Mortgage REITs May Be Safe to Buy

NEW YORK (TheStreet) -- Let me make it perfectly clear from the start. I don't know where the employment numbers are going to end up tomorrow or a month from tomorrow. Yet I know from my contacts on the Street that there are lots of under-employed people.

For those of you who have the latest phobia -- fear of tapering -- about what the Fed may do regarding their massive bond-buying program and QE-4ever, let me put your mind at ease. As one of the nation's most honored commander-and-chiefs stated, "We have nothing to fear but fear itself."

The good news is that taper-phobia has been somewhat responsible for putting some darn good publicly-traded companies in the "taper toilet" for the past few weeks. One sub-sector that has been brutalized is the mortgage REITs, and frankly my dear, it's nothing short of ironic.

For example take the biggest and one of the best-managed, Annaly Capital Management AnnalyCapital ( NLY) which has been around for 17 years. That means they have experience navigating through treacherous financial waters. AnnalyCapital also owns securities backed by the Federal Reserve.

The company invests in mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures and other securities representing interests in or obligations backed by pools of mortgage loans. It also invests in agency debentures issued by Federal Home Loan Bank, Freddie Mac, and Fannie Mae.

It also offers diversified real estate, asset management, and some other money-making financial services. If you're even the slightest bit interested in investing in this sub-sector, visit Annaly.com.

Speaking of a great deal, whenever you're incented by the Federal Reserve and the government's "terrific trio" of sponsored enterprises (Federal Home Loan Bank, Freddie Mac, and Fannie Mae) you're downside risk is mitigated. That's why mortgage REITs invest mostly in government-guaranteed debt obligations.

AnnalyCapital does get involved in originating and acquiring commercial mortgage debt including commercial mortgage loans, commercial mortgage-backed securities, B-notes, mezzanine loans, preferred equity and other commercial real estate-related debt investments. This is the more risky "stuff."

That's precisely where good management comes into play. They have to measure and weigh every one of these commercial deals and see if the risk is worth the reward. They judge the property types to make sure they suit the current economic climate both nationally and regionally.

You have to know this business well to succeed at it, and you'd better be a good number cruncher. When it comes to the commercial side of the business that's even truer and that's one reason AnnalyCapital, May 23, completed its acquisition of and merger with CreXus Investment.

CreXus acquires, manages and finances, directly or through its subsidiaries, commercial mortgage loans and other commercial real estate debt, commercial real property, commercial mortgage-backed securities and other commercial and residential real estate-related assets. CreXus will be renamed Annaly Commercial Real Estate Group following the merger.

Again, don't take my word for it, just because AnnalyCapital is paying a dividend yield-to-price of more than 13%. Don't be too overwhelmed that the chairman and CEO of AnnalyCapital, Ms. Wellington Denahan-Norris owns more than one million shares as of May 8, and her predecessor's estate still owns more than 2.7 million shares.

Do keep in mind that the shares of companies like AnnalyCapital are trading close to its 52-week low. So are its competitors like Invesco Mortgage Capital InvescoMortgage ( IVR). You can read TheStreet's rating and opinion of IVR then judge for yourself if now is a good time to begin accumulating shares of yet another dividend that yields around 13%.

A less well-known mortgage REIT happens to be one I recently featured in an article. WesternAssetMortgage ( WMC) is currently is yielding close to 20%. That's not a misprint and should rivet your attention for awhile longer.

WMC is managed by Western Asset Management Company, a global leader in diversified fixed-income management since 1971. As of March 31, the firm had approximately $459.4 billion in assets under management.

This number included $58.3 billion in total mortgage exposure, of which $39.2 billion was invested in agency RMBS (residential mortgage-backed securities), $8.8 billion in non-agency RMBS, $1.3 billion in CMBS, and $8.8 billion in ABS. This fits with its "core investment strategy" which is to be focused on agency RMBS.

WMC's management teams wrote on its web site that, "We may opportunistically supplement our portfolio with RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, or non-agency RMBS, commercial mortgage-backed securities and other asset-backed securities. My aforementioned article goes into more detail as to why.

Their stated goal is to provide attractive risk-adjusted returns to the investors over the long-term while taking into consideration a variety of market conditions and economic cycles. As I wrote in my article the share price is now currently below the "adjusted net book value of $19.42 as of March 31."

WMC debuted as a publicly-traded company in May 2012. Its 52-week high of $24.72 was established in September 2012. As you look at the one-year chart below you'll see what happened the last time shares of WMC corrected down to current price levels. Notice the rise in quarterly revenue too. WMC Chart WMC data by YCharts

There's plenty to like about the mortgage REITs right now. The best and brightest will survive and thrive. If you're still suffering from "taper-phobia" just consider the Fed's objectives and determination when it comes to decreasing unemployment and keeping the economy from deflating.

We may have already seen the bottom for mortgage REITs and if not it's probably is quite near. Buy low and then buy more if the shares go even lower. Also, spread your risk around by buying more than one company, and by all means do your own careful due diligence in choosing the ones where you invest.

At the time of publication the author is long NLY and WMC.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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