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3 Promising mREIT Stocks to Buy as Industry Gains Momentum
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The Zacks REIT and Equity Trust industry is set to record a recovery thanks to declining mortgage rates and expected improvement in purchase originations and refinancing as the Federal Reserve signaled interest rate cuts beginning September. The mREIT industry is likely to witness book value improvement in the near term as spreads in the Agency market tighten, positively impacting asset prices.
However, receding prepayment spreads offer respite to the industry players by supporting asset yields and margins, whereas business diversification offers support. Hence, companies like Starwood Property Trust, Inc. (STWD - Free Report) , Arbor Realty Trust (ABR - Free Report) and Apollo Commercial Real Estate Finance (ARI - Free Report) are well-poised to navigate the market blues.
About the Industry
The Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Industry participants invest in and originate mortgages and mortgage-backed securities (MBS) and provide mortgage credit for homeowners and businesses. Typically, these companies focus on either residential or commercial mortgage markets. Some invest in both markets through asset-backed securities. Agency securities are backed by the federal government, making it a safer bet and limiting credit risks. Such REITs also raise funds in the debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt and other credit facilities. The net interest margin (NIM), the spread between interest income on mortgage assets and securities held, as well as funding costs, is a key revenue metric for mREITs.
What's Shaping the Future of the mREIT Industry?
Lower Mortgage Rate to Increase Demand: Long-term bond yields have declined due to expectations that the Fed will lower interest rates in September. This resulted in a decline in mortgage rates. The average rate on the 30-year fixed-rate mortgage dropped to 6.47% in July from 6.73% — the lowest level in over a year.
Housing affordability challenges are expected to decline with lower mortgage rates. With rates trending lower and balanced supply/affordability playing out in the mortgage market, demand is set to increase in the coming days. While June 2024 saw record-high home prices, the rate of existing home sales slowed down. There are indications that the housing market is shifting back toward favoring buyers over sellers. With this turnaround, mortgage originations will likely witness a positive trend. This will reduce operational and financial challenges for originators and increase the gain on sale margin and new investment activity.
Fed Rate Cut Signal Came as a Breather: Volatility in the fixed-income markets, high interest rates, and the widening of the spread between the 30-year Agency MBS and 10-year treasury rate are affecting valuations of Agency mortgage-backed securities. Agency mortgage REITs are witnessing slight Tangible book value decreases currently as spreads on benchmark indices have widened but have been more stable than the volatility in 2023.
The Fed’s indication of rate cuts beginning in September will likely increase net interest spreads. This will ease earnings pressure for highly leveraged mREITs that have been facing rising funding costs. Agency markets stand to recover from the interest rate relief. Hence, industry players are likely to raise their dividends. This may encourage mREIT investors and result in capital inflows from the industry, potentially improving book value in the upcoming period.
Conservative Approach to Limit Returns: The volatile scenario in MBS markets, restricted financial conditions and resultant lower fixed-income fund flows have strained credit-risky assets. Hence, companies are making efforts to de-lever and de-risk their portfolios. This is likely to result in lower portfolio growth. Also, numerous mREITs have resorted to higher hedge ratios to reduce interest rate risks. While such moves may seem prudent amid the ongoing uncertainties, those will impede industry players’ earnings power. We expect robust returns to remain elusive as companies prioritize risk and liquidity management over incremental returns, at least in the short term. As interest rates come down, this will help industry players gain confidence in shifting their portfolios to high-risk investment options, which will result in high portfolio growth.
Zacks Industry Rank Paints a Rosy Picture
The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #46, which places it in the Top 18% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector and S&P 500
The Zacks REIT and Equity Trust industry has lagged the broader Zacks Finance sector and the S&P 500 composite in the past year.
The industry has gained 0.5% in the above-mentioned period against the broader sector’s rise of 21.1%. Notably, the S&P Index has grown 21.2% over the past year.
One-Year Price Performance
Industry's Current Valuation
Based on the trailing 12-month price-to-book (P/BV), which is a commonly-used multiple for valuing mREITs, the industry is trading at 0.89X compared with the S&P 500’s 7.71X. In the past five years, the industry has traded as high as 1.14X, as low as 0.39X and at the median of 0.89X.
Price-to-Book TTM
As finance stocks typically have a low P/BV ratio, comparing REIT and Equity Trust with the S&P 500 might not make sense to many investors. A comparison of the group’s P/BV ratio with that of the broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector’s trailing 12-month P/BV came in at 3.1X. This is above the Zacks REIT and Equity Trust industry’s ratio, as the chart below shows.
Price-to-Book TTM
3 mREIT Stocks Worth Betting On
Starwood Property: The Greenwich, CT-based company operates through four segments — Commercial and Residential Lending, Infrastructure Lending, Property and Investing and Servicing.
Starwood Property had a $14.7-billion diverse loan portfolio as of Jun 30, 2024. Multifamily loans, U.S. office loans and hotel loans accounted for 21%, 10% and 8% of its $26-billion asset base.
