Congress created Real Estate Investment Trusts (REITs) in 1960. They believed that investors of all backgrounds should be able to access income-producing real estate. REITs span several different real estate markets including infrastructure, data centers, retail, office, mortgages, and more.
Mortgage REITs (mREITs) invest in residential and commercial mortgages. Additionally, they invest in residential and commercial mortgage-backed securities. Mortgage REITs allow for essential liquidity in the real estate market. They generate revenue from interest on the properties.
After the financial crisis of 2008, many people did not want to invest in mortgage-backed securities. However, sub-prime loans fueled this economic crash. These loans ended up affecting both homeowners and investors.
For mortgages to work, each party involved must follow through on their initial commitments. The bank grants mortgages at reasonable rates, homeowners make payments on time, and credit agencies that rate mortgage-backed securities do their part.
2020 has not been a great year for real estate. However, mortgage REITs have astonishingly performed better than almost any other asset class on the market in general. We’ve put together a list of the best mortgage REITs to take a look at today to take advantage of this specific area of growth at an odd point in global economic history.
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Best Mortgage REITs To Buy
Ellington Residential Mortgage REIT (NYSE:EARN)
Ellington acquires, invests in, and manages residential mortgages and real estate-related assets. The company’s portfolio involves the construction and management of residential mortgage-backed securities. Ellington is based in Connecticut with a market cap of $153.44 million. US government agencies or US government-sponsored enterprises guarantee principal and interest payments.
This is one of the few mortgage REITs that has completely recovered from a drop in Covid-19 prices. Many investors in the REIT space have turned their attention toward more ‘exciting’ REITs such as data centers and cell towers. That said, mREITs are currently undervalued. As less money is devoted to real estate investment trusts in retail, office, and hospitality industries, mREITs like Ellington could pick up a lot of momentum. Ellington’s performance in the final three-quarters of 2020 shows promise for this mortgage-backed securities REIT.
Arbor Reality Trust Inc. (NYSE:ABR)
Arbor is a New York based REIT that specializes in the investment of structured finance assets in the multi-family and commercial real estate markets. A bit larger than Ellington, Arbor holds a market cap of $1.77 billion.
This is another mortgage REIT that has seen a return to pre-covid performance levels. One of the largest advantages of Arbor is its focus on multi-family homes. With delays in the second Covid-19 stimulus relief packing in the US, many families may be forced to rent in the coming months, moving from single-family homes to apartments. This is particularly advantageous for mREITs that hold assets in urban centers, where high demand for multi-family housing allows landlords to push housing prices higher.
Arbor saw peak performance over a decade ago in 2007. Since then, share prices have slowly climbed until the Covid-19 market crash. The promise of Arbor’s holdings in combination with high-yielding dividends could make this a great time for a buy. That said, Arbor is one of just a few mREITs that have seen positive returns for the last 12 months.
Mortgage REITs do present a certain amount of risk that you won’t see with equity REITs. However, those who time mREIT purchases well could see incredible yields on investment. Either way, mortgage REITs could be a great form of diversification for your assets overall.
New Residential Investment Corp (NYSE:NRZ)
New Residential Investment Crop invests and manages investments in the residential real estate market. The company is the third-largest mREIT in the sector. New Residential’s investments primarily focus on excess mortgage servicing rights, servicer advances, non-agency residential mortgage-backed securities, and associated call rights.
New Residential Investment Corp has not recovered from the COVID market crash as well as the others. The company is currently trading at its lowest price in history. With a $4.12 billion dollar market cap, this apparent underperformance comes as a surprise to many.
That said, it’s unlikely they’ll continue to perform lower than before. As an undervalued mREIT, investors should hop on this one quickly. 2021 could be a very expansive year for residential investment as individuals are forced to stay home, make improvements, and settle in a place they feel comfortable calling home.
Commercial Mortgage REITs
Hannon Armstrong Sustainable Infrastructure (NYSE:HASI)
Hanson is the first stock on our list that is entirely in the commercial mortgage field. Hanson Armstrong provides capital for companies in the efficiency, renewable energy, and sustainable infrastructure markets. Based in Maryland, Hanson Armstrong has more than $6 billion in managed assets. The company seeks to provide climate-positive investments whose returns are superior and risk-adjusted.
As a company providing capital for sustainably-focused real estate, Hanson Armstrong provides one of the most unique investing angles on our list of mREITs. They provide ample diversification for those who are reluctant to get involved in the mortgage industry space. They currently have more than 200 investments.
