Real estate investment trust yields robust rewards despite risk
Sinking money into real estate investment trusts is considered to be one of Wall Street’s most complex investments.
Owning shares of REITs gives investors an opportunity to get investment exposure to real estate, including apartments, shopping centers and office buildings. But they’ve gained a reputation of being risky and confusing — especially after the industry was pummeled during the last real estate crash.
Even Lloyd McAdams, chief executive of Anworth Mortgage Asset Corp., makes no bones about saying his Santa Monica REIT does carry some risk. But it also has given shareholders high dividend yields as the real estate market has recovered.
“The potential magnitude of the risks we have to manage around has been the most daunting aspect of managing the business,” said McAdams, who has been CEO since the company was founded in 1998.
Market shocks have been a challenge for Anworth, whose portfolio holds residential real estate where the mortgages are secured by government guarantees from Freddie Mac, Fannie Mae and Ginny Mae.
Anworth’s stock price has had big gyrations because of the company’s ties to the housing market. The stock at one point traded above $15 before the housing crisis walloped the industry. It now trades for about $5 a share.
But analysts are bullish on the company’s prospects and hail its consistent dividend. The company has averaged about a 10% payout every year for the last decade. That compares to the 2.65% average weighted dividend yield for the Standard & Poor’s 500 index.
The REIT this month announced that it owns about $9 billion of securitized government-guaranteed residential mortgages.
The company also recently declared a 15-cents-a-share quarterly dividend to its stockholders. The dividend is payable July 29 to anyone who purchased the stock on or before July 8.
Anworth has paid a 15-cent dividend the last three quarters as well. However, the dividend was 18 cents during the quarter before that stretch and had been even higher before that.
Anworth has endured “an unusually large number of events which created significant disruption in the financial markets,” McAdams said.
Among them: the near-collapse of Connecticut hedge fund Long-Term Capital Management in 1998, the computer meltdown fears of 2000, the Sept. 11 terrorist attacks in 2001, missed debt ceiling deadlines and repeated trillion-dollar federal deficits.
That Anworth is still in existence is one of his best accomplishments, he said.
“It’s an industry where our company, sitting out here in Santa Monica, it is probably one of the oldest in existence in the United States,” McAdams said.
The company is difficult for the average person to understand, McAdams said. The way it generates revenue is also contrary to how most consumers tend to operate.
“As homeowners, we all know that refinancing our home mortgage at a lower interest rate will save us money and is good for our families,” McAdams said. “However, it is not good for Anworth. We are among those who lose when one of our mortgages is prepaid before its maturity because we will probably be receiving less interest income in the future.”
The company’s profit has been hurt during the last year because of the boom in home mortgage refinancing, he said.
Four analysts rate the stock as a buy, four suggest holding the stock and one says investors should sell it. They estimate the stock will be trading at $6.46 in 12 months.
“Our rating on the stock is currently ‘outperform,’ which means we expect [more than a] 15% total return over the coming 12 months, mostly through dividends,” said Michael Widner, an analyst with financial services firm Keefe, Bruyette & Woods.
Maxim Group, another such firm, advises investors to hold Anworth’s stock. Michael Diana, an analyst with the firm, noted in a recent report that Anworth is under a lot pressure.
“Mortgage REITs that focus on ARM (adjustable-rate mortgage) collateral, such as Anworth, are at the shorter end of the yield curve, where there is less net interest rate spread, and therefore more pressure on core earnings and dividends than for REITs that focus on fixed-rate collateral,” Diana said. “This is a major reason why Anworth has lowered its dividend in four of the past seven quarters, in our view.”
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