Continued Positive Outlook on Mortgage REITs in Low-Rate Environment: a Wall Street Transcript Interview with Douglas Harter, Vice President at Credit Suisse Group

Wall Street Transcript

67 WALL STREET, New York - October 23, 2012 - The Wall Street Transcript has just published its REITs Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Acquisition and Financing Costs - Pricing Power Outlook - Residential and Commercial REITs - Real Estate New Supply - Inexpensive Access to Capital - Apartment, Lodging, Self-Storage and Office REITs

Companies include: Agency, Non-Agency and Hybrid Mortgage REITs

In the following excerpt from the REITs Report, an expert analyst discusses the outlook for the sector for investors:

TWST: When we spoke about a year ago, you had a positive stance on the mortgage REITs. Is that still the case? What has or hasn't changed?

Mr. Harter: I still do have a positive viewpoint on the mortgage REITs. I would say at this point, given the performance of that sector in the past year, that positive stance is really reliant upon continued high-dividend yields for the sector. The sector is still paying out low double-digit dividend yields, and while we are past peak returns, I do think that that level of low double-digit returns should be sustainable for the next two-plus years. And in this low rate environment, that remains attractive.

TWST: So you don't anticipate any changes for a while?

Mr. Harter: Yes. Again, I think we are past the peak returns, and dividends have started coming down, and they should continue to slowly drift lower. But again, they should stay in the low double-digit range.

TWST: Do you see any particular impact from the QE3 for the mortgage REITs?

Mr. Harter: It definitely had an impact. In the short term, it drove book values higher for, in particular, the agency REITs, but it did have spillover effect to the nonagency REITs as well. The Fed buying has driven mortgage spreads to recent tights, so that has been a positive for book value. The offset to that is that the yields on new money purchases of mortgages has fallen, which will lead to lower returns over time as a result of QE3.

TWST: Has there been a notable difference in the performance of agency versus nonagency mortgage REITs?

Mr. Harter: I would say this quarter you've had, in addition to QE3, you've had a sharp rally in nonagency prices as well as, again, part of this low rate environment and a search for yield. Nonagency bonds still do, but had been offering very high loss-adjusted yields relative to other corporate or high-yield asset classes. And that has led to strong nonagency price appreciation during the third quarter, so you've had similar phenomenon of strong book value gains across the mortgage REIT space.

TWST: Do you cover one or more of the commercial mortgage REITs? How are they faring, and how do they compare to those with a residential securities focus?

Mr. Harter: Yes, I cover one commercial mortgage REIT, Crexus (CXS). I would say you're seeing a similar thing that you see on the nonagency side, where you have yields on CMBS and commercial real estate loans, in general, having compressed as people look for yield. So again, a similar phenomenon where yields are sort of coming down across the board.

TWST: What are your top stock picks right now?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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