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Nomura: Mortgage REITs Could Benefit from Money Market Reform Income Investors 2018-02-15 05:45:53 Nomura analysts said that the upcoming money market reform could provide tailwind for mortgage REITs. Dividend Stocks,News

Nomura: Mortgage REITs Could Benefit from Money Market Reform

Mortgage REITs Have Real Upside, Analysts Say

For income investors interested in real estate, there are more than 200 real estate investment trusts (REITs) to choose from, with a small portion of them being mortgage REITs. And according to Japanese financial holding company Nomura Holdings, Inc. (ADR) (NYSE:NM), mortgage REITs are about to experience some tailwinds.

Mortgage REITs are different from equity REITs in that they do not invest directly in and own properties. Instead, mortgage REITs loan money for mortgages to owners of real estate or purchase existing mortgages or mortgage-backed securities; that is, they make loans secured by real estate, but do not generally own or operate real estate.

Note that money market reforms issued by the U.S. Securities and Exchange Commission will be implemented in October. While those changes would lead to higher funding costs, Nomura analysts Brock Vandervliet and Vilas Abraham believe that mortgage REITs could actually benefit from the reform. (Source: “Money Market Reform a ‘Tailwind’ for Mortgage REITs: Nomura,” Barron’s, August 17, 2016.)

In a note to investors on Wednesday, August 17, the analysts wrote, “Unlike last fall, when swap spread tightening side swiped sector book values, swap spreads are now widening, especially in shorter maturities. This benefit was visible in Q2 and may be more powerful in Q3 as swap spreads widen further.”

Vandervliet and Abraham picked two mortgage REITs in particular: CYS Investments Inc (NYSE :CYS) and American Capital Agency Corp. (NASDAQ:AGNC). They noted that the benefit from widening swap spreads, “has not been universal, but skewed toward companies with shorter duration swap books including CYS and AGNC.”

“CYS Investments, with a short duration swap book, should continue to outperform peers with respect to book value appreciation, American Capital Agency Corp. somewhat less so, and Annaly Capital Management, Inc. (NLY) with a longer maturity swaps may not benefit unless 7 and 10 year swaps widen,” they wrote.

So far into 2016, there have been mixed results on the stock price appreciation of mortgage REITs. But many of them still offer attractive yields. CYS Investments Inc has an 11.22% annual dividend yield while American Capital Agency Corp. is yielding 10.91%.


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