Rising funding costs and narrowing yield spreads are forcing mortgage REITs to rely on thin earnings coverage, putting high-yield payouts at risk of further cuts.
Arbor Realty already cut its dividend 43% to $0.17, but distributable earnings of $0.10 still fall short, with $1.07 billion in non-performing assets pressuring payouts further.
ARMOUR's Q2 distributable earnings of $0.72 exactly match its quarterly payout, giving coverage of 1.0x and no cushion, with management language signaling a dividend under review.
Invesco Mortgage's Q2 EAD of $0.36 exactly matches its $0.36 quarterly payout, with net interest margin compressing to 2.82% and leverage at 9x, leaving no cushion.
AGNC's net spread and dollar roll income fell to $0.40 per share from $0.42, and with a 13-day repo maturity, the payout requires spreads to hold at current levels.
Orchid Island's payout was already cut to $0.10 monthly, and with repo cost at 3.80% versus RMBS yield of 5.74%, the dividend remains vulnerable to spread narrowing.
Dynex's Q2 EAD of $0.36 per share covers its quarterly $0.51 payout with a 1.17% net interest spread, but 8.1x leverage and $391M ATM issuance increase downside risk if spreads compress.
Mortgage REITs are struggling as the 10-year minus 2-year Treasury spread hits a 1-year low of 0.27%, squeezing net interest margins. With many firms operating at high leverage and thin earnings coverage, analysts warn that dividend sustainability is increasingly at risk across the sector.
Mortgage REITs rely on the spread between short-term borrowing costs and long-term asset yields. As this spread narrows and funding costs remain elevated, the net interest margin compresses, leaving less profit to cover dividend distributions.