Mortgage REITs are known for their high dividend yields, but investors should know a little more before they get started. And this is even true when it comes to a mortgage REIT like ARMOR Residential REIT (NYSE: ARR), which invests exclusively in mortgages guaranteed by government agencies like Fannie Mae and Freddie mac.
In this article, we will take a closer look at ARMOR’s investment strategy, recent developments and its history of performance.
ARMOR Residential REIT Company Profile
ARMOR Residential REIT is a mortgage REIT, founded in 2009, with a portfolio of mortgage backed securities issued or guaranteed by government sponsored agencies such as Fannie Mae and Freddie Mac. These types of securities are called agency mortgage backed securities, or agency MBS for short.
While agency MBS typically offer lower returns than other types of mortgage-backed securities such as corporate and non-agency residential securities, they also benefit from the protection provided by a government principal guarantee, which protects the business against losses in the event of borrower default. on their loan obligation.
ARMOR previously invested in a combination of agency and non-agency MBS, but completed its strategic transition to an agency MBS portfolio in August 2020. As of April 30, 2021, 100% of ARMOR’s portfolio is comprised of of residential agency mortgages, about 14% of these are multi-family loans (such as apartment buildings) and the remainder are miscellaneous single-family mortgages, most of which have fixed interest rates.
Like most mortgage REITs, ARMOR uses significant leverage to increase returns and enable its double-digit dividend yield. As of April 19, 2021, ARMOR’s leverage ratio was 6.9 to 1, indicating that for every $ 690 in debt, the company had $ 100 in net assets.
News from ARMOR Residential REIT
The biggest news in recent ARMOR history has been the COVID-19 pandemic, as has been the case with most mortgage REITs. Without going into too much detail, when the COVID-19 pandemic swept across the United States in March 2020, it plunged financial markets into a volatile roller coaster and asset values (including those of asset-backed securities mortgage) has plunged. After all, with so much uncertainty, no one knew whether we were going to see a massive wave of defaults or even a total collapse of the housing finance system.
Fortunately, such an apocalyptic scenario did not materialize, but as the value of MBS plummeted, many mortgage REITs were forced to liquidate assets at clearance prices in order to meet leverage requirements. In fact, from the end of 2019 to the first quarter of 2020, ARMOR’s total assets grew from $ 13.3 billion to $ 5.1 billion and the company recorded a loss of over $ 500 million for the quarter (remember that ARMOR’s market cap is less than $ 1 billion). As the company said, “To increase liquidity in March, ARMOR significantly reduced its portfolio of agency securities… by 68% from December 31, 2019.” I’ll cover the effect on the share price in the next section, but let’s just say it wasn’t a positive catalyst.
Following the COVID-19 pandemic, ARMOR suspended its monthly dividend payments for April and May 2020, and when the payment was reimplemented in June, it was at just over half the rate before COVID. . As you will see in the next section, ARMOR’s dividend is still not close to what it was before the pandemic. In summary, the volatility of March 2020 caused serious and lasting damage to the company and its investors.
ARMOR Residential REIT share price
Since 2010, the ARMOR Residential REIT share price has fallen by 82%, in May 2021. However, that does not say everything.
First of all, it does not include dividends. Mortgage REITs are designed to maximize income, not to produce long-term stock price appreciation. Now it’s fair to say that a decline more than 80% is a lower than average return, but the point is that it is not fair to judge the performance of a Mortgage REIT without considering total returns, which include income as well as changes in price. And ARMOR’s total return seems a little better at minus 7% since 2010.
Prior to the COVID-19 pandemic, the company was in positive territory in terms of total returns, but significantly underperformed the S&P 500 in most time frames, with the exception of last year which included the rebound post-COVID. Here’s a quick graph of ARMOR’s total returns versus the benchmark S&P 500 over the past several years: