How To Make Money From Other People's Mortgages
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Find out how you can start investing in real estate through mortgages. (Photo by Shutterstock)
With a strong housing market and expectations for rising interest rates, several MoneyShow.com contributors see upside in those companies that make money when homebuyers and businesses take out mortgages. Here’s a look at some favored stocks, funds and REITs that make, service and package mortgages.
Carla Pasternak, Dow Theory Letters'The Income Investor
As interest rates likely rise over the next five years, lending rates are expected to increase as well. Lenders should benefit, as they profit from the difference between higher long-term lending rates and lower short-term borrowing costs on capital that funds their loans.
Unlike equity REITs, mortgage REITs generally don’t own properties. Instead, they invest in debt by originating or buying mortgage securities that they manage in a loan portfolio. Here’s a look at my two top picks among mortgage REITs.
Apollo Commercial Real Estate Finance originates subordinate and first-mortgage loans on commercial properties across the U.S. and the U.K. Almost 90% of the 56 loans in the $3.6 billion loan portfolio are at floating rates, positioning the company for higher interest rates.
Earnings have grown by nearly 8% annually over the past five years, in line with portfolio growth. For the first nine months, per-share earnings of $1.23 were 10.8% higher than the year-ago period, thanks to higher interest income on floating rate loans.
Earnings are expected to ratchet up 15% next year, after taking an 11% hit in 2017, in part on a 30% increase in outstanding shares in an effort to raise capital.
Dividends of $0.46 per share have been paid every quarter for the last two years. That gives the shares an annual yield of nearly 10% at today’s share price ($1.84/$18.69). Trailing 12-month earnings of $1.86 give a 99% payout ratio, which is not uncommon for a REIT. Most of the dividend qualifies as ordinary income, taxable at your marginal tax rate.
Blackstone Mortgage Trust originates and buys senior mortgage loans collateralized by properties in North America and Europe. The $10.7 billion portfolio of 111 senior loans is secured by assets in major markets, with over 40% located in New York or California. With 92% at floating rates at September 30, the trust is positioned for higher interest rates.
Earnings have grown a robust 25% annually on average during the past five years, driven by loan origination growth. The dividend has grown an average 8% a year during the last three years, in line with earnings. The current quarterly dividend of $0.62 per share annualizes to $2.48, giving a yield of nearly 8% at today’s share price ($2.48/$32.46).
Estimated earnings of $2.54 per share in 2017 give a 98% payout ratio. Over 90% of the dividend is taxable as ordinary income, making the shares suitable for a tax-sheltered account.
Todd Shaver, BullMarket
Annaly Capital Management is worth a close look right here. The company is the largest mortgage REIT in the world with a market cap of almost $14 billion. The yield on the stock right now is greater than 10%.
Their diversified business model includes investing in agency loans, residential credit, commercial real estate and middle marketing lending.
The Agency group invests in agency Mortgage Backed Securities collateralized by residential mortgages which are guaranteed by
The Residential Credit group invests in non-agency residential mortgage assets. This area is more complex because there is no government guarantee, but the opportunity for enhanced investment returns is greater.
The Commercial Real Estate group originates and invests in commercial mortgage loans, securities and other commercial real estate debt and equity investments, which is a great way to pick-up real estate exposure in your portfolio.
The Middle Market Lending group provides financing to private equity-backed middle market businesses across the capital structure, which can be quite lucrative.
The company is very well run, in fact, the best in the industry, and the board of directors appointed chief executive officer and president Kevin G. Keyes as chairman effective January 1, 2018.
With a 10% dividend yield and sturdy fixed income investments across asset classes, we see compelling value in the stock. If we see a volatile equity market, their portfolio of mortgage-backed securities should provide steady income to support the $1.20 dividend that is covered by earnings.
Higher interest rates could cause some near-term volatility, but Annaly will be able to reinvest at the higher rates ultimately driving higher dividends that should appeal to any high income-seeking investor.
John Buckingham, The Prudent Speculator
Anworth Mortgage Asset is a REIT focused mainly on U.S. mortgage-backed securities (MBS) issued or guaranteed by an agency of the U.S. (Ginnie Mae) or a U.S. government-sponsored entity (Fannie Mae or
Anworth’s core business produced adjusted EPS of $0.12 in its recently reported Q3, in line with consensus analyst estimates. We appreciate management’s efforts to diversify and plan for the long term via the ownership of 88 single-family residential rental properties located in southern Florida.
With shares off more than 7% since the summer, impacted by rising rates and a less-steep yield curve, ANH is now trading at 93% of its latest reported book value of $6.04 per share, while yielding a massive 10.7%.
True, the company must continue to navigate a more volatile interest rate environment that could include an even flatter yield curve, but management generally has proven adept thus far, supporting the dividend, while buying back stock at favorable times — such as when it trades below book value.
