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mREITs Industry Outlook Gloomy on Funding Market Dislocations
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The Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Players in this industry provide financing for income-producing properties by investing in or originating mortgages and mortgage-backed securities (MBS). Typically, these companies focus on residential or commercial mortgage markets, although some invest in both markets through the respective asset-backed securities.
Residential mREITs mainly invest in low credit-risk agency RMBS — securities issued by government-sponsored enterprises. Nonetheless, some companies also hold non-agency or private-label RMBS, and residential mortgage loans.
Commercial mREITs invest in CMBS, mezzanine loans, sub-ordinated securities or construction loans, and might participate in loan securitizations. These securities are not backed by the government, hence, carry higher risks.
Net interest margin (NIM) — spread between interest income on mortgage assets and securities held and funding costs — is the key revenue metric for mREITs. These companies raise funds in both debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities.
Let’s take a look at the industry’s three major themes:
Mortgage market on better footing: Improved economic data and revived confidence in the economy have led to the recent stability in mortgage rates. After the interest-rate turbulence in 2019, this stability is encouraging. Per Freddie Mac, the U.S. 30-year mortgage rate fell to 3.64% on Jan 9 — the lowest in 13 weeks’ time. Low mortgage rates will likely drive loan originations for industry players. In fact, $1.91 trillion of new mortgages are projected to be funded this year. Notably, low mortgage rates boost real estate prices, and hence, increase the volume of loans. This strong demand for mortgages is anticipated to result in tighter spreads.
Interest-rate sensitivity: Managing the impact of changes in short- and long-term interest rates is at the core of mREIT operations. Since these companies borrow extensively at short-term rates and then purchase higher-yield long-term mortgage securities, unfavorable changes in interest rates can mar their NIMs. This will also likely hamper the value of mortgage assets, thereby, hindering their corporate net worth. The rapidly-changing interest-rate environment was the key theme which dominated financial markets last year. Although the current low-interest rate is driving strong originations, the same has resulted in asset write-downs and impacted mortgage service rights (MSR) valuations. Further, in mid-September, the rate on overnight general collateral repo spiked to 10%, about four times more than usual levels, due to shortage of cash available for lending. This prompted the Fed to conduct a series of operations for overnight repurchase agreements, thereby injecting significant liquidity to the funding markets.
Commercial v/s agency mREITs: Agency mREITs borrow debts that carry fixed short-term rates, while commercial mREITs often use loans which have floating rates over Libor. Hence, agency mREITs are more vulnerable to roll-over risk in a way that if the short-term interest rate is raised, it will impact the NIM of these companies. Commercial mREITs, however, match duration of assets and liabilities on their balance sheet and thus, face lesser roll-over risks. Last year, encouraging transaction activities translated into higher demand for commercial real estate debt, resulting in solid portfolio growth for commercial lenders and mREITs alike. The trend is anticipated to continue this year as well, with commercial mREITs likely to witness stellar loan growth.
Zacks Industry Rank Indicates Weak Prospects
The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #167, which places it at the bottom 34% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. The industry’s current-year earnings estimate moved 7.1% south, over the past year.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector & S&P 500
The Zacks REIT and Equity Trust industry has lagged the Zacks S&P 500 composite and the broader Zacks Finance sector over the past year. The industry has gained 4.6% during this period compared with the S&P 500’s and broader sector’s rally of 25.6% and 14.5%, respectively.
One Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month price-to-book ratio (P/BV), which is a commonly used multiple for valuing mREITs, the industry is currently trading at 1.31X compared with the S&P 500’s 4.46X. It is also below the sector’s trailing-12-month P/BV of 2.82X.
Price-to-Book TTM
Over the past five years, the industry has traded as high as 1.34X, as low as 0.87X, and at the median of 1.15X.
Bottom Line
Near-term growth prospects of mREITs are uncertain, as volatility in the repo markets have escalated funding costs and dampened performance of industry players. Although the Fed responded to the spike in the repo rates, it seems the market has not shrugged off the possibility of another period of volatility. In addition, the central bank’s resolve to implement a more permanent liquidity boost — a standing repo facility or another round of quantitative easing — remains a guessing game.
Although we don’t have any stocks in the industry with a Zacks Rank of 1 (Strong Buy), we are presenting three stocks carrying a Zacks Rank #2 (Buy) or Zacks Rank #3 (Hold) that investors may consider, at present.
New York Mortgage Trust, Inc. (NYMT - Free Report) : The company is focused on owning and managing a leveraged portfolio of residential mortgage securities and a mortgage origination business. The mortgage portfolio is comprised largely of prime adjustable-rate and hybrid mortgage loans and securities, much of which, over time will be originated by the company’s wholly-owned mortgage origination business, The New York Mortgage Company. The stock currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2020 net income per share is pegged at 75 cents, suggesting year-over-year growth of 12.9%. Also, revenues for 2020 are expected to surge 72.5% to $209.3 million.
