Hybrid Mortgage REITs Attractive, Despite Dividend Cuts

25 9월, 02:38blogs.barrons.com

Real Estate Investment Trusts that are investing in a diversity of mortgage assets remain attractive, according to Maxim Group.

 

 In a report out today, Michael Diana writes that he expects further volatility in mortgage REIT prices until the Federal Reserve announces a schedule to taper its $85 billion bond-buying program, and a new Fed chairman is named. In that scenario, he favors hybrid mortgage REITs over those focused on agency mortgage-backed securities. The logic:

 

 “We favor hybrids, due to less leverage and to exposure to rising home prices (in non-Agency RMBS). Absent volatility, we regard the mREIT environment as favorable, with: (1) less basis risk (due to 2Q13 moves); (2) less payup premium risk (due to 2Q13 moves); (3) less extension risk (due to 2Q13 moves and larger hedge positions); (4) slower prepayments (due to higher mortgage rates); and (5) wider spreads (due to higher MBS yields and no fed funds increase).”

 

 Maxim Group’s picks:

 

 Top pick for 2013: Ellington Financial ( EFC ), a non-REIT with “the ability to hedge and trade on an unrestricted basis [to profit from] volatility. In addition, Ellington has a non-Agency focus and substantial non-Agency expertise. Target price: $28.50.

 

 Two Harbors ( TWO ) “due to substantial non-Agency and hedging expertise, as well as diversification.” Target: $11.50.

 

 American Capital Mortgage ( MTGE ) “the hybrid counterpart of our Buy-rated Agency mREIT American Capital Agency, both run by Gary Kain.” Target: $25.00.

 

 Eleven mortgage REITs have cut their dividends in the third quarter, but Maxim Group says that with most mortgage REITs trading below book value, the average dividend yield is attractive relative to current trading prices at 13.9% for agency mortgage REITs and 13.1% for hybrid mortgage REITs. on the following page are REITs that have cut dividends, with Maxim Group’s outlook on each.

 

 The following shows mortgage REITs that cut dividends in the third quarter, followed by Maxim Group ratings