Mortgage REITs, popularly known as mREITs, offer financing for income-producing real estate through purchase or origination of mortgages and mortgage-backed securities. By investing in residential and commercial mortgages, as well as residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), mREITs provide the much-needed liquidity for the real estate market.
For investors, mREITs offer the scope to enjoy equity investment in the mortgage market, with both liquidity and transparency of publicly-traded equities. These, otherwise, are not available in case of direct investment in mortgage loans and mortgage-backed securities. Moreover, because of their history of relatively high dividends, mREITs have found their place in investors’ portfolio traditionally. In fact, the dividend yield of the FTSE Nareit Mortgage REITs Index was 9.89% at the end of November. By comparison, the S&P 500 delivered a 1.89% dividend yield.
mREITs earn their profit from the spread between interest income on their mortgage assets and their funding costs. Their funding sources include both debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities. Thus, dynamics of these markets play a crucial role in determining their performances.
Notably, housing is a proven driver of the economy, and with the GSE shrinkage and banks lowering their mortgage business, private capital has become all the more important in the U.S. housing market, opening up scope for mREITs.
However, there have been hiccups in the past three quarters, as mREITs’ operating performance depends upon conditions prevailing in the MBS and broader financial markets, as well as on the macro-economic situation and things seemed not favorable that time with weaker global economic growth, trade tensions, and benign inflation indicators. Apart from the market volatility, unfavorable funding costs also affected their performances.
Nevertheless, with the added liquidity in the repo market because of Fed’s concerted efforts, including overnight and term operations, the elevated repo funding levels will likely begin to decline and return to more normal levels in 2020. Meanwhile, with healthy job market and high consumption, economic fundamentals now seem relatively healthier and are likely to support mREITs’ investments in credit sectors.
Potential Outperformers of 2020
We have handpicked three mREIT stocks using our Zacks Screener, and aside from having robust fundamentals and solid dividend yield, these better-ranked ones have higher chances of market outperformances.
AGNC Investment Corp. AGNC focuses on leveraged investments in agency residential mortgage-backed securities, financing predominately through collateralized borrowings structured as repurchase agreements. This Bethesda, MD-based mREIT currently carries a Zacks Rank of 2 (Buy). The Zacks Consensus Estimate of net spread and dollar roll income per common share for 2019 and 2020 have been revised 7.1% and 6.1%, respectively, over the past two months, indicating analysts’ bullish expectations about the company’s performance. It has a dividend yield of 10.86%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Glen Allen, VA-headquartered Dynex Capital, Inc. DX, an internally-managed mortgage REIT, invests in mortgage assets on a leveraged basis. The company makes investments in Agency and non-Agency RMBS, CMBS, and CMBS IO. This Zacks Rank #2 mREIT is experiencing favorable view from analysts and the Zacks Consensus Estimate for 2019 earnings moved 9.7% north over the last 60 days. It also has a dividend yield of 10.5%.
New York-based MFA Financial, Inc. MFA is engaged in leveraged-basis investing in residential mortgage assets, including residential mortgage-backed securities and residential whole loans. This Zacks Rank #2 mREIT has a dividend yield of 10.2%. Moreover, the Zacks Consensus Estimate of 2019 and 2020 earnings moved north marginally over the past two months to 77 cents and 82 cents, respectively. The figures denote projected increase of 13.2% and 6.5%, year on year, which is encouraging.
Here’s how the above stocks have performed in the past three months.
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Start Your Access to the New Zacks Top 10 Stocks >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
MFA Financial, Inc. (MFA) : Free Stock Analysis Report
AGNC Investment Corp. (AGNC) : Free Stock Analysis Report
Dynex Capital, Inc. (DX) : Free Stock Analysis Report
To read this article on Zacks.com click here.