The company has seen massive market gains since Covid-19. These gains have put current performance higher than it has ever been able to perform. Hanson’s diverse portfolio of assets is not only attractive to those interested in sustainability initiatives. Hanson’s is a company that will likely see continued explosive growth as the globe turns toward more sustainable solutions in the coming years.
Apollo Commercial Real Estate Finance Inc. (NYSE:ARI)
Investors looking for geographical diversification should look no further than Apollo. Apollo Commerical Real Estate is an mREIT primarily involved with senior mortgages and mezzanine loans, using commercial real estate as collateral throughout the US and Europe. They are currently based in New York.
Just like any of the mREITs on our list, Apollo is made attractive through high dividends and payouts. American mortgage REITs like Apollo are made attractive based upon the fact that they are based in the US, but operate in international locations. Thus, Apollo’s focus on commercial mortgages sets them apart from previously listed mREITs for a number of reasons.
Apollo is one mREIT that has not fared well as a result of COVID-19. The price of Apollo per share has actually plummeted to its lowest price since their IPO. This makes it a wonderful time to invest.
The performance of the company has likely been stalled by the overarching international implications of real estate investing in general. As business around the world begins to reopen, investment in real estate, especially commercial mortgage-backed securities may see an incredible rebound.
Largest Mortgage REITs
Annaly Capital Management (NYSE:NLY)
Annaly Capital Management is a very large mortgage REIT, one of the largest in fact. Another mREIT based in New York, Annaly is one of the largest REITs in the residential or commercial mortgage space. The company specializes in the investment of borrowed money into primary mortgage-backed securities. Company profits are generated by the net interest paid between the company’s assets and its borrowing costs.
Annaly currently has a portfolio of $103 billion in assets across 38 properties. At the end of 2019, the company had a debt-to-equity ratio of 7.2. As a result of the pandemic, the company currently has some of the lowest trading prices that it has seen in its history on the public market. However, this follows a recent trend the company’s market performance has seen, not having peaked in price since 2008. Residential mortgage REITs will see a return after this pandemic. Worthwhile returns may simply require investors simply need to wait out the long-term scale of growth.
AGNC Investment Corp. (NASDAQ:AGNC)
AGNC is quite similar to Annaly is its size and focus. Based in Maryland, AGNC is an mREIT that predominantly invests in mortgages and mortgage-backed securities. These investments typically take place on a leveraged basis. AGNC has an $8.5 billion market cap.
The company prides itself on being one of the best-managed mREITs. When the market returns to its normal high performance, those who invest in larger companies such as AGNC may see massive returns. AGNC has nearly made up its market loss from the pandemic. That said, the company has struggled to return to its highest price on the market realized nearly a decade ago. Investors should take advantage of this gold mine before prices skyrocket in the coming US period of economic expansion.
Cheap Mortgage REITs
Arlington Asset Investment Corp. (NYSE:AAIC)
Headquartered in Virginia, Arlington Asset Investment is a mortgage REIT in the residential mortgage space. Arlington borrows via short term repurchase agreements, which are then invited in mortgage-backed securities. Profit is generated from the net interest spread of its assets from its borrowing costs. They also amplify this effect through the use of leverage. As one of the smaller REITs on our list, Arlington has a market cap of $126.35 million, with a debt-to-equity ratio of 11.2 at the end of 2018.
After reaching a peak trading price of $540 in 2004, the company has struggled to keep its trading price up. The financial crisis of 2008 seemed to seal the deal with trading prices not reaching above even a fraction of what the price was previously. Arlington is now trading at $3.78 a share. This near-record low price is hard to beat for investors looking to take advantage of mortgage REITs before they really take off in the coming months.
Should You Invest Into Mortgage REITs?
Most of the mREITs on our list are currently seeing record low prices as a result of Covid. Long-term underperformance prior to Covid has exacerbated this effect. However, it’s likely that the market will eventually swing back around and performance will improve. Record low prices indicate investors could see incredible returns from investing today. Waiting too long could make investors late to the trend!
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Mortgage REITs: Final Thoughts
The pandemic has resulted in an unprecedented investment environment. Since mortgage-backed securities were in part due to the economic collapse we saw in 2008, it’s understandable why investors have been wary of mREITs. That said, the market upswing after the pandemic will likely be just as unprecedented. Now is a great time to join this investment trend!