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5 Beaten-Down mREITs Poised for a Turnaround in 2021

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The COVID-19 pandemic took a toll on the economy and wreaked havoc on mortgage REITs (mREITs) in first-half 2020. In fact, the Zacks REIT and Equity Trust industry has declined 22.3% in the year so far, against the S&P 500 Index’s rally of 18%.

This turmoil started in late March followed by a nationwide shutdown. Investors adopted a risk-off approach, shedding risky positions across all asset classes as the economic impact of the coronavirus outbreak became apparent. The distress-selling effect was evident in the mortgage market, which experienced increased sale of mortgage-backed securities (MBSs). This resulted in a fall in prices of these securities, resulting in a decline in book values of the mREITs, which hold the securities as assets. As a result, high volatility and liquidity crisis crept in the Agency MBS market.

Additionally, with so many uncertainties in the credit markets, credit-sensitive assets and non-Agency MBS (not backed by Fannie Mae and Freddie Mac) were severely impacted, driving margin calls from repo lenders. Amid this landscape, to preserve liquidity, companies resorted to suspension of dividends. 

Since then, the residential mortgage market witnessed one of the most remarkable recoveries backed by numerous favorable regulatory changes, coronavirus relief packages and continued Fed purchases.

In fact, in its December meeting, the Federal Reserve announced that it expects to maintain an accommodative stance of monetary policy in a bid to achieve inflation rate of 2% over the longer run.

Moreover, the central bank will continue to increase its Treasury security holdings by at least $80 billion per month and agency MBS by at least $40 billion per month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. With this, the prospects for Agency MBS markets and the housing market in general look bright.

On Dec 23, the rate on the 10-year Treasury bond surged to 0.956%, marking the highest level since this March. Earlier this year, concerns over the pandemic’s negative impact on the U.S. economy escalated investors’ anxieties and caused the yield on benchmark 10-year Treasury note to dip.

Nonetheless, the Fed’s support to the economy, progress on vaccine distribution and new coronavirus relief package have raised hope and revived investors’ optimism, pushing yields higher. Notably, with rising yields, mortgage REITs’ performance is expected to improve.

Moreover, of the 12 finance company subsectors, Moody’s only sees a positive 2021 outlook for the U.S. non-bank residential mortgage industry. In fact, the rating agency expects players to thrive in 2021 with robust profitability as origination volumes are likely to remain elevated supported by the continued refinance boom.

As for commercial real estate lending, this section too was not immune to the disruptions caused by the pandemic as demonstrated by near record-high delinquency and special servicing numbers in 2020. In fact, lending activity has slackened in 2020 due to near-term rental income uncertainty. Nonetheless, the pandemic has resulted in strong polarity between different real estate asset classes. Although operating fundamentals of office, retail and hotel assets have remained under pressure, investor preferences have tilted toward industrial and logistics assets as well as apartments in certain markets.

With an uptick in forbearance numbers, delinquency levels have retreated. Importantly, the recently-approved $900 billion COVID relief bill will assist individuals to meet apartment rents and provide businesses with loans for lease payments. Also, the progress on vaccine distribution raises hopes that people are likely to restart venturing out for work and leisure. Considering these, it seems that the commercial real estate fundamentals will likely improve in the next year, supporting lending activities.

5 Stocks to Buy on the Dip

Given these factors, some mREIT stocks that performed dismally this year are likely to rebound in 2021 on their fundamental strength.

With the help of the Zacks Stock Screener, we have handpicked the following five stocks with more than $500 million market capitalization. These stocks have lost more than 20% year to date but carry a Zacks Rank #2 (Buy). These have also witnessed upward estimate revisions driven by bullish sentiments of analysts. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

Starwood Property Trust, Inc. (STWD - Free Report) : This leading mREIT’s core focus is on the real estate and infrastructure sectors.  The company has seen its 2021 earnings estimate move up 2.6% in the past 60 days. The consensus estimate for 2021 indicates 1.02% growth over 2020.

Though the stock has lost 20.2% year to date, deployment of excess liquidity into new investments, flexibility to increase currently-conservative leverage position and diversification of business with attractive risk-adjusted investments places it well for earnings growth in 2021. It has a market cap of $5.7 billion. 

Two Harbors Investment Corp. (TWO - Free Report) : This Minnetonka, MN-headquartered company’s investment portfolio consists almost entirely of Agency securities and mortgage servicing rights. Given the low-funding cost scenario, the company is likely to enjoy elevated net yield in the next year.

It has witnessed 13.9% upward revision in 2021 earnings estimate.  The consensus estimate for 2021 indicates 29.9% growth over 2020. The stock has plunged 57.5% so far this year. It has a market cap of $1.8 billion.

Redwood Trust, Inc. (RWT - Free Report) : This specialty finance company is focused on housing credit. It delivers customized housing credit investments through its best-in-class securitization platforms and whole-loan distribution activities.The company’s accretive acquisitions, and leverage-enhancement initiatives demonstrate its ability to enhance book value and return on equity. Moreover, a strong origination market for jumbo loans and the company’s mix-shift to higher-yielding business purpose loans should support earnings growth.

This company has seen its 2021 earnings estimate move 48.6% up in the past 60 days. Shares of this $991.7-million company have plunged 47.2% in the year-to-date period. The consensus estimate for 2021 indicates 119.2% growth over 2020.

Invesco Mortgage Capital Inc. (IVR - Free Report) : This mREIT focuses on investing in, financing and managing residential and commercial MBS and mortgage loans. Amid favorable environment for Agency MBS, the company resumed its investments in such securities in the third quarter. Given the attractive return prolife of this asset class, the company’s earnings are likely to improve in the next year.

This company has seen its 2021 earnings estimate being revised 56% upward over the past two months. Further, 2021 earnings are projected to grow 103.4% year over year. Shares of this $607.6-million company have tumbled 79.9% in the year-to-date period.

Granite Point Mortgage Trust Inc. (GPMT - Free Report) : This New York-headquartered company is focused on directly originating, investing in and managing commercial mortgage loans and other debt and debt-like commercial real estate investments. With an investment portfolio consisting primarily of senior floating -rate loans, this commercial real estate lender is likely to enjoy an attractive risk-reward opportunity with a fast recovery in real estate fundamentals in the upcoming year.

This company has witnessed its 2021 earnings estimate move 26.6% higher in the past 60 days. The consensus estimate for 2021 indicates 2.3% growth over 2020. Shares of this $569.2-million company have tumbled 45.1% in the year-to-date period.

Here’s the year-to-date price performance of the above-discussed stocks

Zacks Top 10 Stocks for 2021

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?

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