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A Look at Mortgage REIT ETFs Post Q4 Earnings

Flattening of the yield curve acted as a deterrent for mortgage REITs (mREITs) in the fourth quarter. This is because mortgage REITs borrow money at short-term interest rates and when they buy mortgages, they lend it at rates near the higher long-term rates.

Against this backdrop, we have highlighted the earnings performance of a couple of major players in the mortgage REIT sector, AGNC Investment Corp AGNC andAnnaly Capital Management Inc NLY, which reported at January-end and mid-February, respectively.

Having said this, we would like to note that the U.S. treasury yield curve has been steepening this year owing to dovish Fed comments. This should work in favor of the sector. Investors should note that key mREIT ETFs have gained around 8% this year (see all Real Estate ETFs here).

Earnings in Detail

AGNC Investment reported fourth-quarter 2018 net spread and dollar-roll income (excluding estimated catch-up premium amortization benefit) of 53 cents per share, missing the Zacks Consensus Estimate of 61 cents. Moreover, the figure was lower than the prior-year 62 cents.

Fourth-quarter comprehensive loss per common share was 90 cents against comprehensive income per common share of 3 cents in the prior quarter. Net interest income (NII) of $186 million was lower than the prior-quarter $188 million.

Annaly Capital Management reported fourth-quarter 2018 core earnings, excluding premium amortization adjustment (PAA), of 29 cents a share, surpassing the Zacks Consensus Estimate by a penny. However, the figure compares unfavorably with the year-ago tally of 31 cents.

NII totaled $272.9 million, down around 13.5% sequentially in the fourth quarter. Probably this is the reason why shares of the company declined 1.2% in the trading session following the release of fourth-quarter 2018 results.

ETFs to Watch

Due to mixed second-quarter results, let’s take a look at ETFs iShares Mortgage Real Estate Capped ETF (REM) and VanEck Vectors Mortgage REIT Income ETF (MORT), which are heavy on the afore-mentioned stocks and are likely to remain in focus in the upcoming days. These funds lost about 1% and 0.6%, respectively, in the past 10 days (as of Feb 15, 2019) (see all Real Estate ETFs here).

REM in Focus

REM tracks the FTSE NAREIT All Mortgage Capped Index, measuring the performance of the residential and commercial mREIT market in the United States. The fund consists of 34 securities in its basket while it charges investors 48 bps a year. Annaly Capital and AGNC Investment REIT are the top two holdings in the fund with a combined allocation of almost 30%. The product has amassed around $1.24 billion in its asset base and trades in an average volume of 400,000 shares a day. It has a solid yield of 9.25%. REM has a Zacks ETF Rank #3 or ‘Hold’ rating with a Medium risk outlook.

MORT in Focus

The ETF tracks the MVIS Global Mortgage REITs Index. The fund consists of 25 stocks and charges 41 bps in investor fees per year. Like REM, Annaly Capital and AGNC Investment also occupy the top two spots in MORT, having a combined exposure of more than 20%. The fund is relatively less popular with an asset base of $156.2 million and an average volume of roughly 50,000 shares a day. It has a dividend yield of 7.54%. The fund has a Zacks ETF Rank #3 or ‘Hold’ rating with a Medium risk outlook.

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iShares Mortgage Real Estate ETF (REM): ETF Research Reports
 
VanEck Vectors Mortgage REIT Income ETF (MORT): ETF Research Reports
 
AGNC Investment Corp. (AGNC): Free Stock Analysis Report
 
Annaly Capital Management Inc (NLY): Free Stock Analysis Report
 
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Zacks Investment Research
 
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