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3 mREIT Stocks to Buy as Industry Continues to Gain Momentum
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The Zacks REIT and Equity Trust industry, which has recovered well from the pandemic blues thanks to the Federal Reserve’s asset purchase program and the fiscal intervention, continues to gain strength as evident from the ongoing purchase origination momentum, and declining forbearance and foreclosures. This is supported by strong housing market fundamentals. Moreover, an increase in the mortgage rates reduces prepayment spreads, offering respite to industry players by supporting asset yields and margins, and boosting mortgage servicing rights (MSR) valuations. These create an encouraging backdrop for players like Annaly Capital Management Inc (NLY - Free Report) , Blackstone Mortgage Trust, Inc. (BXMT - Free Report) and Redwood Trust, Inc. (RWT - 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?
Fading Refinance Wave to Lift MSR Valuations: After remaining at considerably low levels in 2020, the 30-year mortgage rate is expected to breach the 3% mark in fourth-quarter 2021 with the increasing trend continuing throughout 2022 as well, according to FreddieMac. With a higher mortgage rate forecast, FreddieMac anticipates refinancing activity to reduce, with refinance originations declining from $2.6 trillion in 2021 to $1 trillion in 2022. This will come as a breather for numerous mREITs that have witnessed higher agency amortization, reduction in income, and lower NIM and asset yields on account of speedy prepayments. Also, higher rates and slower refinancing are likely to buoy MSR valuations going forward.
Purchase Originations to Remain Strong: While lower refinancing activity might be a concern for originators, a rise in house pricing is expected to lift home purchase mortgage originations from $1.9 trillion in 2021 to $2.1 trillion in 2022. While the demand-supply imbalance has been the primary reason for the skyrocketing prices, the spike in both multifamily and single-family rental rates has also not helped the case. The rent increase has made the home purchase market a viable option as mortgage rates remain attractive. This will support total origination volume going ahead.
Delinquencies and Foreclosures Retreat: With the continued economic recovery, backed by government stimulus, the macro landscape for debt has improved as well. Also, forbearance volumes have been declining. In fact, according to Black Knight’s data, in September, the national delinquency rate fell to 3.91% – falling below 4% in 18 months. Similarly, despite the federal foreclosure moratoria expirations, foreclosure starts also dipped in September. 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 #88, which places it in the top 35% 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 5.6% 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 and S&P 500
The Zacks REIT and Equity Trust industry has lagged the broader Zacks Finance sector and the S&P 500 composite in the past year.
The industry has jumped 37.8% during this period compared with the broader sector’s growth of 45.6 and the S&P 500’s rally of 40.8%.
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 7.19X. It is also below the sector’s trailing-12-month P/BV of 3.41X. Over the past five years, the industry has traded as high as 1.31X, as low as 0.89X, and at the median of 1.20X.
Price-to-Book TTM
3 mREIT Stocks Worth Betting on
Redwood Trust, Inc.: The specialty finance company is focused on several distinct areas of housing credit with its investment portfolio including a diverse mix of residential, business purpose and multifamily investments. Given the optimism surrounding substantial growth in home equity, Redwood is well poised to leverage on opportunities for expanded credit products, supported by its highly scalable platform. Moreover, the company is investing in innovative technology and processes, aimed to drive further efficiencies.
It sports a Zacks Rank #1 (Strong Buy) at present. The Zacks Consensus Estimate for 2021 earnings has been revised 20.7% upward over the past week to $1.46. It indicates significant year-over-year growth. Moreover, the 2021 net interest income (NII) estimate of $133.8 million indicates a year-over-year uptick of 7.9%.
Annaly Capital Management Inc: This is the largest mREIT by market capitalization with a solid business model significant diversification benefit. While its Agency investments offer downside protection in case of defaults, its non-Agency business generates attractive returns. Encouraged by a favorable residential credit market, the company has increased its capital allocation to residential credit to $4.3 billion or by 3% in third-quarter 2021. Moreover, the company continues to expand its holdings in MSR assets by meaningfully growing its portfolio to $575 million as of the third quarter of 2021, representing a sequential rise of 41%. Such prudent selection of assets and effective allocation of capital will drive incremental returns.
It currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2021 earnings has been revised 2.7% upward to $1.13 in a week’s time. Moreover, the 2021 NII estimate of $1.8 billion indicates a year-over-year uptick of 35.3%.
Price and Consensus: NLY
Blackstone Mortgage Trust:This real estate finance company originates senior loans collateralized by commercial real estate in North America, Europe, and Australia. The company’s portfolio is composed primarily of loans secured by high-quality, institutional assets in key markets. It benefited from the origination wave and recorded $4.7 billion of originations in third-quarter 2021. Such continued purchase originations are likely to drive portfolio growth. Major market focus and diversification of collateral assets also provide stability.
The Zacks Consensus Estimate for 2021 earnings has been revised marginally upward to $2.45 over the past month. Moreover, the estimate for 2021 net income from loans and other investments is pegged at $464.6 million, indicates a year-over-year uptick of 7.5%. It carries a Zacks Rank of #2 at present.
