Seeking Alpha

Credit Suisse picks over beaten-up mREIT sector

  • The big picture view says better entry points are coming soon - perhaps after the taper actually begins (September?) and a new Fed chief is announced (October?).
  • The team's favorite names are those associated with the sector that really aren't mREITs, but instead have more-specialized business models: Newcastle Investment (NCT +0.5%), its spinoff New Residential (NRZ +1.8%), and PennyMac Mortgage Investment Trust (PMT -0.1%).
  • In the security-focused names, top picks are Two Harbors (TWO -0.8%) and Ellington Financial (EFC +0.1%), and American Capital Mortgage (MTGE).
  • Thus far in Q3, CS sees sector book values off 4% amid a 40 bp increase in rates. The good news is credit spreads haven't continued to widen, but a coming taper announcement could blow them out again.
  • Sector ETFs: REM, MORT, MORL.
  • Earlier: Two Harbors gets an upgrade.
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Comments (8)
  • Michael Bryant
    , contributor
    Comments (5619) | Send Message
     
    Bet the taper won't begin in September. But not selling (NCT).
    21 Aug 2013, 01:16 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (1291) | Send Message
     
    The stocks listed (NRZ, EFC, MTGE) will probably do fine even if the Fed tapers. NRZ hopes rates do go up, it's betting on it. EFC and MTGE are very heavily hedged, even if rates go up, they are likely to add economic value (=dividend + book change).
    21 Aug 2013, 01:55 PM Reply Like
  • joelkatz
    , contributor
    Comments (462) | Send Message
     
    NRZ will actually profit if rates should go up, as they charge a percent of the mortgage, being in the mortgage 'servicing' business.
    21 Aug 2013, 01:59 PM Reply Like
  • 20 Slots
    , contributor
    Comments (62) | Send Message
     
    @joelkatz: that's not exactly how it works; they do not actually receive more income as rates go up, but rather the cash flows of their original MSR assets don't go down as fast because people don't refinance, meaning their returns go up. The book value of their assets will tend to rise as interest rates rise, accordingly.

     

    End result is the same as your point: they do better when rates go up.
    21 Aug 2013, 04:15 PM Reply Like
  • joelkatz
    , contributor
    Comments (462) | Send Message
     
    Thanks for clarification.
    21 Aug 2013, 06:20 PM Reply Like
  • gw2100
    , contributor
    Comments (47) | Send Message
     
    how NCT will benefit if rate goes up?
    21 Aug 2013, 07:41 PM Reply Like
  • gw2100
    , contributor
    Comments (47) | Send Message
     
    It is just weird NRZ goes down as rest of REIT when rate goes up. Today is the first day it didn't
    21 Aug 2013, 07:43 PM Reply Like
  • joelkatz
    , contributor
    Comments (462) | Send Message
     
    Actually went up 2.95% today, in a rad day.
    21 Aug 2013, 08:57 PM Reply Like
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