Gundlach Steers Clear of Mortgage REITs

Investors should avoid real estate investment trusts that buy U.S. mortgage-backed securities because they’ll continue to cut dividends as homeowners refinance mortgages at lower rates, said DoubleLine Capital LP’s Jeffrey Gundlach.

“I expect further dividend cuts in the quarters ahead and would avoid MBS REITS for the time being,” Gundlach, who heads the $21 billion Los Angeles-based money manager, said in an e- mailed statement.

Mortgage REITs including Annaly Capital Management Inc. (NLY), Hatteras Financial Corp. (HTR) and Capstead Mortgage Corp. announced dividend reductions this month, while rivals American Capital Agency Corp. (AGNC), Two Harbors Investment Corp. (TWO) and MFA Financial Inc. maintained their quarterly payouts. The industry’s shares have returned 0.65 percent over the past 12 months, assuming reinvested dividends, declining 5.7 percent since mid-year as loan rates fell to record lows, according to a Bloomberg index. (BBREMTG)

“I sold all MBS REITS a few months back,” said Gundlach, whose main bond fund has beaten 99 percent of rivals this year, according to data compiled by Bloomberg. “I figured the dividends were going to be cut.”

The trusts are lowering payouts because prepayments are increasing on government-backed securities, most of which are carried by REITs above 100 cents on the dollar, which means “their yields are going lower,” Gundlach said.