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3 Promising mREIT Stocks to Buy From the Prospering Industry

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The Zacks REIT and Equity Trust industry is set to record a robust recovery thanks to the Fed’s asset purchase program and the fiscal intervention that have provided strong support for assets and liabilities of industry players. While strength in the housing sector is likely to keep origination momentum strong, an increase in mortgage rates could slow refinance activity that has been hindering asset yields.

These create an encouraging backdrop for players like Annaly Capital Management Inc (NLY - Free Report) , Chimera Investment Corporation (CIM - Free Report) and Granite Point Mortgage Trust Inc. (GPMT - Free Report) .

About the Industry

The Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Industry players invest in and originate mortgages and mortgage-backed securities (MBS), thereby providing mortgage credit for homeowners and businesses. Typically, these companies focus on residential or commercial mortgage markets although some invest in both markets through the respective asset-backed securities. Agency securities are backed by the federal government, making it a safer bet and limiting credit risk. Also, such REITs 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. Net interest margin (NIM) — spread between interest income on mortgage assets and securities held and funding costs — is the key revenue metric for mREITs.

What's Shaping the Future of the mREIT Industry?

Continued Federal Purchases Promote Agency MBS Market Attractiveness: Unsurprising, the Federal Reserve has announced that it will continue to increase its $120-billion asset purchase program “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” Particularly, the Fed has been buying $80 billion in Treasury securities and $40 billion in agency mortgage-backed securities monthly. These efforts have supported the smooth functioning of the market and injected liquidity and credit to households and businesses.This is lifting valuations of Agency MBS securities held by mREITs and providing support to assets. Moreover, a low interest rate environment will continue to substantially reduce borrowing costs for mREITS, thereby driving NIM expansion.

Refinance Incentive to Fade: After remaining at considerably low levels in 2020, the 30-year mortgage rate is expected to increase to 3.5% in 2021, according to a forecast by Mortgage Bankers Association. This is a significant rise from 2.8% witnessed in 2020. We expect that higher mortgage rates will result in a decline in mortgage refinance origination activity. This will come as a breather for numerous mREITs who have witnessed higher Agency amortization, reduction in income, and lower NIM and asset yields on account of speedy prepayments.

Pockets of Strength in Credit Businesses: With the economic recovery underway, backed by government stimulus and progress made on the vaccination front, the macro landscape for debt has improved as well. This has pushed prices for most risk assets higher. Moreover, given the strength in the housing sectorrelating to both construction and home price appreciation, demand for high-quality loans is likely to remain high. Also, forbearance volumes have been declining. In fact, there are only around 4% of all mortgage-holders in forbearance plans. This is the first time since the onset of the pandemic that the number has fallen so low. Hence, companies are likely to see attractive residential credit spreads and solid performance.

Zacks Industry Rank Paints a Rosy Picture

The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #127, which places it in the top 50% 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 bright 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 top 50% of the Zacks-ranked industries is an outcome of the positive earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are upbeat about this group’s earnings growth potential. The industry’s current-year earnings estimate has moved 17.2% north 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, Outperforms S&P 500

The Zacks REIT and Equity Trust industry has outperformed the S&P 500 composite but lagged the broader Zacks Finance sector in the past year.

The industry has jumped 41% during this period compared with the broader sector’s growth of 42%. The S&P Index has rallied 37.7% over the past year.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month price-to-book (P/BV), which is a commonly used multiple for valuing mREITs, the industry is currently trading at 1.27X compared with the S&P 500’s 7.03X. It is also below the sector’s trailing-12-month P/BV of 3.31X. Over the past five years, the industry has traded as high as 1.39X, as low as 0.50X, and at the median of 1.21X.

Price-to-Book TTM

3 mREIT Stocks Worth Betting on

Granite Point Mortgage Trust Inc.: This company focuses primarily on directly originating, investing in and managing senior floating-rate commercial mortgage loans and other debt and debt-like commercial real estate investments. Given the strong economic recovery potential later this year, the rebound in the debt markets is likely to support the company’s originations activity. Also, since majority of loans in its portfolio are floating-rate ones, it is well positioned even in a rising interest rate environment. It sports a Zacks Rank of 1 (Strong Buy), at present. The Zacks Consensus Estimate for 2021 earnings has been revised 18.4% upward over the past two months to $1.35. It indicates year-over-year growth of 15.4%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: GPMT

Annaly Capital Management Inc: This is the largest mREIT by market capitalization with a solid business model significant diversification benefits. While its Agency investments offer downside protection in case of defaults, its non-agency business generates attractive returns. The company has increased its capital allocation to credit with main focus on residential credit investments. Given the favorable credit backdrop this business is likely to drive growth for the company in the upcoming quarters. Moreover, the Fed’s asset purchase program is likely to support Annaly’s asset valuations. It currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2021 earnings has been revised marginally upward to $1.10 in a month’s time. Moreover, 2021 net interest income (NII) estimate of $1.9 billion indicates a year-over-year uptick of 45.8%.

Price and Consensus: NLY

Chimera Investment Corporation: This company invests, either directly or indirectly through its subsidiaries, in RMBS, residential mortgage loans, Agency CMBS, commercial mortgage loans, real estate-related securities and various other asset classes. Going forward, the low interest rate environment is likely to reduce financing cost and improve NII. The Zacks Consensus Estimate for 2021 earnings has been revised 17.6% upward to $1.47 over the past month. Similarly, the consensus mark for 2022 earnings has moved 20.5% north to $1.59 over the same time period. It carries a Zacks Rank of #2 at present.

Price and Consensus: CIM

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In-Depth Zacks Research for the Tickers Above

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Annaly Capital Management Inc (NLY) - free report >>

Chimera Investment Corporation (CIM) - free report >>

Granite Point Mortgage Trust Inc. (GPMT) - free report >>