPL), an attractive niche comprised of fix-and-flip, construction, multi-family and single-family rental loans.
An aging U.S. housing stock is creating demand for real estate renovations and causing BPL to soar. BPL loans are good quality and high-yielding, but difficult to source in the marketplace. With the purchase of Lima One, MFA Financial gains a $1.1 billion BPL loan-servicing portfolio and an established national franchise for originating these types of loans.
Lima One's impact was apparent in MFA Financial's September-quarter results. The REIT originated $2.0 billion of loans, the highest quarterly total on record, and grew its portfolio by $1.5 billion after runoff.
Net interest income increased 15% on a sequential basis, and gains recorded on the Lima One purchase contributed 10 cents to the mREIT's earnings of 28 cents per share. MFA Financial also took advantage of the strong housing market to sell 151 properties, booking a $7.3 million gain on the sale. MFA's book value – the difference between the total value of a company's assets and its outstanding liabilities – rose 4% sequentially to $4.82 per share, a modest 3% premium to its current share price.
Raymond James analyst Stephen Laws upgraded MFA to Outperform from Market Perform – the equivalents of Buy and Hold, respectively – in December. He thinks the Lima One acquisition will accelerate loan growth and reduce the mortgage REIT's borrowing costs.
MFA Financial has a 22-year track record of paying dividends. While payments were reduced in 2020, the REIT recently signaled improving prospects with a 10% dividend hike in late 2021.
Broadmark Realty Capital
- Market value: $1.3 billion
- Dividend yield: 8.6%
Broadmark Realty Capital (BRMK (opens in new tab), $9.77) is unusual for its zero-debt balance sheet, robust loan origination volume and sizable monthly dividends. This mortgage REIT provides short to mid-term loans for commercial construction and real estate development that are less interest-rate sensitive. As such, BRMK is a solid play on America's housing boom.
Lending activities focus on states with favorable demographics and lending laws. Plus, 60% of its business comes from repeat customers, ensuring low loan acquisition costs.
Broadmark Realty Capital achieved record loan origination volume of $337 million during the September quarter, roughly twice prior-year levels and up 68% sequentially. The overall portfolio grew to $1.5 billion. Broadmark Realty Capital also originated its first loans in Nevada and Minnesota, with expansion into additional states planned during the December quarter.
Despite rising revenues and distributable EPS, Broadmark Realty's results came in slightly below analyst estimates and its share price declined in reaction. However, this price slip may present an opportunity to pick up one of the best mREITs at a discount. At present, BRMK shares trade at just 12.7 times forward earnings and 1.1 times book value – the latter of which is a 15% discount to industry peers.
The mortgage REIT cut its dividend in 2020, but continued to make monthly payments to shareholders. And in 2021, it raised its dividend 17% in early 2021. While dividend payout currently exceeds 100% of fiscal 2021 earnings, analysts are forecasting a 17% rise in fiscal 2022, which would comfortably cover the current 84 cents per share annual dividend.
Lisa currently serves as an equity research analyst for Singular Research covering small-cap healthcare, medical device and broadcast media stocks.
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