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Two REITs Walking a Different Path


Instead of actually managing and holding real estate, this pair holds mortgages. While the niche is small and can be risky, these pass the test.

The number of foreclosures is also falling, with the overall percentage of failings for the past two years dropping by 12.3%. Add in the Fed's heavy buying and lending, and it's no wonder that mortgage rates are low and falling some 24.95% for the same time period.

The result is that the market for mortgages is rallying, much like we've seen in the US Treasury market with the Fed buying heavily in both markets. Overall, mortgage-backed securities as tracked by JPMorgan have risen in price by more than 13.6% from the end of 2009, when the Fed really began to step into this market.

And those gains are on top of the yield earned in this market, which is significantly stronger than US Treasuries.

Take the Fed

There's money to be made here. The key is to own not only what the Fed is buying, but also what the Fed is proven to stand behind if the market turns. Buying mortgages during the turnaround and bailout has become more and more lucrative.

The easy way to participate is to buy companies that buy and own mortgages and mortgage bonds. Structured as real estate investment trusts (REITs), there are many in this segment; but not all are successful. Understanding the underlying mortgages and the structures of mortgage bonds is a specialized science. So it pays to be picky.

But it does pay. The group has performed well, with the Bloomberg Mortgage REIT index up more than 51% since the end of 2009.

There are two worth looking at within this group: MFA Financial (NYSE:MFA) and Invesco Mortgage Capital (NYSE:IVR). Both (especially MFA Financial) have proven to perform not just during the recent acceleration in profits over the past year, but also over the past few years, including the time of the more troubling market conditions.

Both trade inexpensively. MFA trades a slight discount to the book of bonds on its balance sheet. Invesco is valued right at book. Both are seeing assets grow-a positive side of the rally in the mortgage market noted above. And both carry some debt, but at a much lower rate with greater capital reserves than major US regulated banks are currently carrying.

Both continue to perform. MFA generated a return of 61.9% since the end of 2009, or an average annual return of 17.4%. Invesco generated similar returns for the period: an overall gain of 62.6%, or an average annual return of 17.6%.

MFA, with a dividend yield of 10%, should be bought ideally below $9 per share. Invesco, with a dividend yield of 12.3%, should be bought ideally below $24 per share.

Editor's Note: This article was written by Neil J. George of Liberty Investor.

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No positions in stocks mentioned.
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