HomeMost PopularWhy I Opted to Sell My Mortgage REITs: A Comprehensive Analysis

Why I Opted to Sell My Mortgage REITs: A Comprehensive Analysis

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As a seasoned investor in the real estate investment trust (REIT) market, I have recently decided to part ways with my mortgage REITs (mREITs). In this article, I will explain my rationale behind this decision and provide you with five compelling reasons why I believe mortgage REITs may not be the best investment option.

Reason #1: Horrific Track Record

The track record of the mortgage REIT sector has been rather disappointing, with average annual total returns of just 2% over the past 20 years. This pales in comparison to the returns offered by equity REITs, which have consistently outperformed their mortgage counterparts.

While mortgage REITs may provide high dividend yields, the erosion of share prices in the long run undermines their attractiveness as an investment option.

Reason #2: Broken Business Model

One of the main drawbacks of mortgage REITs is their heavy dependence on unpredictable macro factors such as interest rates and spreads. These factors often lead to leveraged bets that generate short-term gains but expose the REITs to significant losses when the macro environment changes.

Annaly Capital Management, a prominent mortgage REIT, serves as a prime example. Its historic dividend payments failed to accurately predict major macro turns, resulting in substantial losses for investors.

This unpredictability raises concerns about the sustainability and reliability of mortgage REITs’ business models. Some even argue that their business is fundamentally broken.

Reason #3: Too Much Leverage

Unlike many equity REITs, which employ relatively low levels of leverage, mortgage REITs typically rely on extensive leverage. This practice leads to boom and bust cycles, making them less attractive to investors, especially in a rising interest rate environment.

Reason #4: Significant Conflicts of Interest

Many mortgage REITs are externally managed, meaning that an outside management company oversees their operations in exchange for fees. This management structure often results in conflicts of interest, as the manager may be incentivized to prioritize their own financial gain over the best interests of the REIT and its shareholders.

In contrast, most equity REITs are internally managed, with the management team being employed directly by the REIT. This structure aligns the interests of the management and shareholders more effectively, leading to greater cost efficiencies and improved long-term performance.

Reason #5: Poor Overall Risk-to-Reward

When considering mortgage REITs as an investment option, it is crucial to weigh the high dividend yields against the associated risks. The sector’s heavy reliance on unpredictable macro factors, excessive leverage, and potential conflicts of interest make for a poor risk-to-reward profile.

While mortgage REITs may appear undervalued and offer attractive dividend yields, I believe that equity REITs provide a more favorable risk-to-reward ratio. Their business models have proven to be more consistent and less vulnerable to the aforementioned challenges faced by mortgage REITs.

In conclusion, after carefully assessing the pros and cons of investing in mortgage REITs, I have made the decision to sell my holdings in this sector. While high dividend yields may initially entice investors, the inherent risks and historical underperformance suggest that other investment options, such as equity REITs, may be more suitable for long-term growth and stability.

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