By Al Yoon
Shares of some real estate investment trusts are on the
comeback, reversing this week a steep, two-month tumble--driven
largely by the Fed's massive mortgage-backed securities buying and
worry over heavier loan refinancing--after MBS and REITs shares
dropped to compelling valuations.
The "broad-based selloff has created attractive investment
opportunities in this space" of mortgage REITs, Bose George and
other analysts at Keefe, Bruyette & Woods said in a research
note on Thursday.
The Dow Jones US Mortgage REITs Index added 3.8% to 7086 on
Friday, and is up 7.8% from Thursday's lows, rebounding from a drop
of more than 18% since the Federal Reserve surprised the markets in
mid-September with a larger-than-anticipated MBS purchase program.
That demand lowered the yield on securities purchased by REITs that
focus on government, or "agency," mortgage bonds.
More recently, investors have speculated that the Obama
administration may go beyond its current initiatives to boost
refinancing of loans backing those bonds, creating prepayments that
could decimate MBS returns if the principal paydowns exceed
investor expectations. The prepayment talk hurt REITs, but have
also dented demand for MBS by other investors.
The bearish trades may have created opportunity in bonds,
reducing the need for REITs to seek assets outside of the
traditional agency MBS, or use the money to buy back shares. Price
drops on mortgage bonds and REIT stocks have pushed both assets to
cheaper levels, and buying of each could reemerge, according to
comments by analysts at Nomura Securities, RBS Securities and
KBW.
The recent drop in mortgage bonds has increased the return on
equity for REITs on some MBS by nearly three percentage points
since late September, to 8.1%, said Nomura Securities analysts,
based on a hypothetical model. That improvement means REITs may
forego stock buybacks and MBS selling "very soon," the Nomura
analysts, led by Ohmsatya Ravi, said in a Thursday note.
Most mortgage REIT shares rose on Friday, after companies
including Annaly Capital Management (NLY) traded down to lows not
seen in years. Annaly shares climbed on Friday by 58 cents to
$14.80, and have gained 7% from when they struck a
three-and-a-half-year low.
American Capital Agency Corp. (AGNC) rose $1.16 to $31, Two
Harbors Investment Corp. (TWO) climbed 35 cents to $11.01, and AG
Mortgage Investment Trust (MITT) gained $1.08 to $23.24.
"While it is likely that REITs are not going to find it
attractive to issue new stock at current yield levels, they should
at least start reinvesting the monthly paydowns back in the MBS
market," the Nomura analysts said. Paydowns are interest and
principal payments from MBS.
REITs that were selling mortgage bonds earlier in the week have
turned into "better buyers" of the securities, Jeana Curro and
Ashley Gam, strategists at RBS Securities, said in a Nov. 15 note.
While the REITs probably won't buy as aggressively as they had over
the past three years, they will likely shift positions within the
MBS market rather than sell outright, and also reinvest MBS
proceeds, she said.
KBW analysts took a more sanguine view of mortgage REITs, but
from an equity angle.
The latest speculation fueling the drop in REIT
shares--including concerns over efforts to expand the government's
flagship refinancing program and the installment of a more
consumer-friendly housing-finance regulator--may still come to
pass, but the impact on REIT assets is likely overblown, the KBW
analysts said. The industry doesn't have the capacity to increase
refinancings much even if those events were to occur, they
said.
In recommending the sector, KBW analysts noted that agency REITs
are now trading below 90% of book value, while "hybrid" REITs are
trading at 90%-95% of book value.
KBW prefers hybrid REITs that can also hold mortgage debt that
isn't exposed to the vagaries of the government-supported markets,
such as Two Harbors, MFA Financial (MFA) and American Capital
Mortgage. Two Harbors and American Capital Mortgage also have "very
low" prepayments on their portfolios, they said.
Annaly this week said it planned to diversify its portfolio from
agency MBS, through an acquisition of commercial property investor
Crexus Investment Corp. (CXS).
Write to Al Yoon at albert.yoon@dowjones.com
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