Price and Consensus: BXMT
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3 mREIT Stocks to Buy as Industry Continues to Gain Momentum
The Zacks REIT and Equity Trust industry, which has recovered well from the pandemic blues thanks to the Federal Reserve’s asset purchase program and the fiscal intervention, continues to gain strength as evident from the ongoing purchase origination momentum, and declining forbearance and foreclosures. This is supported by strong housing market fundamentals. Moreover, an increase in the mortgage rates reduces prepayment spreads, offering respite to industry players by supporting asset yields and margins, and boosting mortgage servicing rights (MSR) valuations. These create an encouraging backdrop for players like Annaly Capital Management Inc (NLY - Free Report) , Blackstone Mortgage Trust, Inc. (BXMT - Free Report) and Redwood Trust, Inc. (RWT - 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?
Fading Refinance Wave to Lift MSR Valuations: After remaining at considerably low levels in 2020, the 30-year mortgage rate is expected to breach the 3% mark in fourth-quarter 2021 with the increasing trend continuing throughout 2022 as well, according to FreddieMac. With a higher mortgage rate forecast, FreddieMac anticipates refinancing activity to reduce, with refinance originations declining from $2.6 trillion in 2021 to $1 trillion in 2022. This will come as a breather for numerous mREITs that have witnessed higher agency amortization, reduction in income, and lower NIM and asset yields on account of speedy prepayments. Also, higher rates and slower refinancing are likely to buoy MSR valuations going forward.
Purchase Originations to Remain Strong: While lower refinancing activity might be a concern for originators, a rise in house pricing is expected to lift home purchase mortgage originations from $1.9 trillion in 2021 to $2.1 trillion in 2022. While the demand-supply imbalance has been the primary reason for the skyrocketing prices, the spike in both multifamily and single-family rental rates has also not helped the case. The rent increase has made the home purchase market a viable option as mortgage rates remain attractive. This will support total origination volume going ahead.
Delinquencies and Foreclosures Retreat: With the continued economic recovery, backed by government stimulus, the macro landscape for debt has improved as well. Also, forbearance volumes have been declining. In fact, according to Black Knight’s data, in September, the national delinquency rate fell to 3.91% – falling below 4% in 18 months. Similarly, despite the federal foreclosure moratoria expirations, foreclosure starts also dipped in September. 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 #88, which places it in the top 35% 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 5.6% 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 and S&P 500
The Zacks REIT and Equity Trust industry has lagged the broader Zacks Finance sector and the S&P 500 composite in the past year.
The industry has jumped 37.8% during this period compared with the broader sector’s growth of 45.6 and the S&P 500’s rally of 40.8%.
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 7.19X. It is also below the sector’s trailing-12-month P/BV of 3.41X. Over the past five years, the industry has traded as high as 1.31X, as low as 0.89X, and at the median of 1.20X.
Price-to-Book TTM
3 mREIT Stocks Worth Betting on
Redwood Trust, Inc.: The specialty finance company is focused on several distinct areas of housing credit with its investment portfolio including a diverse mix of residential, business purpose and multifamily investments. Given the optimism surrounding substantial growth in home equity, Redwood is well poised to leverage on opportunities for expanded credit products, supported by its highly scalable platform. Moreover, the company is investing in innovative technology and processes, aimed to drive further efficiencies.
It sports a Zacks Rank #1 (Strong Buy) at present. The Zacks Consensus Estimate for 2021 earnings has been revised 20.7% upward over the past week to $1.46. It indicates significant year-over-year growth. Moreover, the 2021 net interest income (NII) estimate of $133.8 million indicates a year-over-year uptick of 7.9%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: RWT
Annaly Capital Management Inc: This is the largest mREIT by market capitalization with a solid business model significant diversification benefit. While its Agency investments offer downside protection in case of defaults, its non-Agency business generates attractive returns. Encouraged by a favorable residential credit market, the company has increased its capital allocation to residential credit to $4.3 billion or by 3% in third-quarter 2021. Moreover, the company continues to expand its holdings in MSR assets by meaningfully growing its portfolio to $575 million as of the third quarter of 2021, representing a sequential rise of 41%. Such prudent selection of assets and effective allocation of capital will drive incremental returns.
It currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2021 earnings has been revised 2.7% upward to $1.13 in a week’s time. Moreover, the 2021 NII estimate of $1.8 billion indicates a year-over-year uptick of 35.3%.
Price and Consensus: NLY
Blackstone Mortgage Trust:This real estate finance company originates senior loans collateralized by commercial real estate in North America, Europe, and Australia. The company’s portfolio is composed primarily of loans secured by high-quality, institutional assets in key markets. It benefited from the origination wave and recorded $4.7 billion of originations in third-quarter 2021. Such continued purchase originations are likely to drive portfolio growth. Major market focus and diversification of collateral assets also provide stability.
The Zacks Consensus Estimate for 2021 earnings has been revised marginally upward to $2.45 over the past month. Moreover, the estimate for 2021 net income from loans and other investments is pegged at $464.6 million, indicates a year-over-year uptick of 7.5%. It carries a Zacks Rank of #2 at present.
Price and Consensus: BXMT