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5 Top Notch mREITs to Outdo Market in '19 Despite Rate Hike

Devyani Chamira

A solid performance of commercial financing mortgage REITs helped the overall mortgage REIT (mREIT) industry more than offset the pressure of rising interest rates on their balance sheets in the first 11 months of 2018. Commercial financing mREITs delivered a total return of 13.83% during this period compared to the FTSE Nareit Mortgage REITs index’s 3.31%.

Nonetheless, rising home costs have impacted homebuilder sentiment and delayed new home purchases as well. This has most likely impacted the performance of home financing mortgage REITs that have witnessed a decline in total returns of 0.44% as of Nov 30, 2018.

However, Wall Street suffered the most catastrophic start to December in 38 years. Most of the indexes fell sharply after the central bank announced the year’s fourth rate hike, raising interest rates by 25 basis points. The Fed lowered its median forecast for rate hikes in 2019 to two from three. This is expected to breathe life into the mREIT sector in the upcoming year.

Although the Fed has been raising short-term interest rates, these hikes have mostly been orderly and widely anticipated by the markets. Hence, over time, mREITs have made calculated moves in their portfolios to survive any short-term yield-curve inversion or flattening.

In fact, these companies have well-developed systems for hedging and mitigating interest rate risks that are inherent to their business model. Most of these firms have reduced leverage and carry lower debt on their balance sheets. Further, conventional hedging strategies, like interest-rate swaps, swaptions, interest-rate collars, caps, floors and futures contracts, come in handy to mitigate short-term interest-rate risks.

Moreover, with higher investment in variable interest rate loans, commercial mREITs are less exposed to rate hikes. Higher availability of mortgage capital and growth in mortgage consumer debt will likely drive performance of agency mREITs.

The widening of spreads between agency RMBS and treasury rates resulted in significant decline in the book value per share for several mREITs this year. Nonetheless, improving affordability will likely aid residential fixed investments to resume residential mREITs growth in 2019.

Potential Outperformers of 2019

With the help of the Zacks Stock Screener, we have shortlisted five stocks that currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). Our research shows that stocks with a Zacks Rank #1 or 2 outperform the broader market. You can see the complete list of today’s Zacks #1 Rank stocks here.

Additionally, these stocks have outpaced the S&P 500 index, year to date, and are witnessing favorable estimate revisions for 2019 EPS.




New York-based Exantas Capital Corp. XAN provides commercial real estate loans and credit investments, such as commercial mortgage-backed securities. Previously known as Resource Capital Corp., the stock currently flaunts a Zacks Rank of 1.

Shares of Exantas Capital have gained 12.2%, as against the S&P’s decline of 4.7%, in the year so far. In addition, the stock’s 2019 earnings estimate has moved up 3% in the last 60 days.

Chicago, IL-based Ares Commercial Real Estate Corporation ACRE is a specialty finance company focused on originating, investing in and managing middle-market commercial real estate loans and other commercial real estate investments.

In the year-to-date period, this Zacks #2 Ranked stock has outperformed the S&P index, gaining 5.4%. Moreover, the stock’s earnings estimate moved 3.1% north over the last 60 days.

Residential real estate finance company Cherry Hill Mortgage Investment Corporation CHMI acquires, invests in and manages residential mortgage assets in the United States. The stock carries a Zacks Rank of 2, at present. Year to date, the Zacks Rank #2 stock has remained flat. Also, its earnings estimate has been revised 1.5% upward in 60 days’ time.

New York-based Ready Capital Corporation RC offers non-bank real estate and small business, lending primarily to multifamily and commercial real estate, delivering value-add bridge loans and fixed rate financings for stabilized assets.

The Zacks Rank #2 stock has declined 3.8%, narrower than the S&P’s loss. Its earnings estimate climbed 1.1% in the last 60 days.

Ladder Capital Corp LADR is a commercial real estate finance company, focusing on mid-market senior secured commercial real estate first mortgage loans, investment grade-rated securities secured by first mortgage loans on commercial real estate and investing in net leased and other commercial real estate.

Year to date, this Zacks #2 Ranked stock has appreciated 18.7%. Furthermore, the company’s earnings estimate has been revised marginally upward over the last month.

In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?

These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>