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Javelin Mortgage Investment Corp (JMI): This 18% Yield Comes With Headwinds

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Javelin Mortgage Investment Corp (NYSE:JMI) might be a small and young mortgage real estate investment trust (mREIT), but its 17.6% dividend yield is attractive enough to lure investors. However, before being enticed by the elevated dividend yield, I recommend looking at some of the headwinds mentioned in this article that JAVELIN is facing.

Javelin Mortgage Investment Corp (NYSE:JMI)

It’s in the family

Since Javelin Mortgage Investment Corp (NYSE:JMI) is a relatively new mortgage REIT, I though its description and relations with other mREITs could be of some value to investors. JAVELIN had no operations before June 18, 2012, which means it’s only one year old; it is being managed by the same external manager who manages ARMOUR Residential REIT, Inc. (NYSE:ARR). So, JAVELIN and ARMOUR are sisters since October 2012, when JAVELIN completed its IPO.

While ARMOUR is a pure-play mREIT, Javelin Mortgage Investment Corp (NYSE:JMI) is classified as a hybrid mREIT. JAVELIN has a target to allocated at least 60% of its equity to residential mortgage backed securities for which any of the government Agencies guarantee principal and interest payments (Agency RMBS). Therefore, Agency RMBS would be the company’s largest holdings, meaning the company would be less exposed to default risk. Among other investments are non-Agency MBS, CMBS and other mortgage investments.


I will jump straight to the headwinds being faced by JAVELIN and other pure-play mREITs.

One of the major risks being faced by mREITs is Fed’s intervention in the Agency MBS markets. The Fed might be pausing or unwinding its asset purchase program any time soon. In such a scenario, JAVELIN’s book value could face significant downward pressure as the Fed has been a large Agency MBS buyer, which kept the MBS yields low. As soon as the Fed leaves, you can expect volatility in the Agency MBS yields. Further, if the Fed decides to raise the short-term rates, Javelin Mortgage Investment Corp (NYSE:JMI)’s funding (1.03%) and hedging costs could increase causing pressure on spread of 1.96% and ROE.

Even if the Fed decides to exit the Agency MBS market, the government sponsored HARP program will remain intact. Therefore, you can expect elevated prepayments in the mortgage market, which will continue to put downward pressure Agency MBS yields. You can expect HARP to continue in the near to intermediate term. During this time, you can expect JAVALIN’s reported CPR of 4.7% (for its Agency portfolio) to go up further.

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