In the search for rich dividend yields, real estate investment trusts (mREITs) fall into a class of their own.
These companies are organized as real estate investment trusts (REITs), but they hold interest-bearing assets such as mortgages and mortgage-backed securities rather than physical real estate.
One of the biggest reasons REITs have their exceptional returns, which currently average around 8% to 9%, according to Narit – the leading global producer of REIT investment research – is more than four times the return available in the S&P 500. These huge returns are attractive, But investors should treat these stocks with caution and hold them as just one part of a larger, more diversified portfolio.
One reason for this is their sensitivity to changes in interest rates. When interest rates rise, the mortgage fund’s earnings generally fall. The Fed is indicating plans to raise interest rates several times in 2022 which could create headwinds for these stocks.
Increased interest rates harm real estate investment companies investing because these companies borrow money to finance their operations. Borrowing costs rise with interest rates, but the interest payments they collect from mortgages stay the same, causing profit margins to shrink. Some of this risk can be managed with hedging tools, but mortgage REITs cannot completely eliminate interest rate risk.
Another caveat is that mortgage-traded REITs often cut their profits when times are tough. During the height of the COVID-19 pandemic in 2020, 30 out of 40 companies in the sector either cut or suspended profits. On the flip side, dividends were quickly restored in 2021, with 20 real estate companies increasing.
We’ve searched the mortgage REIT world for stocks that look safe this year.
Read on as we explore five of the best marine stables for 2022. A few of these REITs reduce interest rate risk with acquisitions or an unusual focus on lending, while others have strong balance sheets or outstanding track records for increasing dividends. All of them offer exceptional returns to investors.
Data as of January 12th. Dividend returns are calculated by dividing the year by the last payment and dividing by the stock price. The stocks are listed in order from lowest to highest dividend yield.
Hannon Armstrong Capital of Sustainable Infrastructure
- Market value: $4.1 billion
- Profit return: 2.9%
Hannon Armstrong Capital of Sustainable Infrastructure (HASI, $48.56) It’s kind of odd for a mortgage trust in that it specializes in clean energy and infrastructure rather than pure real estate. Specifically, REIT invests in wind, solar, storage, energy efficiency, and environmental remediation projects – making it not only one of the best renewable energy companies, but also one of the best green energy stocks to have.
Its loan portfolio includes 260 projects worth $3.2 billion. In addition to his own loans, Hannon Armstrong manages nearly $8 billion in other assets, mainly for public sector clients.
This project houses a $3 billion pipeline and is ideally positioned to get a portion of the spending out of the $1.2 trillion infrastructure bill passed by Congress in late 2021.
Over the past three years, Hannon Armstrong has posted 7% annual earnings per share (EPS) and 1% annualized earnings per share. Over the next three years, HASI is targeting accelerated earnings of 7% to 10% annual earnings per share growth and 3% to 5% in dividend growth. Future earnings growth should be boosted by 1.6 times the company’s debt-to-equity ratio.
Hannon Armstrong produced exceptional results for the September quarter, which showed a 45% year-over-year growth in the loan portfolio 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 annual dividends of $1.40 per share.
HASI is admired by Wall Street analysts, with five of the six who track the stock describing it as a strong buy or sell.
Starwood Property Fund
- Market value: 7.7 billion dollars
- Profit return: 7.6%
Starwood Property Fund (STWD, $25.44) has a loan portfolio of $21 billion, making it the largest mortgage fund in the United States. The company belongs to Starwood Capital Group, one of the world’s largest private equity firms.
STWD is a mortgage real estate investment trust, but it operates more like a hybrid by owning physical property in addition to mortgages and real estate securities. Its portfolio consists of 61% of commercial loans, but the REIT also has significant footholds in housing loans (11%), real estate (12%) and infrastructure lending (9%), a relatively new focus for the company.
mREIT benefits from access to the databases of Starwood Capital Group, which generates more than $100 billion in real estate transactions annually and has a portfolio consisting of 96% of variable debt. This high percentage of floating-rate debt and unusually short loan terms – averaging just 3.3 years – reduce Starwood’s risk of rising interest rates.
STWD is also one of the largest providers of commercial mortgage-backed securities (CMBS) loans in the country. Large and reliable loan service fees help mitigate risk if loan credit quality deteriorates.
Starwood Property Trust closed $3.8 billion in new loans during the September quarter and posted distributable earnings of 52 cents per share — a sequential increase from June and slightly above analyst consensus estimates. After closing the September quarter, the Ministry of Investment and Real Estate Investment reported a massive gain of $1.1 billion from the sale of a 20% stake in an affordable housing real estate portfolio.
The company has generated 12 consecutive years of quarterly dividend payments, and unlike many other REITs, it maintained its strength in 2020 by maintaining an unchanged dividend.
