3 Mortgage REIT Preferred Stocks to Consider


  • Many investors shy away from mortgage REIT common stocks because of the risk.
  • mREIT preferred stocks are safer than common stock and may have been ignored by the marketplace.
  • Introducing 3 mortgage REIT preferred stocks with good metrics and yields between 7.2 and 8.2%

This article was written by Richard Hill

I Prefer Income maintains a preferred stock & ETD database program with 642 preferred stocks & ETD (exchange traded debt securities).  Out of the 642 issues, 278 are cumulative, 171 are non-cumulative, 16 are trust preferred stocks and 177 are ETD (exchange traded debts).  There are now only 123 that are priced at $25 or below. It is a challenge to find higher yielding preferred stocks that are considered as reasonably safe and provide a reliable dividend that is sustainable over the long term.

Despite there being fewer choices, I feel there are good preferred stocks left that many income investors may want to consider.  There is one industry that contains 16 parent companies with 42 preferred stocks that the market loves to hate.  That industry is Mortgage REITs.  I am the first to agree with many that mREIT common stocks are a high-risk asset class and only those with a high degree of knowledge and investment skills should invest in the common issues.  However, the preferreds are different.  The risks are less because they are safer than the common.  All of them are cumulative and the dividends cannot be reduced.  Yes, the dividends can be delayed, but only if the common stock dividends are cut to zero first.   And if they do stop the dividend, those missed dividends must be paid back once dividends are resumed.

There is also a concern with recession and how it will affect the mortgage REIT preferred stocks.  Mortgage REITs make money from the spread between borrowing rates and lending rates.  As interest rates drop, mREIT’s borrowing costs also drop.  Many analysts feel that mREITs do well in a recession.  Out of the 3 companies in this article, only CIM was in business during the last great recession of 2009.  Annaly Capital Management, Inc (NLY), the largest mREIT, was also in business during that time.  Table 1 provides a few metrics for NLY and CIM from 2008 through 2012.  Both NLY and CIM show that earnings, cash flow and dividends did well during those 5 years.  Dividends even grew in 2010.

Preferred Stocks

 (Table 1. Source, I Prefer Income)

Out of the 42 mREITs in the database, I have selected 3 preferred stocks with the following criteria:  priced below $25.50, yields above 7%, future call dates, decent dividend metrics, earnings, payout and debt metrics.  All preferred stocks issue 1099 tax forms, pay quarterly dividends and have fixed-to-floating dividend rates.

As is my practice, I analyze the securities by first reviewing 5 important financial areas: Earnings, Payout Ratios, Debt Ratios, Dividend Metrics and Credit Ratings.  These metrics are grouped and highlighted with different colors.  This gives me a great first review of the issues and lays the foundation for further analysis.  My goal is to uncover solid choices that meet my requirements for safety and reliable / sustainable income.  The 3 picks are in the table below.

Preferred Stocks

(Table 2. Source, I Prefer Income)

To read the table properly, the parent company is in the top row with grey background.  Each of the preferred stock issues are located directly underneath the parent row.  All metrics are on the parent as they are responsible for the preferred stock.  However, the credit ratings are on the preferred stock.   Here is information on each parent and preferred stock.

Cherry Hill Mortgage Investment Corporation (CHMI)  a residential real estate finance company that acquires, invests in, and manages residential mortgage assets in the United States. The company operates through Investments in RMBS and Investments in Servicing Related Assets segments.  CHMI has 2 preferred stocks.  CHMI-B has a coupon rate of 8.25% and is priced at $25.25 with a yield of 8.2%.  It also is a Fixed to Floating rate preferred that starts on 4/14/24 with the rate at 3 month libor + 5.631%.

The metrics are generally favorable.  Earnings.  Out of the last 5 years, all 5 have been profitable on a GAAP basis.  However, over the last 5 quarters, they have been profitable only 2 of the 5.   On a Non-GAAP basis; however, the record of earnings is much better.  Review table 3 to see a comparison between EPS and Core EPS.

Payout ratios are good for both common stock and preferred stock payout ratios. Debt-to-equity is good at .4.  Credit ratings are NF / NF.  Dividend metrics show 0% dividend growth over the last 3 year and considered as being stable.

