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The Right REIT at the Right Time


Are distressed mortgages now a go-to sector for investors? They have both yield and upside.


More articles keep popping up about distressed mortgages being a real go-to sector for large institutional buyers who are seeking yield and upside.

Cash Machine already has positions in mortgage REITs (or mREITs) that invest in conforming and non-conforming residential mortgage-backed securities (or RMBS)-and so far, those trades are working very well for our firm. Shares of American Capital Agency (AGNC), Two Harbors Investment (TWO), and PennyMac Mortgage (PMT) are all within a point of their 52-week highs, which says volumes in the current market.

Since adding those three residential mortgage plays, I also recommended the purchase of Newcastle Investment (NCT), which invests in residential and commercial real estate mortgages while also growing its mortgage servicing sector.

Again, the stock has been a winner to date, and is a smidgen away from its yearly high. No complaints with any of these holdings, as we're averaging dividend yields of 13.5% on them.

This month, I'm rounding out our exposure in this very attractive sector with the addition of NorthStar Realty Finance (NRF), a finance real estate investment trust that originates, acquires, and manages portfolios of commercial real estate debt, commercial real estate securities, and net lease properties.

NorthStar also engages in asset management and other activities related to real estate and real estate finance. NRF yields 11.1%.

Unlike the RMBS business that characterizes the three mREITs noted above, NorthStar is more fully engaged in what would be termed commercial mortgage-backed securities (or CMBS). The company doesn't just trade in secondary markets, but rather it originates and structures debt investments, net leases, mezzanine loans, credit tenant loans, and other collateralized debt obligations (or CDOs) that represent approximately 44% of its portfolio holdings.

It wasn't too long ago that CDOs were a toxic acronym being tossed around as the primary security blamed for much of the mortgage meltdown in 2008-2009. It isn't that CDOs weren't a good instrument as a stand-alone structured security; it's the way they were leveraged and packaged that brought about the calamity. Call it another case of a good idea that got into the hands of unchecked greed.

But here's the diamond-in-the-rough part of this investment theme: As of March 31, the principal proceeds that NorthStar could receive from its owned CDOs bonds is $706 million, of which $527 million was repurchased at an average price of $.36 on the dollar in the secondary market with a weighted average original credit rating of AA-/Aa3.

Editor's Note: This article was written by Bryan Perry of Cash Machine.

Below, find some more great investing and trading content from MoneyShow:

A Smart Way Back into Real Estate
By Stephen Leeb

A Canadian REIT Back on Track
By the Staff of Investor's Digest

Buy This REIT Now, While It's Uncool
By Bryan Perry

3 REITs Down, One to Go...Up
By Steve Mauzy

Twitter: @TopProsTopPicks
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No positions in stocks mentioned.
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