Mortgage REITs Should Repurchase Their Own Shares

As I wrote recently, mortgage REITs as a sector are trading at some of the steepest discounts to book value in their histories. I consider mortgage REITs trading at 80 cents to 90 cents on the dollar to be a fantastic bargain. But I also know that those bargains exist for a reason. With bond yields — and mortgage rates — scraping along near all-time lows and the Federal Reserve expected to at least modestly raise rates this year, the fear is that the interest rate spreads that allow mortgage REITs to pay out such large dividends are about to get crimped.

When mortgage REITs’ higher-yielding mortgages get pre-paid by homeowners, the mortgage REITs are left with slim picking to reinvest in today’s market. It’s a problem with an easy solution. Rather than buy low-yielding mortgages — or slide down the credit quality scale to chase yield — mortgage REITs trading at discounts to book value should repurchase their own shares. Mortgage REITs haven’t been very active on the share repurchase front. Annaly Capital Management, Inc. (NYSE:NLY) approved a share repurchase program in 2012, but it didn’t amount to a lot.

Source: InvestorPlace

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