Preferred Stocks

(Table 3. Source, I Prefer Income)

Preferred Stocks

(Table 3a. Source, I Prefer Income)

Chimera Investment Corporation  (CIM)  invests in a portfolio of mortgage assets, including residential mortgage loans, agency and non-agency residential mortgage-backed securities, agency mortgage-backed securities secured by pools of commercial mortgage loans, commercial mortgage loans, and other real estate related securities. Chimera Investment Corp has 4 preferred stocks. CIM-C was the best pick of the 4.  It has a coupon rate of 7.75% and is priced at $25.16 with a yield of 7.7%.  It also is a Fixed to Floating rate preferred that starts on 9/30/25 with the rate at 3 month libor + 4.743%.

The metrics for CIM are mostly positive.  Over the last 5 years, all 5 years have been profitable on a GAAP basis.  During the last 5 quarters, 4 have been profitable.  However, table 4 shows the comparison between GAAP and Non-GAAP earnings.  Core earnings are much better than EPS.  Don’t forget about table 1 which shows that CIM’s earnings, cash flow and dividend metrics did well during the great recession of 2009.

Payout ratios for both common and preferred stock are good.  Debt-to-equity is the highest of the 3 at 2.0.   Credit ratings are NR / NR.   Dividend metrics show 1.4% dividend growth over the last 3 years.  Note that CIM and NRZ are 2 out of 3 mREITS to have increased their dividends over the last 3 years.

Preferred Stocks 

(Table 4, Source, I Prefer Income)

Preferred Stocks

(Table 4a.  Source, I Prefer Income)

New Residential Investment Corp. (NRZ) focuses on investing in and managing residential mortgage related assets in the United States. It operates through Servicing and Originations, Residential Securities and Loans, and Consumer Loans segments. The company invests in excess mortgage servicing rights (MSRs) on residential mortgage loans; and in servicer advances, including the basic fee component of the related MSRs.  New Residential Investment Corp has 2 preferred stocks.  NRZ-B was the best pick.  It has a coupon rate of 7.125% and is priced at $24.85 with a yield of 7.2%.  It also is a Fixed to Floating rate preferred that starts on 8/15/24 with the rate at 3 month libor + 5.640%.

The metrics for NRZ are mostly positive.  Over the last 5 years, GAAP earnings have been profitable all 5 years.  And over the last 5 quarters, 3 quarters have been profitable and 2 have reported losses on a GAAP basis. On a Non-GAAP basis however, core EPS has been profitable every year for the last 5 years and quarters.  Table 5 below shows the comparison between EPS and CEPS.

Payout ratios for common and preferred are in good shape.    Debt to Equity is good at 1.1.   Credit ratings are NR / NR.   Dividend metrics show 3.1% dividend growth over the last 3 years and NRZ is designated as a Dividend Diamond for having increased their dividend every year for the last 6 years.

Preferred Stocks (Table 5, Source, I Prefer Income)

Preferred Stocks

(Table 5a, Source, I Prefer Income)

In summary, all 3 preferreds stocks in this article are mortgage REIT cumulative preferred stocks that have been somewhat ignored by the marketplace because their common stocks are considered as high risk investments.  However, the preferreds are safer because the dividends cannot be cut and they can only delay distribution if and only when the common has been cut to zero.  With that said, there is concern that mREITs cannot do well during a recession with falling interest rates and poor economy.  After reviewing historical records, I found that NLY and CIM’s earnings, cash flow and dividends performed well during the great recession.  That gives me confidence that mREITs in general can continue to perform well if we once again go into a recession where interest rates and the economy fall.

The bottom line for me is that all 3 companies have good metrics and should continue to do well in the future, even if we enter a recession.  With yields from 7.2 to 8.2%, these 3 preferreds could provide a good risk/reward for many investors.   If you find interest in any, take the time to read the last quarterly statement of each.  Also recommend Seeking Alpha (www.seekingalpha.com).  Once there, do a search for the parent company and then look for any recent articles.

As interest rates continue downward and the market heads higher, the search for yields will only become more challenging.  Waiting for better days might not result in more opportunities.

Thanks for reading.

Rich Hill
I Prefer Income

Disclosure.  I own preferreds from all 3 companies.

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