Doug Gerlach, Investor Advisory Service
Essent Group Ltd. is legally domiciled in Bermuda; its sole business is providing private mortgage insurance (PMI) both as a primary insurer and as a reinsurer (buying pieces of the insurance book of other insurance companies).
Private mortgage insurance has a bad reputation, but it performs a vital function in the property and mortgage markets. The role of PMI is to serve as an additional buffer against loan losses when homeowners don’t have enough equity (typically 20%) in case they default on their mortgages.
In fact, Fannie Mae and Freddie Mac, two government-sponsored purchasers of mortgages, require a 20% down payment (or PMI) for most loans. When a homeowner defaults on a mortgage, PMI insulates the lender from losses by making up the shortfall between the equity in the home and the 20% equity threshold.
Essent maintains relationships with 1,360 originators of residential mortgage loans and depository institutions (chiefly banks and credit unions) that hold mortgage loans. Its top ten customers represented 35% of new insurance written in 2016.
At least 95% of its borrowers have a FICO score above the 640 level which is typically considered the dividing line between prime and subprime borrowers. Its guarantee portfolio is well diversified by state, with populous states like California (9% of the portfolio), Texas (8%), and Florida (7%) comprising the largest representation.
Essent’s loan losses are unusually low because of its relatively young and rapidly growing portfolio. Mortgage guarantee losses typically peak 3-6 years into the mortgage and Essent’s rapid growth means its average mortgage has been in force for only 18 months.
As with all insurers, premiums are invested until needed to pay claims. Essent has a broadly diversified, low-risk investment portfolio, which is 99.6% investment grade.
While rising interest rates might hurt the mortgage refinancing market, this is less of a concern for Essent because mortgages for home purchase are far more likely to need PMI.
The healthy economy and growing homeownership rates among the millennial generation suggest the PMI industry should continue to grow as long as interest rates don’t rise to a level that chokes off housing and the economy.
Essent Group’s growth should be augmented by its rising market share. While future revenue growth will not likely reach levels in recent years, we believe that 14% annual growth is possible. Strong revenue growth typically allows for rising margins.
However, we believe the efficiencies of scale and potential benefits from U.S. tax reform will largely be offset by a gradual increase in mortgage guarantee losses as Essent’s portfolio matures.
We expect EPS growth to track revenue growth at 14% annually. Five years of such growth could result in EPS of $5.74. A repeat of the typical high P/E ratio of 15.7 might lead to a potential high stock price of $90. The downside risk is 31% to 31, its low price over the past 12 months.
">Find out how you can start investing in real estate through mortgages. (Photo by Shutterstock)
With a strong housing market and expectations for rising interest rates, several MoneyShow.com contributors see upside in those companies that make money when homebuyers and businesses take out mortgages. Here’s a look at some favored stocks, funds and REITs that make, service and package mortgages.
Carla Pasternak, Dow Theory Letters'The Income Investor
As interest rates likely rise over the next five years, lending rates are expected to increase as well. Lenders should benefit, as they profit from the difference between higher long-term lending rates and lower short-term borrowing costs on capital that funds their loans.
Unlike equity REITs, mortgage REITs generally don’t own properties. Instead, they invest in debt by originating or buying mortgage securities that they manage in a loan portfolio. Here’s a look at my two top picks among mortgage REITs.
Apollo Commercial Real Estate Finance originates subordinate and first-mortgage loans on commercial properties across the U.S. and the U.K. Almost 90% of the 56 loans in the $3.6 billion loan portfolio are at floating rates, positioning the company for higher interest rates.
Earnings have grown by nearly 8% annually over the past five years, in line with portfolio growth. For the first nine months, per-share earnings of $1.23 were 10.8% higher than the year-ago period, thanks to higher interest income on floating rate loans.
Earnings are expected to ratchet up 15% next year, after taking an 11% hit in 2017, in part on a 30% increase in outstanding shares in an effort to raise capital.
Dividends of $0.46 per share have been paid every quarter for the last two years. That gives the shares an annual yield of nearly 10% at today’s share price ($1.84/$18.69). Trailing 12-month earnings of $1.86 give a 99% payout ratio, which is not uncommon for a REIT. Most of the dividend qualifies as ordinary income, taxable at your marginal tax rate.
Blackstone Mortgage Trust originates and buys senior mortgage loans collateralized by properties in North America and Europe. The $10.7 billion portfolio of 111 senior loans is secured by assets in major markets, with over 40% located in New York or California. With 92% at floating rates at September 30, the trust is positioned for higher interest rates.
Earnings have grown a robust 25% annually on average during the past five years, driven by loan origination growth. The dividend has grown an average 8% a year during the last three years, in line with earnings. The current quarterly dividend of $0.62 per share annualizes to $2.48, giving a yield of nearly 8% at today’s share price ($2.48/$32.46).
Estimated earnings of $2.54 per share in 2017 give a 98% payout ratio. Over 90% of the dividend is taxable as ordinary income, making the shares suitable for a tax-sheltered account.
