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%.
Dear Reader: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. We are 100% independent in that we are not affiliated with any bank or brokerage house. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose. The opinions in this content are just that, opinions of the authors. We are a publishing company and the opinions, comments, stories, reports, advertisements and articles we publish are for informational and educational purposes only; nothing herein should be considered personalized investment advice. Before you make any investment, check with your investment professional (advisor). We urge our readers to review the financial statements and prospectus of any company they are interested in. We are not responsible for any damages or losses arising from the use of any information herein. Past performance is not a guarantee of future results. All registered trademarks are the property of their respective owners
Sign up to receive our FREE Income Investors newsletter along with our special offers and get our FREE report:
5 Dividend Stocks to Own Forever
This is an entirely free service. No credit card required. You can opt-out at anytime.
We hate spam as much as you do.