Business is good for mortgage real estate investment trusts (mREITs) nowadays. Regular readers have heard about mREITs before. These firms raise cash through debt issues, then buy up pools of higher-yielding mortgages. Profits come from the difference between those two rates, otherwise known as the “spread.” And in the current post-financial-crisis environment, these businesses have become money-making machines. Low interest rates allow mREITs to borrow cheap. At the same time, yields on long-term mortgages remain quite high.
Take Arlington Asset Investment Corp (NYSE:AI), for example. This firm owns a huge portfolio of residential mortgages. The company collects monthly interest income on these loans, which come with the full backing of the “Uncle Sam” or government-sponsored agencies. In the latest reported quarter, Arlington earned six-percent interest on its loans, so it earned a three-percent spread. If the company borrows $6.00 for every $1.00 of equity, that comes out to roughly a 18% return on equity. Analysts figure Arlington will stay consistent next year. The Federal Reserve doesn’t seem to be in a rush to raise interest rates. The yields on long-term bonds, meanwhile, continue to rise. If it pays out $2.20 next year, that’s a 17.2% dividend yield (based on a $17.50 stock price).
Source: Income Investors
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