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mREIT Prospects Dim as Coronavirus Crisis Overwhelms Industry
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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.
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:
The economic and financial impacts of the coronavirus crisis have been substantially affecting mortgage markets in a number of ways. Significant dislocations in the mortgage and credit markets flared up market volatility as well as brought in a liquidity freeze across the mortgage market. Specifically, as the pandemic’s economic impact took an acute shape, cash preservations caused indiscriminate sales of risky assets. This resulted in a decline in prices of MBS and wider spreads. Amid these, mREITs — which hold the securities — witnessed a fall in book values. A decline in collateral values also triggered margin calls. Several companies have been able to meet margin calls by selling assets, while others have entered into forbearance discussions with lenders. Additionally, some residential mREITs face risks relating to higher servicing advance obligations. These issues continue to drag the industry into murkier waters.
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 clip their NIMs. This will also likely hamper the value of mortgage assets, thereby, affecting their corporate net worth. This March, the Fed lowered the federal funds rate target by 150 basis points to the current target range of 0-0.25%. With interest rates at historically-low levels, there is an increased extension risk for mREITs and the mortgage market as a whole. While the prepayment speed is generally high during low interest-rate periods, disruptions in the housing market and mortgage origination operations related to COVID-19 will likely curb prepayment activities in the days to come.
REITs typically invest in Agency and non-Agency MBS. Agency MBS are backed by mortgages on single-family homes. Principal and interest payments on these MBSs are backed by Fannie Mae and Freddie Mac (also known as Government Sponsored Agencies, or GSEs). These securities also dominate most mREITs’ portfolio holdings. Additionally, Agency CMBS are backed by multi-family mortgages and issued by the GSEs. Non-Agency MBS or private-label MBS, are issued by banks and entities outside of GSEs. These securities do not have a government backing. The liquidity support provided by the central bank amid this looming crisis, particularly its significant Agency MBS purchases, has improved Agency MBS valuations and stabilized the broader mortgage market. The non-Agency MBS market, however, did not benefit from this intervention and consequently, mREITs with significant credit exposure have been stressed during these unprecedented times. Companies with Agency CMBS on their balance sheets have also been plagued with funding pressures amid illiquidity concerns.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #190, which places it at the bottom 25% 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 the 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 44.3% 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 & the S&P 500
The Zacks REIT and Equity Trust industry has lagged the S&P 500 composite and the broader Zacks Finance sector for the past year.
The industry has plunged 51.7% during this period compared with the S&P 500’s and the broader sector’s decline of 2.3% and 23.9%, 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 0.61X compared with the S&P 500’s 3.74X. It is also below the sector’s trailing-12-month P/BV of 1.98X. Over the past five years, the industry has traded as high as 1.34X, as low as 0.44X, and at the median of 1.16X.
Price-to-Book TTM
Bottom Line
In light of the coronavirus pandemic and the resultant macroeconomic uncertainties, credit and operational headwinds are expected to persist in the near term. This will likely cause havoc in mortgage originations and refinance processes. We are of the view that in this market mayhem, companies will manage portfolios with a liquidity-first approach, with a focus to de-risk across asset classes and protect book values.
Hence, we anticipate seeing capital-allocation strategy to be weighted primarily in the Agency market, and these near-term liquidity-driven decisions will dictate future portfolio returns and preserve shareholder value.
We are presenting one stock each with a Zacks Rank of 1 (Strong Buy) and a Zacks Rank #2 (Buy) that investors can consider betting, at present, as well as a Zacks #3 (Hold) Ranked stock, which they might keep on their radar. You can see the complete list of today’s Zacks #1 Rank stocks here.
NexPoint Real Estate Finance Inc. (NREF - Free Report) : NexPoint Real Estate Finance originates, structures and invests in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multi-family CMBS. The stock’s Zacks Consensus Estimate for the current-year earnings per share (EPS) has been revised 37% upward to $1.48 over the past month. Further, the 2021 estimate for earnings per share of $1.77 calls for a year-over-year improvement of 19.3%. The stock currently flaunts a Zacks Rank of 1.
Price and Consensus: NREF
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI - Free Report) : Hannon Armstrong Sustainable Infrastructure Capital provides debt and equity financing for infrastructure projects. Its infrastructure projects include Energy Efficiency Projects, Clean Energy Projects and Other Sustainable Infrastructure Projects. The company serves federal, state and local governments, commercial, utility, and industrial markets. The Zacks Consensus Estimate for 2020 EPS moved 1.3% north to $1.45 in a week’s time. Moreover, the favorable estimate revision calls for year-over-year growth of 3.6%. It holds a Zacks Rank of 2, presently.