Of the seven Wall Street pros who follow STWD, one says it’s a solid buy, five calls it Buy and only one calls it Hold. To make matters worse, CNBC analyst John Najarian recently chose Starwood as one of his top stocks to watch, given its 7.6% dividend yield.
Arbor Realty Trust
- Market value: $2.8 billion
- Profit return: 7.7%
Arbor Realty Trust (ABR, $18.70) It stands out as one of the top mREITS due to its six consecutive quarters of dividend growth and a compound annual growth rate (CAGR) of nearly 18% for dividend growth over the past five years.
Furthermore, Arbor Realty Trust has delivered 10 consecutive years of earnings growth while maintaining the lowest dividend rate in the industry.
This mortgage REIT is able to steadily increase dividends thanks to the diversity of its operating platform, which generates income from agency and non-agency loans, physical real estate (including rentals) and service fees.
Wakala loan creation and services portfolio grew at a compound annual growth rate (CAGR) of 16% over five years. During the first nine months of 2021, Arbor Realty Trust set a new record with issuance of balance sheet loans, reaching $7.2 billion – 2.5 times the previous record. The volume of loans increased by 45% from the previous record to reach a total of $13.2 billion during the nine-month period.
While earnings per share for September fell year-over-year due to lower contribution from equity subsidiaries, earnings for the first nine months of the year were up 164% from a year earlier to $1.56 per share.
The Arbor Realty Trust earns buy ratings from two of the three Wall Street analysts who track the stock, and Zacks Research recently ranked ABR as one of the highest income options for 2022.
Valued at 10 times forward earnings — 15.4% less than their industry peers — ABR shares look bargain-priced right now.
Ministry of Foreign Affairs of Finance
- Market value: $2.1 billion
- Profit return: 8.2%
Ministry of Foreign Affairs of Finance (Department of State, $4.68) Just completed an impressive 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 United States government and tend to be safer, have a lower yield and are more sensitive to interest rates than non-agency securities. By combining them into a single portfolio, MFA Financial generates good returns while minimizing the impact of changes in interest rates and prepayments on the portfolio.
With the acquisition of Lima One in July, MFA Financial has become a major player in business lending (BPL), an attractive niche comprising of fixed-lease, reversal, construction, multi-family and single-family loans.
The rising housing stock in the US has increased the demand for property renovations which has resulted in a higher BPL. BPL loans are of high quality and high yield, but they are hard to get in the market. With the purchase of Lima One, MFA Financial gains a $1.1 billion BPL loan service portfolio and a well-established national franchise to create these types of loans.
Lima One’s impact was evident in MFA Financial’s first quarter results. The REIT created $2.0 billion in loans, the highest quarterly total ever, and grew its portfolio by $1.5 billion after liquidation.
Net interest income was up 15% on a sequential basis, and the 10-cent gain reported on the Lima One deal contributed to mREIT’s earnings of 28 cents per share. MFA Financial also took advantage of the housing market’s strength to sell 151 properties, posting a gain of $7.3 million from the sale. The book value of the MFA — the difference between the total value of the company’s assets and accrued liabilities — rose 4 percent sequentially to $4.82 per share, a modest 3 percent premium over its current share price.
Stephen Laws, analyst at Raymond James upgraded the microfinance approach to outperforming the market — the equivalent of buying and holding, respectively — in December. He believes that the acquisition of Lima One will accelerate loan growth and reduce mortgage borrowing costs.
MFA Financial has a 22 year track record of paying dividends. While payments have been reduced in 2020, the REIT recently noted improved prospects with a 10% dividend increase in late 2021.
Broadmark Realty Capital
- Market value: 1.3 billion dollars
- Profit return: 8.6%
Broadmark Realty Capital (BRMK, $9.77) Unusual for its debt-free balance sheet, strong loan creation volume, and large monthly profits. This mortgage provides short to medium term loans for commercial construction and real estate development that are less rate sensitive. As such, BRMK plays a powerful role in America’s housing boom.
Lending activities focus on countries with favorable demographics and lending laws. In addition, 60% of its business comes from repeat customers, which ensures low costs for obtaining loans.
Broadmark Realty Capital generated a record $337 million in loan creation during the September quarter, nearly double levels from the previous year and up 68 percent from the previous quarter. The total portfolio has grown to $1.5 billion. Broadmark Realty Capital also created its first loans in Nevada and Minnesota, with expansion into additional states planned during the December quarter.
Despite higher revenue and dividend yield, Broadmark Realty’s results came in just below analyst estimates and its share price fell in response. However, this price slip may represent an opportunity to get one of the best real estate investment companies at a discount. Currently, BRMK shares are trading at just 12.7 times forward earnings and 1.1 times book value – the latter representing a 15% discount to industry peers.
The mortgage fund 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 the dividend currently exceeds 100% of fiscal 2021 profit, analysts expect a 17% increase in fiscal year 2022, which will comfortably cover the current annual dividend of 84 cents. for each share.