Mortgage REITs Are a High-Yield Bargain

As a value investor, I’m a little frustrated these days. There is virtually nothing cheap anywhere in the public markets. Stocks are expensive, trading at cyclically-adjusted price earnings ratios higher than those before the 1929 and 2008 crashes. And the 10-year Treasury yield — even after its recent surge — is barely 0.4% above the core inflation rate. Yet there is one corner of the market still showing signs of value: mortgage REITs.

I wrote earlier this year that mortgage REITs as an asset class were trading at some of the steepest discounts to book value in history. Well, as we round out the first quarter, very little has changed on that front. Even as earnings and revised book values have come in, valuations haven’t changed much. The mREIT universe is small, and the top 10 holdings [of iShares Mortgage Real Estate Capped (NYSEARCA:REM)] make up 68% of the total portfolio. Two mortgage REITs alone — Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NYSE:AGNC) — make up about 30% of the portfolio.

Source: InvestorPlace

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