MORT

ICYMI: The Impact Rising Interest Rates Have on Equity REITs

by

Image: REITs have not performed as well as one might have thought. The Vanguard REIT ETF has underperformed the broader market considerably since 2015, while dividends per share have not grown much, if at all, since 2005. Source: Vanguard By Brian Nelson, CFA The question on most everyone’s minds: How will equity real estate investment trusts (REITs) fare in the current rising interest-rate environment? The topic has long been debated and studied, and there are myriad opinions on the subject. From where we stand, however, there are two main moving parts consisting of fundamental and investment dynamics that investors should be aware of. Let’s have a look. Fundamental Considerations In the discounted cash-flow (enterprise) valuation context, a rising nominal interest rate (real + inflation) … Read more

Mortgage REITs Have Underperformed Significantly the Past Several Years

by

Image: An ETF that tracks the mortgage REIT industry has fallen more than 31% on a price-only basis, while an ETF that tracks the S&P 500 has advanced more than 160% on a price-only basis, as measured from May 2013. By Brian Nelson, CFA Mortgage REITs (REM) are popular vehicles because of their deceptively enticing dividend yields, but we’ve never been bullish on the group. We’re reiterating our take today that these instruments are not for the individual investor or even prudent financial advisor and are more complicated vehicles than many investors believe. In May 2013, we first starting warning about the group, and the performance, as shown in the image above, hasn’t been pretty. On a price-only basis, the … Read more

Mortgage REITs Still Dangerous Income Vehicles

by

Image: Since late May 2013, mortgage REITs, as measured by the iShares Trust Mortgage Real Estate ETF (REM), middle, have fallen more than 20%, while the master limited partnership space, as measured by the Alerian MLP ETF (AMLP), has fallen by nearly 45%, bottom. Meanwhile, the S&P 500 (SPY) has rallied more than 75%, all on a price-basis, top.  By Brian Nelson, CFA There’s nothing “safe” about mortgage REITs (REM). The industry caught a lot of attention with the high-profile performance of some of the larger players, including AGNC Investment (AGNC) and Annaly Capital (NLY), in years past, but the hype has fizzled out. Not only has the mortgage REIT industry vastly underperformed a broad market benchmark such as the … Read more

Risks Remain Prevalent For Mortgage REITs

by

Image shown: Mortgage REITs have held up better than master limited partnerships (MLPs) since mid-2015, but they haven’t exactly done well. For income investors, they may be the lesser of the two pain areas, but we’re still not really excited about them. By Kris Rosemann “The fundamental point remains sound: these are highly-levered, risky entities that depend on a number of factors beyond their control to generate profits.” – Kris Rosemann The Yield Curve Curve Is A Key Driver The mortgage REIT (mREIT) industry is not easy for many to understand, and even a great understanding of the space may not lead to investment success either. Many have stated that this area is not one in which individual investors should … Read more

Our Data Sheet on the Residential / Mortgage REITs

by

Image Source: Jeff Djevdet Structure of the Residential/Mortgage REIT Industry The residential REIT industry consists of REITs that own and manage housing, multi-family and apartment communities as well as mortgage REITs that invest in agency securities in which the principal and interest payments may be guaranteed by the government. The industry has been materially impacted by recent changes in the lending landscape, defaults, credit losses, and significant liquidity concerns during the recent global financial crisis. The firms in this industry generally are not subject to federal taxes on their taxable income to the extent that they annually distribute all of their taxable income to stockholders. As a result of this business structure, many firms have elevated distribution yields, but almost … Read more

Podcast: The Hazards of Mortgage REITs

by

President of Investment Research Brian Nelson talks mortgage REITs and the concept of spread risk that may lead to steep book value declines and weakened dividend health across the industry. ~5 mins. If you cannot view the video below, please view the transcript that follows or select the link here. Kris Rosemann: Hi, I am Kris Rosemann for Valuentum Securities. Today on our podcast President of Investment Research Brian Nelson is going walk us through some of our thoughts on mortgage REITs (REM). Brian could you explain to us why we at Valuentum don’t like mortgage REITs and maybe go through some of the risks individual investors should be concerned with that are not as prevalent as a normal operating … Read more

Valuentum Strives To Be the Gold Standard in Equity Research

by

This article was originally published July 17, 2013. Valuentum’s Best Ideas portfolio and Dividend Growth portfolio continue to exceed their respective goals, but the firm’s research on the mortgage REIT industry has put it in a class by itself. In this article, please find a graphic portrayal of its call on the mREIT industry. Maxim, KBW, RBC, Edward Jones, Seeking Alpha, Wunderlich, Citi, Evercore, and JP Morgan were all behind the curve. Will still more research shops come around? 1)    September 13, 2012. 2)    May 6, 2013. 3)    May 6, 2013. http://blogs.barrons.com/focusonfunds/2013/05/06/mortgage-reit-funds-in-focus-jefferies-says-investors-underestimate-mreit-risks/ 4)    May 26, 2013. /20130526_1 5)    May 30, 2013. http://www.thestreet.com/story/11937184/1/mortgage-reit-sell-off-overdone-on-rate-fears-kbw-rbc.html?puc=yahoo&cm_ven=YAHOO 6)    June 7, 2013. http://seekingalpha.com/symbol/agnc/currents/2 7)    June 24, 2013. http://seekingalpha.com/article/1515952-american-capital-agency-corp-book-value-resilience-in-the-face-of-rates-back-up 8)    July 8, 2013. http://www.analystratings.net/ratings/Downgrades/7-8-2013/ 9)    July 9, … Read more

Are You Still Trying to Catch Lightning with American Capital Agency?

by

Investors familiar with the mortgage REIT space that have spent any time on our website know of our groundbreaking call on the industry. Please have a look here. American Capital Agency (AGNC), one of the most prominent operators in the mortgage REIT space, reported yet another disappointing quarter. It continues to be painful to write how much we don’t like the uncertainties regarding the broader mortgage REIT environment. Some of the more bullish research shops appear to finally be throwing in the towel. Though the yields on some of the mortgage REIT equities appear attractive, the risks of further dividend cuts continue to grow. Shares of American Capital currently yield ~13%, for example. In the third quarter, American Capital Agency … Read more

American Capital Agency Loses $2.37 Per Share in Second Quarter

by

As we have encouraged readers since the peak in September 2012, the mortgage real estate investment trust (REIT) industry has myriad risks, and the marketing pitches indicating that their principal and interest payments are guaranteed by a US government sponsored entity (GSE) should not make investors feel safe. This dynamic has little bearing on the underlying trajectory of fundamentals and a mortgage REIT’s book value, the key valuation driver and the major impetus behind share price movements in the space. During the second quarter (results released Monday), American Capital Agency (AGNC) failed at its principal objective to preserve net asset value, as book value plunged to $25.51 per share from $28.93 per share in the previous sequential quarter (a $3.42 move). … Read more

The Mortgage REIT Business Doesn’t Work…

by

Key Takeaways: ·         The good times are over for mortgage REITs. o       Mortgage market dynamics are inherently difficult to predict. o       A flatter yield curve has negatively impacted net interest rate spread income across the entire mortgage REIT universe. We’re already seeing deteriorating gross ROE’s from some of the largest industry constituents. o       The Fed has only caused a marginal tightening in mortgage spreads, and in our view, a marginal widening due to reduced Fed activity (if/when it happens) is perhaps the best-case scenario as it relates to spread income for the group. A continuation of spread tightening is likely the base-case scenario, which is negative for the group. o       Net interest rate spread income and gross ROE’s will only be materially enhanced … Read more