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Zacks Industry Outlook Highlights: NLY, AGNC and RC

For Immediate Release

Chicago, IL – September 22, 2020 – Today, Zacks Equity Research discusses the REIT and Equity Trust, including Annaly Capital Management, Inc. NLY, AGNC Investment Corp. AGNC and Ready Capital Corp. RC.

Industry: REIT and Equity Trust

Link: https://www.zacks.com/commentary/1060919/3-mreit-stocks-to-watch-amid-unfavorable-prepayment-landscape

The coronavirus crisis has substantially affected the Zacks REIT and Equity Trust industry. Low mortgage rates are driving refinancing activities that are affecting net interest margin (NIM) of mortgage REITs, also known as mREITs. Moreover, with high forbearances, mortgage servicing operations have gone for a toss as servicers scramble to advance payments with their limited cash availability.  

Nonetheless, as the industry turns the corner from its March lows, thanks to Fed’s constant support and persistently-low interest rates, it seems an opportune time to shun reservations about industry players like Annaly Capital Management, Inc., AGNC Investment Corp. and Ready Capital Corp.

About the Industry

The Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Players in this industry provide financing for income-producing properties by investing in or originating mortgages and mortgage-backed securities (MBS). Typically, these companies focus on residential or commercial mortgage markets, although some invest in both markets through the respective asset-backed securities.

NIM — spread between interest income on mortgage assets and securities held and funding costs — is the key revenue metric for mREITs. These companies raise funds in both debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities.

What’s Shaping the Future of the mREIT Industry?

  • Higher Prepayment Risk:The pandemic-led historically-low interest rates have increased prepayment risks for mREITs. Recently, the Freddie Mac Primary Mortgage Market Survey announced that the 30-year fixed-rate mortgage averaged 2.87% for the week ending Sep 17, 2020, significantly down from 3.73% a year ago. With rates hovering near all-time lows, there has been a flurry in refinancing activities aimed to lock in lower rates. Such increase in prepayments on investment securities will materially affect NIM and tangible net book values of mREITs.
     
  • High Level of Forbearance Burdening mREITs With Mortgage Servicing Operations:The March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act provided the mortgage forbearance option, allowing millions of homeowners with federally-backed mortgages to forgo monthly mortgage payments, without documenting financial hardship. It enabled borrowers to request forbearance from servicers and delay mortgage payments for up to 180 days, with additional 180-day extension available upon request at the end of the first forbearance period. But as millions of homeowners forgo mortgage payments, mortgage servicers are on the tenterhooks as they are required to continue making advances on behalf of borrowers to pay back investors on those mortgages with their limited cash ability. In fact, COVID-19-related forbearances peaked in late May with 4.7 million homeowners in such plans. Further, per data provided by Black Knight, as of Sep 15, unpaid principal balance of loans in forbearance totaled $781 billion. Going forward, this will be problematic for mREITs with mortgage servicing arms as they are required to make mortgage payments regardless of coronavirus-related deferments.   
     
  • Federal Support Stabilizing Agency MBS Market: The Federal Reserve has been undertaking concerted efforts like purchasing Agency MBS to provide support to mortgage lending and housing markets and to improve functioning of the general financial markets. In March and April, it clocked in $292.2 billion and $295.1 billion in agency MBS. This ensued stability in the Agency MBS market and the Fed reduced its purchases to around $100-$104 billion per month in May, June and July. Continued Fed support has been injecting liquidity in the mortgage sector and improving Agency MBS outlook by tightened spreads. This will help to lift valuations of Agency MBS securities held by mREITs. Moreover, at the recently-concluded meeting, the Fed said that it would allow interest rates to run “moderately above” 2% for some time such that “inflation averages” 2% over time, before raising rates to control it. In fact, Fed officials are expecting a low-rate environment till 2023. This will substantially lower expense level for mREITS, thereby driving NIM expansion.

 Zacks Industry Rank Indicates Bleak Prospects

The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #199, which places it in the bottom 21% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of the negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. The industry’s current-year earnings estimate moved 42.8% south over the past year.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector & the S&P 500

The Zacks REIT and Equity Trust industry has lagged the S&P 500 composite and the broader Zacks Finance sector in the past year.

The industry has plunged 33.5% during this period compared with the broader sector’s decline of 12.3%. The S&P 500 Index has rallied 11.3% over the same time period.

Industry’s Current Valuation

On the basis of the trailing 12-month price-to-book (P/BV), which is a commonly used multiple for valuing mREITs, the industry is currently trading at 0.97X compared with the S&P 500’s 5.70X. It is also below the sector’s trailing-12-month P/BV of 2.50X. Over the past five years, the industry has traded as high as 1.36X, as low as 0.49X, and at the median of 1.16X.

3 mREIT Stocks Poised to Survive the Industry Challenges

Ready Capital Corporation: This Zacks Rank of 1 (Strong Buy) stock is a multi-strategy real estate finance company that originates, acquires, finances and services small-to-medium balance commercial loans. In fact, it is the only nationwide specialty finance company focused on the small balance commercial (“SBC”) market.

After a pause during the second quarter, due to uncertainty in the capital markets and distressed underwriting conditions, commercial real estate lending activities are likely to pick up pace in the near future with resumption of economic activity. Hence, with a keen focus on SBC markets, the company is likely to continue to pursue opportunities and will benefit from fragmentation in the SBC origination market.

Its shares have rallied 41.3% over the past three months. The Zacks Consensus Estimate for the current-year earnings per share (EPS) has been revised 4.6% upward to $1.36 over the past week. The same for 2021 has been revised 14.4% upward to $1.19 over the past seven days.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Annaly Capital Management, Inc.: The company’s investment portfolio includes Agency MBS, Agency pass-through certificates, collateralized mortgage obligations (CMOs), interest-only securities and credit risk transfer (CRT).

The company’s investments in Agency MBS will likely benefit from Fed’s robust purchase activity. Moreover, with the Fed advocating a low interest-rate environment, Annaly is well-positioned to further capitalize on operating in a lower cost market environment, given its strong relationships with best-in-class sponsors and operating partners.

The Zacks Consensus Estimate for current-year EPS has been revised 12.14% upward to $1 over the past two months. Further, shares of this Zacks Rank #2 (Buy) stock have risen 11.8% over the past three months.

AGNC Investment Corp.: The company focuses on leveraged investments in Agency MBS. This includes residential mortgage pass-through securities and CMOs. It borrows against its investment portfolio pursuant to a master repurchase agreement, which provides short-term financing. The company expects to make a profit and pay the dividend from the net interest income (NII), which is the difference between interest earned on investments and its cost of borrowing.

The company’s prudent capital-allocation efforts bode well for long-term growth. Also, high origination volumes and the Fed’s Agency MBS purchases have created an ideal backdrop for roll specialness. This is likely to drive AGNC Investment’s bottom-line growth in the near term.

The Zacks Consensus Estimate for 2020 EPS has moved 13.8% north to $2.22 in two months’ time. Moreover, the favorable estimate revision indicates year-over-year growth of 2.8%. It holds a Zacks Rank of 2, presently. Shares of the company have gained 11.7% over the past three months.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performancefor information about the performance numbers displayed in this press release.


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AGNC Investment Corp. (AGNC): Free Stock Analysis Report
 
Annaly Capital Management Inc (NLY): Free Stock Analysis Report
 
Ready Capital Corp (RC): Free Stock Analysis Report
 
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