Dividend yields that average about 12 percent have also lured investors seeking alternatives to corporate and government debt paying shrinking coupons. American Capital is yielding more than 15 percent. The company increased 0.8 percent to $32.78 at 4 p.m. today in New York.
Kain has applied knowledge from his experience at Freddie Mac to buy mortgage bonds that have a lower risk of refinancing, helping the firm return 17 percent this year. Since the debt typically trades above 100 cents on the dollar, homeowners taking out new loans when interest rates fall can erase the value of the securities.
The resurgence of REITs has attracted the attention of Fed officials and regulators, including the Securities and Exchange Commission, which has said it’s examining whether the companies should be allowed to continue borrowing without restrictions.
Market Forces
The concerns are overstated as REITs are limited by the quality of assets or lender confidence in how they manage their businesses, according to Kain.
“Fannie Mae and Freddie Mac were not regulated by the markets,” Kain said. “That was a key complaint which turned out to be very fair. There weren’t any market forces that were controlling the government sponsored enterprises. They could borrow money irrespective of their risk posture because of the implied guarantee” of the government, he said.
Kain’s team at American Capital, which includes longtime Freddie Mac colleagues Peter Federico and Christopher Kuehl, managed more in assets as of Dec. 31 than regional banks such as Keycorp and M&T Bank Corp. Kain is also chief investment officer of American Capital Mortgage Investment Corp., a separate REIT with $7.7 billion in assets that buys securities not backed by the government. The two companies have a staff of about 50 people, according to Wilkus.
No Business
“There are a lot of risks that need managing when you get that big,” said Jason Stewart, an analyst at Washington-based Compass Point Research & Trading LLC. “Kain and his team have managed a block of assets much larger than they are doing today. There are others that have no business having a balance sheet that big.”
Armour Residential REIT Inc., which offered 65 million shares to raise capital this quarter, is “an example of a company pushing the limit of what their infrastructure can support,” Stewart said.