While the real estate cycle may be getting long in the tooth and pockets of weakness are sure to appear, Doug Harter and team are comfortable with the overall health of residential and commercial real estate credit.
They haven't seen signs of overbuilding, and both residential and commercial demand remain strong.
For residential mortgage REITs (BATS:REM), the team sees another year of double-digit economic returns. Still, their preference is for those names that can protect book value during periods of volatility and create proprietary assets with better return profiles. At the top of that list is New Residential (NYSE:NRZ).
For commercial mREITs, the team is cautiously optimistic on the underlying health of the market, but expects "noise" in terms of problem loans - i.e. idiosyncratic events and not meaningful deterioration in the market. Top pick: Starwood Property Trust (NYSE:STWD).
In mortgage banking, Mr. Cooper (NASDAQ:COOP) is the top pick. With volatility in rates, they say, the key to outperformance is the "macro hedge" of originations and servicing. While an expected decline in originations might sting COOP's bottom line this year, the stock's discount to book value and improved ROE outlook make it worth owning.
Try Seeking Alpha PREMIUM for unlimited analysis on REM