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Chicago, IL – June 21, 2021 – Zacks Equity Research discusses REITs and Equity Trust today, including Annaly Capital Management, Inc. NLY, Chimera Investment Corporation CIM and Granite Point Mortgage Trust Inc. GPMT.
The Zacks REIT and Equity Trust industry is set to see a sustained recovery thanks to the Fed’s asset buying program and fiscal intervention that have provided strong support to the assets and liabilities of industry players. While the strengths of the housing sector are likely to maintain strong lending performance, higher mortgage rates could slow down refinancing activities that have hampered asset returns.
They provide an encouraging backdrop for players like Annalee Capital Management, Chimera Investment Corp. as well as Granite Point Mortgage Fund…
About the industry
The Zacks REIT and Equity Trust industry includes mortgage REITs, also known as mREITs. Industry players invest and create mortgages and Mortgage Backed Securities (MBS), thereby providing mortgages for homeowners and businesses. Typically, these companies focus on the residential or commercial mortgage markets, although some invest in both markets through matching asset-backed securities.
The agency’s securities are backed by the federal government, which makes betting safer and limits credit risk. In addition, such REITs raise funds in both debt and equity markets through common and preferred shares, repurchase agreements, structured finance, convertible and long-term debt obligations and other lending mechanisms. Net Interest Margin (NIM) – the difference between interest income on mortgage-backed assets and held securities and financing costs – is a key indicator of income for mREIT.
What is shaping the future of the mREIT industry?
Continued federal procurement contributes to increasing the attractiveness of the MBS Agency market: Unsurprisingly, the Federal Reserve has announced that it will continue to increase its $ 120 billion asset purchase program “until significant further progress is made towards the Committee’s goals of maximum employment and price stability.” Specifically, the Fed bought $ 80 billion in Treasury securities and $ 40 billion in mortgage-backed securities every month.
These efforts contributed to the smooth functioning of the market and ensured liquidity and lending to households and businesses. This raised the valuation of MBS’s securities held by mREIT and supported the assets. Moreover, the low interest rate will continue to significantly reduce the cost of borrowing for mREITS, thereby stimulating NIM’s expansion.
Refinance an incentive to fade: The Mortgage Bankers Association predicts that after the 30-year mortgage rate remains at a fairly low level in 2020, it will rise to 3.5% in 2021. This is a significant increase from 2.8% in 2020.
We expect that higher mortgage rates will lead to a decrease in mortgage lending activity. This will be a respite for the numerous mREITs that have witnessed higher Agency amortization, lower revenue and lower net interest and return on assets due to quick prepayments.
Strengths of the lending business: As the economy recovers, supported by government incentives and progress made in vaccinations, the macroeconomic debt landscape has improved as well. This led to an increase in the prices of most risky assets.
Moreover, given the strengths of the housing sector in both construction and housing appreciation, demand for high quality loans is likely to remain strong. The volume of abstinence also decreases. In fact, only about 4% of all mortgage holders participate in abstinence plans.
This is the first time since the start of the pandemic that this number has dropped so low. Consequently, companies are likely to see attractive home loan spreads and good results.
The Zacks title in the industry paints a rosy picture
The Zacks REIT and Equity Trust industry is in the broader Zacks Finance sector. It is ranked 127th in the Zacks industry, placing it in the top 50% of over 250 Zacks industries.
The Zacks Industrial Rating, which is basically the average of the Zacks rating for all member stocks, indicates a bright short-term outlook. Our research shows that the top 50% of industries ranked by the Zacks outperform the bottom 50% by more than 2x.
The industry’s positioning in the top 50% of the Zacks ranked industries is the result of positive outlooks for member companies’ earnings. Looking at the revised total profit estimate, analysts appear to be optimistic about the group’s profit growth potential. The industry’s profit estimate for the current year has changed by 17.2% over the past year.
Before we present a few stocks that you might want to consider for your portfolio, let’s take a look at the recent stock market performance and valuation picture.
Industry Sector Lagging, Beats S&P 500
The Zacks REIT and Equity Trust industry outpaced the composite S&P 500 last year but lagged behind the broader Zacks Finance sector.
The industry jumped 41% over this period, compared with 42% growth in the broader sector. The S&P Index has risen 37.7% over the past year.
Current industry assessment
Based on a trailing 12-month price-to-book value (P / BV) that is commonly used to estimate mREIT, the industry is currently trading at 1.27X versus 7.03X for the S&P 500. This is also below the trailing 12-month a P / BV of 3.31X. Over the past five years, the industry has traded at 1.39X, just 0.50X and averaging 1.21X.
3 mREIT promotions worth betting on
Granite Point Mortgage Fund: This company mainly specializes in the direct provision, investment and management of senior commercial mortgage loans with floating interest rates, as well as other debt and debt investments in commercial real estate. Given the strong potential for economic recovery later this year, a recovery in debt markets is likely to support the company’s start-up activities.
In addition, since most of the loans in his portfolio are at floating interest rates, he is well positioned even in the face of rising interest rates. It currently has a Zacks rating of 1 (Active Buy). The Zacks Consensus estimate for 2021 has been revised 18.4% upward over the past two months to $ 1.35. This indicates an increase of 15.4% year on year.
You can see See the full list of today’s Zacks # 1 Rank (Strong Buy) stocks here…
Annalee Capital Management: It is the largest mREIT by market capitalization with a solid business model and significant diversification benefits. While his agency investments offer protection against losses in the event of default, his non-agency business is generating attractive returns. The company increased its capital investment in loans, focusing mainly on investments in home loans.
Given the favorable credit background, this business is likely to drive growth for the company in the coming quarters. Moreover, the Fed’s asset purchase program is likely to support the valuation of Annaly’s assets. He is currently Zacks # 2 (Purchase).
The Zacks consensus estimate for 2021 earnings was revised slightly upward to $ 1.10 a month later. What’s more, a 2021 net interest income (NII) estimate of $ 1.9 billion represents an increase of 45.8% over the same period last year.
Chimera Investment Corp.: This company invests directly or indirectly through its subsidiaries in RMBS, residential mortgages, CMBS agency, commercial mortgages, real estate securities, and various other asset classes.
In the future, a low interest rate environment is likely to lower the cost of financing and improve the net interest rate. The Zacks Consensus for 2021 earnings has been revised 17.6% upward to $ 1.47 in the last month. Likewise, the 2022 profit consensus forecast moved 20.5% north to $ 1.59 over the same period. He is currently ranked Zacks # 2.
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