Anyone work in MREITs? I'm looking at some presentations and see some government residential pools show a ton of holdings with 4-5.6% coupons. How would this be possible if all-in rates at asset-levels shake out to around that level, so the REIT would only be entitled to the interest, correct?
Do they show the all-in rates to illustrate what they're holding?
I'm trying understand how many of these REITs have 8-11% yields, but hold a ton of agency loans with way lower rates.
Apologies if this is an elementary question.
Couple reasons
When a REIT is valued below Net Asset Value, the dividend yield is going to look high. Let’s say a Mortgage REIT has one asset, a 100mil loan with a 10% yield, and no liabilities. They plan on distributing half of that 10% yield to investors, giving the REIT a 5% yield assuming a market cap of 100mil.
But let’s say the market values that loan at 50mil (the company has a market cap of 50mil), now that 5mil of dividends gives the REIT a 10% yield.
Reason two: Leverage. You can take out a loan to finance a loan you’re making to someone else, which juices your yield. Instead of giving someone a 100mil of your cash and asking them to pay 10 mil in interest every year, you can give them 50 mil cash and then take out a low interest loan (5%) for 50 mil from a bank. You only have 50 million of cash in the deal, but you’re collecting 7.5 mil in interest (10 mil in interest less the 2.5 mil interest you have to pay on the 50 mil 5% loan). Now the yield is 7.5 / 50 or 15%. But if you look at the company’s public filings, you’re just going to see a 100 million loan with a 10% rate
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