Real estate investment trusts, or REITs, are a great source of passive income as they are required by law to distribute at least 90% of their taxable income in the form of dividends. As a result, REITs typically have higher yields than the broader market (the S&P 500 Index yields 1.7% currently).

Of course, along with high yields can come high risk. This is especially true for mortgage REITs. These trusts purchase mortgages and then use the monthly mortgage payments to distribute dividends. Mortgage REITs typically borrow money to acquire mortgages, which makes them highly leveraged. As a result, their 10%+ dividends should be considered highly risky.

For investors willing to take the risk, these 3 mortgage REITs have high yields and could generate strong total returns.

Ares Commercial Real Estate (ACRE)

Ares Commercial Real Estate Corporation is a specialty finance company primarily engaged in originating and investing in commercial real estate (“CRE”) loans and related investments. The company is externally managed by a subsidiary of the publicly traded Ares Management Corporation (NYSE: ARES), a leading global alternative asset manager. ACRE generated around $170 million in interest income last year and is headquartered in New York, New York.

The company’s loan portfolio (98% of which are senior loans) comprises 53 market loans across 8 asset types, with an outstanding principal balance of $2.2 billion. Around 59% of the loans are tied to multifamily, office, and mixed-use properties. In terms of geographical diversification, ACRE’s highest exposure is in the Southeast, West, and Midwest, which account for 23%, 14%, and 15% of the total principal balance, respectively.

On May 2nd, 2023, ACRE reported its Q1 results for the period ending March 31st, 2023. Interest income came in at $49.5 million, 48.2% higher year-over-year, driven by incremental investment activity and the positive sensitivity of ACRE’s floating rate loans to rising interest rates. However, interest expense also rose by 91.6% to $23.0 million. Further, no revenues from ACRE’s previously owned real estate were recognized amid the sale of these assets. Total revenues (interest income - interest expenses) grew by just 10.4% to $26.5 million.

Excluding the effect related to the provision for credit losses, distributable EPS came in at $0.28. Book value per share stood at $13.15 at the end of the year. For FY2023, we expect distributable EPS of $1.35. Note that from FY2021’s beginning, the company has been paying an additional supplemental dividend of $0.02/quarter – resulting in FY2021’s and FY2022’s $1.40 in dividends. The base annual dividend rate remains at $1.32 per share, representing a nearly 13% yield.

Annaly Capital Management (NLY)

Annaly invests in and finances residential and commercial assets, including agency MBS, non-agency residential mortgage assets, and residential mortgage loans. Annaly is one of the larger mortgage REITs in the industry, with a $10 billion market capitalization. Annaly invests in and finances residential and commercial assets.

The trust invests in various types of agency mortgage-backed securities, non-agency residential mortgage assets, and residential mortgage loans. It also originates and invests in commercial mortgage loans, securities, and other commercial real estate investments. Annaly provides financing to private equity-backed middle market businesses and operates as a broker-dealer.

On April 26th, 2023, NLY announced its financial results for the first quarter. Annaly Capital Management reported a GAAP net loss of $1.79 per average common share in Q1 2023. The company generated earnings available for distribution of $0.81 per average common share. Annaly had an economic return of 3.0% for the quarter and book value per common share of $20.77.

Its total assets were $85.5 billion, including $77.6 billion in highly liquid Agency portfolio. Annaly's GAAP leverage was 5.9x and economic leverage was 6.4x. The company also priced four whole loan securitizations totaling $1.5 billion in proceeds. NLY shares yield 12.5% currently.

KKR Real Estate Finance Trust (KREF)

KKR Real Estate Finance Trust is a real estate finance company that engages primarily in originating and acquiring transitional senior loans secured by institutional-quality commercial real estate (“CRE”) properties. These senior loans are originally owned and operated by experienced and well-capitalized sponsors located in liquid markets with strong underlying fundamentals.

The company has an $8.0 billion purpose-built portfolio of senior loans that’s primarily secured by multifamily and office properties owned by high-quality sponsors. KREF generates around $185 million in net interest income and is headquartered in New York, New York.

 On April 24th, 2023, KREF reported its Q1-2023 results for the quarter ending March 31st, 2023. For the quarter, total net interest income grew by 14.2% year-over-year to $46.6 million, with the company originating and funding $203.6 million related to loans closed in previous quarters. Distributable earnings came in at $33.1 million, or $0.48/share, vs. $12.4 million, or $0.18/share, in Q4-2022.

During the quarter, the company collected 100% of interest payments due on its loan portfolio, which, according to management, now has a weighted average risk rating of 3.2 (on a five-point scale). The company’s floating rate loan portfolio is now benefiting from rising rates amid a rotation out of higher rate-floor loans.

Since the company’s IPO, KREF has rapidly grown its loan portfolio by borrowing at lower rates and issuing shares with a lower cost of equity than the spreads it receives as net interest income from its loan portfolio. While the strategy has worked successfully so far, KREF’s future profitability is susceptible to changes in interest rates, with 100% of its portfolio attached to floating rates. Based on its current portfolio composition, a 0.5% and a 1.0% increase in one-month LIBOR would boost the quarterly net interest income per share by $0.08 and $0.16, respectively.

The ongoing rising-rates environment could benefit KREF, assuming its own financing remains cheap. Consequently, we are forecasting a modest earnings growth ahead of 1.5% per year. Shares currently yield 13%.
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Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.