Mortgage REITs (mREITs) performed well for most part of the third quarter, which helped companies in the space to post encouraging earnings in the quarter. The Fed’s decision to keep interest rates unchanged during the quarter played a significant role in boosting mREITs last quarter. These REITs finance their investments with equity and debt capital and generate profits through the spread between interest income on mortgage assets and funding costs.
Meanwhile, mREITs’ concerted measures to reposition their portfolio as a hedge against interest rate uncertainty is also speculated to have a positive impact on the sector. Separately, their dividend payout ends up being more lucrative than yields on fixed income and money market accounts. This has helped them to attract significant investor attention in the recent times (read: 6 ETF Areas to Watch as Fed Meeting Starts).
Below we have highlighted the earnings of some of the major players in the mortgage REIT sector.
mREITs Earnings in Focus
American Capital Agency Corp. (AGNC - Free Report) saw third-quarter 2016 net spread and dollar roll income of 64 cents per share (excluding the estimated “catch-up” premium amortization benefit), ahead of the Zacks Consensus Estimate of 55 cents. While this was the second straight quarter in which the company came up with better-than-expected income, the reported figure also came in higher than 51 cents in the prior-year quarter. Though the company’s net interest income (“NII”) of $219 million missed the Zacks Consensus Estimate of $235 million it was higher than $217 million in the prior-year quarter (read: Dull Mortgage REIT Earnings: ETFs in Focus).
As of Sep 30, 2016, the company’s net book value per share was $22.91, up from $22.22 as of Jun 30, 2016. This rise was attributed to interest rate hedges outperforming agency mortgage backed securities (“MBS”). Separately, AGNC Investment declared monthly dividends of 20 cents per share for July, August and September.
Another key player, Annaly Capital Management, Inc. (NLY - Free Report) reported third-quarter 2016 normalized core earnings per share of 29 cents, beating the Zacks Consensus Estimate by a cent but lower than 30 cents earned in the year-ago quarter. NII totaled $384.5 million, down 12.9% year over year and significantly ahead of the Zacks Consensus Estimate of $248 million (read: Bet On These 6 REIT ETFs Amid Rate Hike Tantrums).
Annaly’s book value per share came in at $11.83 as of Sep 30, 2016, compared with $11.99 as of Sep 30, 2015. At the end of the quarter, the company’s capital ratio (representing the ratio of stockholders’ equity to total assets) was 13.3%, down from 14% in the prior-year quarter. The company offered an annualized core return on average equity of 10.09% in the quarter, up from 9.67% in the year-ago quarter.
ETFs to Watch
Below we have highlighted two mREITs ETFs that have significant exposure to the above mentioned companies and are likely to remain in focus in the upcoming days (see all Real Estate ETFshere).
iShares Mortgage Real Estate Capped (REM - Free Report)
REM tracks the FTSE NAREIT All Mortgage Capped Index, measuring the performance of the residential and commercial mREIT market in the U.S. The fund consists of 36 securities in its basket while it charges investors 48 bps a year. American Capital and Annaly Capital are the top two holdings in the fund with a combined allocation of almost 30%. The product has amassed around $1.2 billion in its asset base and trades in an average volume of 1.7 million shares per day. It has a solid yield of 10.65%. REM gained a respective 2% and 2.6% in the last one month and during the third quarter. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
VanEck Vectors Mortgage REIT Income ETF (MORT - Free Report)
This ETF tracks the MVIS Global Mortgage REITs Index. The fund consists of 25 stocks and charges 41 bps in investor fees per year. Like REM, American Capital and Annaly Capital also occupy the top two spots in MORT, having a combined exposure of more than 23.2%. The fund is relatively less popular with an asset base of $102 million and an average volume of roughly 25,000 shares per day. It has a dividend yield of 8.34%, comparable to that of REM. MORT gained 2.3% and 5.8% in the last one month and during the third quarter, respectively. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
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