The REITs Correction: When Reaching for Yields Goes Wrong

Jacob Harper  |

Mortgage real estate investment trusts, otherwise known as REITs, plunged in value just after a first quarter massive stock sale, according to a Bloomberg report. Two of the hardest hit funds – American Capital Agency Corp (AGNC) and Armour Residential REIT Inc. (ARR) lost 20 and 26 percent of their respective value. And Annaly Capital Management Inc. (NLY), the largest REIT with $126 billion of assets as of the end of March, has dropped 18 percent.

The companies lost money when their underlying mortgage-backed securities went south. The companies attempted to hedge their bets, but the losses were too severe to stop the hemorrhaging. The big question being asked is: why were these companies raising money when disaster loomed ahead?

The answer it seems lies with the commission based model some companies had been paying their brokers under. They simply had no incentive to quit selling shares.  And investors were happy to gobble them up: at times, some REITs were paying dividends upwards of 13 percent. Other companies just came in at the wrong time. Ellington Residential Mortgage (EARN) raised $126 million in a May IPO before promptly dropping 15 percent in value.

Regardless of how and why they raised money, REITs are simply in bad shape right now. And recent comments from fed chairman Ben Bernanke have certainly contributed to the bond slump. But according to analyst Julian Mann at First Pacific Advisors LLC, they’ve also forced investors to look more closely at what’s inside the REITs they’re buying, and be assured there’s some good underlying value in them. Or, as he put it, “People want to know the bottoms (of the REITs.)”

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


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