Price and Consensus: NYMT
Redwood Trust, Inc. (RWT - Free Report) : This Zacks #2 Ranked company is a specialty finance company that focuses on making credit-sensitive investments in single-family residential, multi-family mortgages and related assets. The company is also engaged in mortgage banking activities. The Zacks Consensus Estimate for the ongoing year’s earnings per share (EPS) remained unrevised at $1.71 in a month’s time. The company’s earnings and revenues are expected to improve 14% and 46.5%, respectively, this year.
Price and Consensus: RWT
Exantas Capital Corp. : The company invests in commercial real estate-related assets such as whole loans, CMBS and CRE equity investments. It carries a Zacks of 3, at present. The Consensus EPS estimate for current year remained unchanged at $1.23, in the past 60 days. However, the figure indicates a year-over-year improvement of 9.8%. Additionally, the Zacks Consensus Estimate for the current-year revenues is pinned at $66.7 million, representing 6.4% growth.
Price and Consensus: XAN
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mREITs Industry Outlook Gloomy on Funding Market Dislocations
The Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Players in this industry provide financing for income-producing properties by investing in or originating mortgages and mortgage-backed securities (MBS). Typically, these companies focus on residential or commercial mortgage markets, although some invest in both markets through the respective asset-backed securities.
Residential mREITs mainly invest in low credit-risk agency RMBS — securities issued by government-sponsored enterprises. Nonetheless, some companies also hold non-agency or private-label RMBS, and residential mortgage loans.
Commercial mREITs invest in CMBS, mezzanine loans, sub-ordinated securities or construction loans, and might participate in loan securitizations. These securities are not backed by the government, hence, carry higher risks.
Net interest margin (NIM) — spread between interest income on mortgage assets and securities held and funding costs — is the key revenue metric for mREITs. These companies raise funds in both debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities.
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Indicates Weak Prospects
The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #167, which places it at the bottom 34% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. The industry’s current-year earnings estimate moved 7.1% south, over the past year.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector & S&P 500
The Zacks REIT and Equity Trust industry has lagged the Zacks S&P 500 composite and the broader Zacks Finance sector over the past year.
The industry has gained 4.6% during this period compared with the S&P 500’s and broader sector’s rally of 25.6% and 14.5%, respectively.
One Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month price-to-book ratio (P/BV), which is a commonly used multiple for valuing mREITs, the industry is currently trading at 1.31X compared with the S&P 500’s 4.46X. It is also below the sector’s trailing-12-month P/BV of 2.82X.
Price-to-Book TTM
Over the past five years, the industry has traded as high as 1.34X, as low as 0.87X, and at the median of 1.15X.
Bottom Line
Near-term growth prospects of mREITs are uncertain, as volatility in the repo markets have escalated funding costs and dampened performance of industry players. Although the Fed responded to the spike in the repo rates, it seems the market has not shrugged off the possibility of another period of volatility. In addition, the central bank’s resolve to implement a more permanent liquidity boost — a standing repo facility or another round of quantitative easing — remains a guessing game.
Although we don’t have any stocks in the industry with a Zacks Rank of 1 (Strong Buy), we are presenting three stocks carrying a Zacks Rank #2 (Buy) or Zacks Rank #3 (Hold) that investors may consider, at present.
You can see the complete list of today’s Zacks #1 Rank stocks here.
New York Mortgage Trust, Inc. (NYMT - Free Report) : The company is focused on owning and managing a leveraged portfolio of residential mortgage securities and a mortgage origination business. The mortgage portfolio is comprised largely of prime adjustable-rate and hybrid mortgage loans and securities, much of which, over time will be originated by the company’s wholly-owned mortgage origination business, The New York Mortgage Company. The stock currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2020 net income per share is pegged at 75 cents, suggesting year-over-year growth of 12.9%. Also, revenues for 2020 are expected to surge 72.5% to $209.3 million.
Price and Consensus: NYMT
Redwood Trust, Inc. (RWT - Free Report) : This Zacks #2 Ranked company is a specialty finance company that focuses on making credit-sensitive investments in single-family residential, multi-family mortgages and related assets. The company is also engaged in mortgage banking activities. The Zacks Consensus Estimate for the ongoing year’s earnings per share (EPS) remained unrevised at $1.71 in a month’s time. The company’s earnings and revenues are expected to improve 14% and 46.5%, respectively, this year.
Price and Consensus: RWT
Exantas Capital Corp. : The company invests in commercial real estate-related assets such as whole loans, CMBS and CRE equity investments. It carries a Zacks of 3, at present. The Consensus EPS estimate for current year remained unchanged at $1.23, in the past 60 days. However, the figure indicates a year-over-year improvement of 9.8%. Additionally, the Zacks Consensus Estimate for the current-year revenues is pinned at $66.7 million, representing 6.4% growth.
Price and Consensus: XAN
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>