To start the week, I want to continue my discussion of real estate-related securities and potential bargains that still exist in this sector. Banks have been the single most profitable sector for me over the years, and real estate is second.
I mentioned a couple of multifamily names I like on Friday, and today let's focus on mortgage-based real estate investment trusts that I think have the potential for enormous total returns during the next few years.
I am well aware of all the negative chatter surrounding mortgage REITs. The same chatter goes on every year and has for as long as I can remember. The companies are vulnerable to rising or falling rates. They will be hurt in another real-estate meltdown. That one may have merit, but I don't see a repeat of 2008-2009 any time soon. Commercial and residential real estate should have a long slow grinding recovery that makes these high-yielding instruments perfect total-return vehicles. Most of the mortgage REITs have done a pretty good job of hedging off much of the feared interest rates move. It is not something that keeps me up at night.
My favorite mortgage REITs are those that have an advantage over their competitors because of their experience or relationships. That's one reason I like Apollo Residential Mortgage (AMTG) . Being partnered with one of the largest private-equity and alternative asset-management firms in the world gives Apollo an advantage over other mortgage-related investors. Apollo Global Management has ties to major lenders and borrowers alike, and so it sees deals no one else does. The shares are cheap at 83% of book value, and after the company's third consecutive dividend hike, the stock is yielding 11.35%. I am a big fan of Leon Black and his team, and I own several companies with ties to the private-equity leader.
I have been a long-term fan of Invesco Mortgage Capital (IVR) for similar reasons. As part of investment firm Invesco, the REIT has access to the research capabilities of WL Ross & Co. As one of the top distressed asset investors in the world, the firm, which is led by famed restructuring specialist Wilbur Ross, sees deals that competitors do not. That has benefitted Invesco Mortgage over the years. Invesco itself has an extensive real-estate department, and the REIT also benefits from that relationship. The shares are trading at 82% of net asset value and currently yield 11.6%. I have owned it for years and intend to own it for a long time.
Ellington Financial (EFC) is another mortgage REIT that I think has a substantial advantage over many of its competitors. The investment manager has extensive experience and trades the mortgage markets like hedge-fund guys. It can go long or short different segments of the mortgage-backed market, giving it far more flexibility than many competitors. Management owns about 10% of the company, which means it has some skin in the game. The executives are using their skills and experience to build their own net worth along with ours. The company has been buying back stock and has repurchased about $450 million in the past two years. The stock is trading at 85% of asset value and is yielding 13.7%. I own it and suspect I will own it for many years to come.
I expect the share price of all my mortgage-related REITs to be volatile and bounce all over the place during the period of time I own them. As long as management doesn't do anything ridiculously stupid that blows up the balance sheet, I don't mind the volatility. I take a private-equity mind-set to these high-yielding securities and intend to own them for at least five years and probably longer
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