• Energy and Income Advisor
  • Conrads Utility Investor
  • Capitalist Times
  • Twitter
  • Seeking Alpha

Mortgage REITs

Risky with a Chance of Dividend Cuts

By Roger S. Conrad, on Aug. 12, 2013

Recent developments have weighed heavily on the performance of the M-REITs. The Bloomberg REIT Mortgage Index has tumbled by almost 9.6 percent since hitting a five-year high on May 22, 2013. 

Source: Bloomberg

Benchmark interest rates have climbed since the end of April 2013, with the yield on the 10-Year US Treasury peaking at 2.7 percent in early August. This recent uptick in Treasury yields reflects the increasing likelihood that the Federal Reserve will reduce its monthly bond purchases as the central bank gradually tightens its accommodative policies. (See Don’t Fight the Fed–Listen to It.)

Source: Bloomberg

In turn, the prospect of rising interest rates has prompted investors to rotate out of fixed income, including the mortgage-backed securities held by M-REITs. At the same time, the cost of borrowing to leverage portfolio returns has climbed, squeezing many M-REITs’ margins.

Although the uptick in mortgage rates has boosted current returns on securities recently purchased by M-REITs, these higher yields haven’t been sufficient to offset the margin squeeze or the declining value of the legacy mortgage-backed securities in their portfolios. M-REITs’ preference for longer-term paper in the low-yield environment of the past two years has exacerbated these problems.

The proof is in the dividends: A number of prominent M-REITs have slashed their payouts over the past 12 months, sending share prices spiraling lower.

Ready to discover your investing potential?
Try Capitalist Times Premium Risk-Free Today