Todd Shaver, BullMarket
Annaly Capital Management is worth a close look right here. The company is the largest mortgage REIT in the world with a market cap of almost $14 billion. The yield on the stock right now is greater than 10%.
Their diversified business model includes investing in agency loans, residential credit, commercial real estate and middle marketing lending.
The Agency group invests in agency Mortgage Backed Securities collateralized by residential mortgages which are guaranteed by
The Residential Credit group invests in non-agency residential mortgage assets. This area is more complex because there is no government guarantee, but the opportunity for enhanced investment returns is greater.
The Commercial Real Estate group originates and invests in commercial mortgage loans, securities and other commercial real estate debt and equity investments, which is a great way to pick-up real estate exposure in your portfolio.
The Middle Market Lending group provides financing to private equity-backed middle market businesses across the capital structure, which can be quite lucrative.
The company is very well run, in fact, the best in the industry, and the board of directors appointed chief executive officer and president Kevin G. Keyes as chairman effective January 1, 2018.
With a 10% dividend yield and sturdy fixed income investments across asset classes, we see compelling value in the stock. If we see a volatile equity market, their portfolio of mortgage-backed securities should provide steady income to support the $1.20 dividend that is covered by earnings.
Higher interest rates could cause some near-term volatility, but Annaly will be able to reinvest at the higher rates ultimately driving higher dividends that should appeal to any high income-seeking investor.
John Buckingham, The Prudent Speculator
Anworth Mortgage Asset is a REIT focused mainly on U.S. mortgage-backed securities (MBS) issued or guaranteed by an agency of the U.S. (Ginnie Mae) or a U.S. government-sponsored entity (Fannie Mae or
Anworth’s core business produced adjusted EPS of $0.12 in its recently reported Q3, in line with consensus analyst estimates. We appreciate management’s efforts to diversify and plan for the long term via the ownership of 88 single-family residential rental properties located in southern Florida.
With shares off more than 7% since the summer, impacted by rising rates and a less-steep yield curve, ANH is now trading at 93% of its latest reported book value of $6.04 per share, while yielding a massive 10.7%.
True, the company must continue to navigate a more volatile interest rate environment that could include an even flatter yield curve, but management generally has proven adept thus far, supporting the dividend, while buying back stock at favorable times — such as when it trades below book value.
Doug Gerlach, Investor Advisory Service
Essent Group Ltd. is legally domiciled in Bermuda; its sole business is providing private mortgage insurance (PMI) both as a primary insurer and as a reinsurer (buying pieces of the insurance book of other insurance companies).
Private mortgage insurance has a bad reputation, but it performs a vital function in the property and mortgage markets. The role of PMI is to serve as an additional buffer against loan losses when homeowners don’t have enough equity (typically 20%) in case they default on their mortgages.
In fact, Fannie Mae and Freddie Mac, two government-sponsored purchasers of mortgages, require a 20% down payment (or PMI) for most loans. When a homeowner defaults on a mortgage, PMI insulates the lender from losses by making up the shortfall between the equity in the home and the 20% equity threshold.
Essent maintains relationships with 1,360 originators of residential mortgage loans and depository institutions (chiefly banks and credit unions) that hold mortgage loans. Its top ten customers represented 35% of new insurance written in 2016.
At least 95% of its borrowers have a FICO score above the 640 level which is typically considered the dividing line between prime and subprime borrowers. Its guarantee portfolio is well diversified by state, with populous states like California (9% of the portfolio), Texas (8%), and Florida (7%) comprising the largest representation.
Essent’s loan losses are unusually low because of its relatively young and rapidly growing portfolio. Mortgage guarantee losses typically peak 3-6 years into the mortgage and Essent’s rapid growth means its average mortgage has been in force for only 18 months.
As with all insurers, premiums are invested until needed to pay claims. Essent has a broadly diversified, low-risk investment portfolio, which is 99.6% investment grade.
While rising interest rates might hurt the mortgage refinancing market, this is less of a concern for Essent because mortgages for home purchase are far more likely to need PMI.
The healthy economy and growing homeownership rates among the millennial generation suggest the PMI industry should continue to grow as long as interest rates don’t rise to a level that chokes off housing and the economy.
Essent Group’s growth should be augmented by its rising market share. While future revenue growth will not likely reach levels in recent years, we believe that 14% annual growth is possible. Strong revenue growth typically allows for rising margins.
However, we believe the efficiencies of scale and potential benefits from U.S. tax reform will largely be offset by a gradual increase in mortgage guarantee losses as Essent’s portfolio matures.
We expect EPS growth to track revenue growth at 14% annually. Five years of such growth could result in EPS of $5.74. A repeat of the typical high P/E ratio of 15.7 might lead to a potential high stock price of $90. The downside risk is 31% to 31, its low price over the past 12 months.
https://www.forbes.com/sites/moneyshow/2017/12/24/how-to-make-money-from-other-peoples-mortgages/
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