My broker's screen says 14% yield on an mREIT. What am I missing?

The number on the screen is the last twelve months of dividends divided by today's share price. If the price drops and the dividend stays flat, the yield printed goes up. So a very high yield often means the market marked the shares down, and the screen hasn't caught up.

What sits underneath it: a mortgage REIT borrows money short term and buys mortgages or mortgage-backed securities, which are bonds made of pooled home or commercial loans. It keeps the difference between what it pays to borrow and what the mortgages pay. That difference is the spread. On agency mortgage bonds, the ones backed by Fannie Mae or Freddie Mac, the spread might be 1.5 percentage points. That's thin, so the company borrows several dollars for every dollar of its own equity to turn it into a double digit return on equity. That borrowed money is where the risk lives.

The piece people miss is book value. Book value per share is the company's assets minus its debts, divided by shares. When rates or spreads move against the portfolio, book value falls, and the share price usually follows. You can collect 13% in cash and still be behind if book value dropped 15% over the same stretch. So the number to track alongside the dividend is book value per share, quarter by quarter, which every one of these publishes.

Total return is dividends plus the change in book value. Judge the holding on that, not on the yield column.

Something I'd add to what canton is asking: check whether the dividend is covered. These companies report distributable earnings (some call it earnings available for distribution) and you want that per share number to be at or above the dividend per share. If the dividend is 0.35 and distributable earnings are 0.28, the gap is coming out of somewhere, and usually that somewhere is book value.

Wait, so when a borrower stops paying, does the mREIT end up owning the house? Because that's a whole operational business and I don't see how a company with 40 employees handles thousands of foreclosures.

@cobalt not for the agency ones. If the bond is guaranteed by Fannie or Freddie, a default just means the loan gets bought out of the pool at par and you get your principal back early. That's prepayment, not credit loss. The credit risk shows up in the non-agency names and the commercial mortgage REITs, which hold whole loans on office and multifamily and absolutely do take title sometimes. Those file REO line items in the 10-K and you can watch them grow. Read which bucket you're in before anything else, because the two are almost different businesses wearing the same label.

I've seen "repo" in every one of these filings and I still can't picture it. Is it just a loan against the bonds?

@vellum yes, basically. You sell the bond to a counterparty and agree to buy it back in 30 days at a slightly higher price, and the difference is the interest. They lend you less than the bond is worth, so on agency paper the haircut might be 3% to 5%. If the bond's market value falls, they call you for more cash the same day. That daily margin mechanic is the actual danger. It's not the credit of the mortgages, it's being asked for cash at the exact moment prices are bad.

Then what are the swaps for? Every deck I've opened has a hedge table showing pay-fixed swaps against the repo book. If the hedges work, why does book value still swing 8% in a quarter?

The hedges cover the rate leg, roughly. They don't cover spread. If mortgage bonds cheapen relative to Treasuries, your assets fall and your hedge doesn't rise to match, and that gap lands in book value.

Separately, on the tax side, mREIT distributions mostly come to you as ordinary dividends on a 1099-DIV rather than qualified dividends, and part can be return of capital that lowers your basis. The treatment differs by company and by year and the rules change, so run it past a tax professional before you assume anything about the after-tax yield.

The way I finally got my head around it: pretend the dividend is a coupon and book value is the principal. Nobody would buy a bond paying 13% if the principal shrank 6% a year and they'd tell you the bond yields 7%. Mortgage REITs get quoted the other way around because the two numbers live in different places on the page.

Ten years of price charts on these things will tell you most of what this thread is saying, honestly.

@thatch the charts also mislead, because they're price only and ignore the dividends, which is most of the return. Look at total return series instead.

The number I actually watch is price to book. If book value is 9.20 and the stock is 7.80, you're paying 0.85. That discount can mean the market expects book to keep falling, or it can mean nobody wants the sector. Those are very different situations and the ratio alone won't tell you which one you're in. I've never found a clean way to separate them.

Curious about the servicing side of this. Some of these hold mortgage servicing rights alongside the bonds, and MSRs gain value when rates rise because nobody refinances. So the servicing acts as a partial hedge on the bond book. Is that a real structural advantage or just a story the ones that own MSRs tell?