Mortgage REITs 'Best Value Opportunity In A Long Time' - KBW

 

11 10월, 01:53blogs.barrons.com

Keefe, Bruyette & Woods looks at mortgage real-estate investment trusts today and sees the “best value opportunity in a long time.” From KBW’s Michael Widner and Sean Tillman:

 

 A rough 2Q and uncertain rate outlook left mREITs shell shocked and concerned on earnings calls a quarter ago. ongoing rate concerns have the group trading at the lowest valuation multiples in years. But we expect mREITs to strike a much more positive tone in 3Q reporting after rebalancing portfolios, adding hedges, and taking down leverage. The bad news of dividend cuts is in, and as investors take a fresh look and listen we expect more to find the opportunity compelling. And against a shaky economic backdrop it may be a great place for equity investors looking for portfolio hedges of their own….

 

 With the group trading around 0.85x book, we see much too much negativity priced into expectations. These are portfolios of liquid assets trading at 15% discounts to mark-to-market value, which we find overly pessimistic given the rebalancing and hedging that’s taken place combined with what we see as a more contained rate outlook.

 

 KBW says mREITs should hold up well to the US debt-ceiling issues because agency MBS, while still government guaranteed, doesn’t need government support to pay timely interest and principal. “If anything we would expect any heighted default concerns around treasuries to tighten MBS spreads, which should be a positive for mREIT book values,” KBW writes. More from KBW:

 

 Against high market expectations for threading the economic recovery needle, we see mREITs as a great hedge. At 15% discounts to book with 13% average yields, we see relatively little downside risk and plenty of reward if the stocks merely trend sideways….

 

 At an extremely big-picture level, the mortgage REITs of today (generally speaking) are resilient yet counter-cyclical. Valuations have been punished by implicit market expectations of growth acceleration, but as the market tapers its own pro-cyclical growth expectations, we see this broadly left-for-dead sector worthy of materially more interest.

 

 For its top mREIT picks, KBW lists CYS Investments ( CYS ) as “the best positioned mREIT to benefit from rates creeping lower rather than higher.” For those remaining more cautious on the rate outlook KBW sees  American Capital Agency Corp. ( AGNC ) and Capstead Mortgage Corp ( CMO ) having the most protected portfolios against rate volatility at the longer end of the curve.

 

 KBW says hybrid mortgage REITs that invest in both agency and non-agency mortgages and MBS trade off generally lower interest-rate exposure for a bit more mortgage credit risk, and lists MFA Financial ( MFA ) and American Capital Mortgage ( MTGE ) among its top picks.