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JakilaTheHun (99.91)

Performance of mREITs vs. Other Asset Classes



August 04, 2011 – Comments (11) | RELATED TICKERS: NLY , MFA , VNO

Due to my own cautiousness regarding the market right now, I have shifted a greater percentage of assets into mortgage REITs (mREITs). My basic thesis is that the US debt ceiling deal, coupled with eurozone problems, is going to lead to a retraction of money in the real economy that will result in interest rates remaining subdued in the US. This will make mREITs an attractive investment class. In my previous article, I noted four mREITs with significant insider buying that I particularly like, including MFA Financial (MFA).

This push into mREITs has led me to examine how well they have performed versus other asset classes in the past, particularly other dividend-paying stocks. I decided to look at the performance of Annaly Capital (NLY) and MFA Financial over a 14-year period.

The reason I chose MFA and NLY is primarily because these are the only two major mREITs I have found a lot of long-term data on. For this reason, there is some selection bias here, so it’s important to note that these two securities do not represent the performance of a broader class of mREITs. In any case, I compared both stocks to US treasury bonds, the S&P 500, the Russell 2000, gold, commercial property REITs, and utility and energy stocks over the same period of time.

My selection of stocks for this exercise includes Vornado Realty Trust (VNO), Simon Property Group (SPG), and Cousins Properties (CUZ) in the commercial REIT sector. For oil/gas/energy stocks, I took at a look at dividend-stalwart Exxon (XOM). For utilities, I examined Excelon (EXC) and NextEra Energy (NEE), which was formerly known as Florida Power & Light.

My methodology for this exercise was to assume that the investor reinvests all dividends back into the common stock at the end of each calendar year. For instance, if XYZ company pays $1.00 in dividends in 2000, and the stock sells for $10.00 on December 31, 2000, then we would buy 1/10 of a share of XYZ company at that date.

One assumption I should mention is that I calculated returns through the end of 2011, based on the assumption that current prices and dividends would hold. Quite simply it was easier to calculate 14-year returns rather than 13.58333-year returns.

To view the result, click below:

Results Chart 

The Results

While I expected NLY to perform well, I was rather surprised to see that it outperformed every other security on the list by a long shot. With a 938% compounded return, it beats out second place Simon Property Group by a considerable amount. This is not a criticism of SPG, as its performance was quite outstanding at 651%; particularly impressive given the real estate market crash.

MFA Financial, likewise, performed well with a 423% compounded total return. That puts it in fifth place on this list, only trailing NLY, SPG, EXC at 463%, and gold, which only recently passed MFA with a 464% return.

While both MFA and NLY performed relatively well, it’s important to remember that most securities on this list performed well. I’ve deliberately selected well-known companies that generally have good track records. MFA and NLY held their own against these companies.

Versus the Market Indices

During my 14-year timeframe, the S&P 500 returned a dismal 69.4%, less than the 83.5% performance of the 10-year Treasury bond. I estimated the return on the Russell 2000 to be a bit higher, around 124%.

Exxon and NextEra Energy both outperform both indexes by a considerable amount with 238% and 205% returns, respectively. So even if they are some of the lesser performers on the list, they still did phenomenally well compared to the broader market. This re-emphasizes the fact that this isn't an arbitrary group; NLY and MFA perform well against some of the best-of-the-best. Their performances look even more impressive versus the broader market indices in the same time frame.

While I do not believe you can say this represents how mREITs overall have performed (as many mREITs have gone the way of the dodo in the past few years), it does show how a well-run mREIT can create a ton of shareholder value over a long period of time.

Disclosure: I am long MFA.

11 Comments – Post Your Own

#1) On August 04, 2011 at 4:22 PM, JakilaTheHun (99.91) wrote:

I don't think I've seen one investment related blog in the past few days make the top 5.  Everything's been political.  Not that I mind the occasional political stuff, if it's intelligent, but it is an investment site, after all.

Let's see if I can at least crack the top 5 blogs. ;)

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#2) On August 04, 2011 at 4:29 PM, binve (< 20) wrote:


Both this post and your last post on mREITs were very good. Thanks for the write up and sharing!

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#3) On August 04, 2011 at 4:35 PM, EnigmaDude (51.69) wrote:

+1 rec for blogging about investing! 

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#4) On August 04, 2011 at 5:01 PM, Option1307 (30.43) wrote:


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#5) On August 04, 2011 at 5:27 PM, TMFAleph1 (93.32) wrote:

Be aware, as I warned last month, that Annaly is entirely dependent on repo financing and that if that market becomes unstuck, things will go very badly, very quickly for Annaly and its shareholders. Here is what happened last Friday, when the repo markets began to reflect the uncertainty concerning the extension of the debt ceiling:

At the height of the debt-ceiling uncertainty on Friday, a handful of mortgage real-estate investment trusts suffered a mini flash crash. Shares of Annaly Capital Management plummeted 19% in a few minutes in the morning, and American Capital Agency fell 22% before recovering the lost ground. The two REITs invest in government-backed mortgage securities using huge amounts of short-term debt.
          --Debt Ceiling's Overlooked Flash Crash, WSJ, Aug. 2

When I published the article readers told me that I was "fighting the last war" and that I had "an axe to grind."

In the mREIT sector, I much prefer Redwood Trust (NYSE: RWT). The yield isn't as impressive, but the company is almost entirely equity-financed.

Alex Dumortier

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#6) On August 04, 2011 at 5:38 PM, JakilaTheHun (99.91) wrote:

Good points, BullnBear. 

Though, I felt that last week's correction was overdone based on overblown fears.  I'm actually not long on NLY for various reasons.  I prefer TWO, MFA, DX, and HTS.

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#7) On August 04, 2011 at 6:54 PM, rd80 (96.69) wrote:

I did a double take mid-day Friday and added to HTS on the dive.  Missed the bottom, but my only regret is not buying more.

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#8) On August 04, 2011 at 8:28 PM, Valyooo (32.83) wrote:

I still dont get why agnc gets no love...its the best of breed IMO

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#9) On August 05, 2011 at 12:19 AM, motleyanimal (38.33) wrote:

I like Annaly and her ugly stepsister Chimera too.

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#10) On August 05, 2011 at 12:27 PM, ikkyu2 (98.54) wrote:

When analyzing long-term data on mREITs through 2011, I will continue to suggest that interested readers look at the performances of NovaStar and New Century Financial to date.  These mREITS are leaders in their field for the last few decades and their performance to date reflects my expectations about the entire sector.

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#11) On August 05, 2011 at 4:32 PM, NumbersDontLie (32.44) wrote:

"One assumption I should mention is that I calculated returns through the end of 2011, based on the assumption that current prices and dividends would hold. Quite simply it was easier to calculate 14-year returns rather than 13.58333-year returns."

This can have a substantial effect when you are comparing total returns over a long period, especially if you are comparing to sectors like energy that tend to have a cyclical nature. (A mere 1% rise in the most recent period for a security that is already up substanitallyin the previous n years, can have a tremendous effect.) This is where a graph over time (perhaps with greater resolution than 1 year) can be helpful.

I'm sure you just wanted to whip up your spreadsheet quickly for comparison, but if you did want to calculate the annualized returns without having to round for the rest of 2011 you can do so easily:

Annualized return % = ((1 + total return %) ^ (12 / # of months)) - 1

Nevertheless, your chart still makes your point that mREITs can be a great portfolio booster.

I always enjoy your posts, Jak.


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