Price and Consensus: HASI
Safehold Inc. (SAFE - Free Report) : Formerly known as Safety, Income & Growth Inc., the company is engaged in acquiring, managing and capitalizing ground leases. Ground leases are long-term contracts between the company and a leaseholder or tenant.The company aims to achieve steady and growing income as well as deliver long-term capital appreciation to its shareholders. The stock’sZacks Consensus Estimate for the ongoing-year net income per share moved up to $1.37, over the past week. Further, the favorable estimate revision suggests a year-over-year jump of 53.9%. It carries a Zacks Rank of 3, at present.
Price and Consensus: SAFE
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2020?
Last year's 2019 Zacks Top 10 Stocks portfolio returned gains as high as +102.7%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.
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mREIT Prospects Dim as Coronavirus Crisis Overwhelms Industry
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.
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 Bleak Prospects
The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #190, which places it at the bottom 25% 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 the 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 44.3% 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 & the S&P 500
The Zacks REIT and Equity Trust industry has lagged the S&P 500 composite and the broader Zacks Finance sector for the past year.
The industry has plunged 51.7% during this period compared with the S&P 500’s and the broader sector’s decline of 2.3% and 23.9%, 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 0.61X compared with the S&P 500’s 3.74X. It is also below the sector’s trailing-12-month P/BV of 1.98X. Over the past five years, the industry has traded as high as 1.34X, as low as 0.44X, and at the median of 1.16X.
Price-to-Book TTM
Bottom Line
In light of the coronavirus pandemic and the resultant macroeconomic uncertainties, credit and operational headwinds are expected to persist in the near term. This will likely cause havoc in mortgage originations and refinance processes. We are of the view that in this market mayhem, companies will manage portfolios with a liquidity-first approach, with a focus to de-risk across asset classes and protect book values.
Hence, we anticipate seeing capital-allocation strategy to be weighted primarily in the Agency market, and these near-term liquidity-driven decisions will dictate future portfolio returns and preserve shareholder value.
We are presenting one stock each with a Zacks Rank of 1 (Strong Buy) and a Zacks Rank #2 (Buy) that investors can consider betting, at present, as well as a Zacks #3 (Hold) Ranked stock, which they might keep on their radar. You can see the complete list of today’s Zacks #1 Rank stocks here.
NexPoint Real Estate Finance Inc. (NREF - Free Report) : NexPoint Real Estate Finance originates, structures and invests in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multi-family CMBS. The stock’s Zacks Consensus Estimate for the current-year earnings per share (EPS) has been revised 37% upward to $1.48 over the past month. Further, the 2021 estimate for earnings per share of $1.77 calls for a year-over-year improvement of 19.3%. The stock currently flaunts a Zacks Rank of 1.
Price and Consensus: NREF
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI - Free Report) : Hannon Armstrong Sustainable Infrastructure Capital provides debt and equity financing for infrastructure projects. Its infrastructure projects include Energy Efficiency Projects, Clean Energy Projects and Other Sustainable Infrastructure Projects. The company serves federal, state and local governments, commercial, utility, and industrial markets. The Zacks Consensus Estimate for 2020 EPS moved 1.3% north to $1.45 in a week’s time. Moreover, the favorable estimate revision calls for year-over-year growth of 3.6%. It holds a Zacks Rank of 2, presently.
Price and Consensus: HASI
Safehold Inc. (SAFE - Free Report) : Formerly known as Safety, Income & Growth Inc., the company is engaged in acquiring, managing and capitalizing ground leases. Ground leases are long-term contracts between the company and a leaseholder or tenant.The company aims to achieve steady and growing income as well as deliver long-term capital appreciation to its shareholders. The stock’sZacks Consensus Estimate for the ongoing-year net income per share moved up to $1.37, over the past week. Further, the favorable estimate revision suggests a year-over-year jump of 53.9%. It carries a Zacks Rank of 3, at present.
Price and Consensus: SAFE
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2020?
Last year's 2019 Zacks Top 10 Stocks portfolio returned gains as high as +102.7%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.
Access Zacks Top 10 Stocks for 2020 today >>