STWD leverages its global multi-cylinder platform to make investments. The company had primarily floating-rate assets, positioning it well to navigate the current rate environment.
The Zacks Consensus Estimate for the company’s 2024 earnings has been revised marginally upward to $2.06 in the past month. Its 2024 earnings are expected to rise 0,5%. Starwood Property carries a Zacks Rank of #2 (Buy) at present. STWD has a market cap of $6.12 billion.
Price and Consensus: STWD
Arbor Realty Trust: This New York-headquartered REIT primarily focuses on originating and servicing loans for multi-family, single-family and other commercial real estate assets
Arbor manages a multibillion-dollar servicing portfolio specializing in government-sponsored enterprise products. Loans held for sale were $342.9 million, with financing associated with these loans totaling $335.2 million as of June 30, 2024.
The Zacks Consensus Estimate for the company’s 2024 earnings has been unchanged at $1.75 in the past month. The company surpassed estimates in each of the four trailing quarters, the average surprise being 7.48%. Arbor Realty carries a Zacks Rank of #2 at present. ABR has a market cap of $2.50 billion.
Price and Consensus: ABR
Apollo Commercial: The New York-based REIT company focuses on originating, acquiring, investing in, and managing performing commercial mortgage loans, subordinate financings and other commercial real estate-related debt investments.
The company’s $8.3-billion portfolio of loans is secured by properties located in the United States and European gateway cities. Moreover, 96% of lending books consist of floating-rate loans. This is a key tailwind for the company amid the current high interest rates.
The Zacks Consensus Estimate for ARI’s 2024 earnings has been revised marginally upward in the past month to $1.38. Its 2024 earnings are expected to rise 26.6%. ARI has a market cap of $1.38 billion.
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3 Promising mREIT Stocks to Buy as Industry Gains Momentum
The Zacks REIT and Equity Trust industry is set to record a recovery thanks to declining mortgage rates and expected improvement in purchase originations and refinancing as the Federal Reserve signaled interest rate cuts beginning September. The mREIT industry is likely to witness book value improvement in the near term as spreads in the Agency market tighten, positively impacting asset prices.
However, receding prepayment spreads offer respite to the industry players by supporting asset yields and margins, whereas business diversification offers support. Hence, companies like Starwood Property Trust, Inc. (STWD - Free Report) , Arbor Realty Trust (ABR - Free Report) and Apollo Commercial Real Estate Finance (ARI - Free Report) are well-poised to navigate the market blues.
About the Industry
The Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Industry participants invest in and originate mortgages and mortgage-backed securities (MBS) and provide mortgage credit for homeowners and businesses. Typically, these companies focus on either residential or commercial mortgage markets. Some invest in both markets through asset-backed securities. Agency securities are backed by the federal government, making it a safer bet and limiting credit risks. Such REITs also raise funds in the debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt and other credit facilities. The net interest margin (NIM), the spread between interest income on mortgage assets and securities held, as well as funding costs, is a key revenue metric for mREITs.
What's Shaping the Future of the mREIT Industry?
Lower Mortgage Rate to Increase Demand: Long-term bond yields have declined due to expectations that the Fed will lower interest rates in September. This resulted in a decline in mortgage rates. The average rate on the 30-year fixed-rate mortgage dropped to 6.47% in July from 6.73% — the lowest level in over a year.
Housing affordability challenges are expected to decline with lower mortgage rates. With rates trending lower and balanced supply/affordability playing out in the mortgage market, demand is set to increase in the coming days. While June 2024 saw record-high home prices, the rate of existing home sales slowed down. There are indications that the housing market is shifting back toward favoring buyers over sellers. With this turnaround, mortgage originations will likely witness a positive trend. This will reduce operational and financial challenges for originators and increase the gain on sale margin and new investment activity.
Fed Rate Cut Signal Came as a Breather: Volatility in the fixed-income markets, high interest rates, and the widening of the spread between the 30-year Agency MBS and 10-year treasury rate are affecting valuations of Agency mortgage-backed securities. Agency mortgage REITs are witnessing slight Tangible book value decreases currently as spreads on benchmark indices have widened but have been more stable than the volatility in 2023.
The Fed’s indication of rate cuts beginning in September will likely increase net interest spreads. This will ease earnings pressure for highly leveraged mREITs that have been facing rising funding costs. Agency markets stand to recover from the interest rate relief. Hence, industry players are likely to raise their dividends. This may encourage mREIT investors and result in capital inflows from the industry, potentially improving book value in the upcoming period.
Conservative Approach to Limit Returns: The volatile scenario in MBS markets, restricted financial conditions and resultant lower fixed-income fund flows have strained credit-risky assets. Hence, companies are making efforts to de-lever and de-risk their portfolios. This is likely to result in lower portfolio growth. Also, numerous mREITs have resorted to higher hedge ratios to reduce interest rate risks. While such moves may seem prudent amid the ongoing uncertainties, those will impede industry players’ earnings power. We expect robust returns to remain elusive as companies prioritize risk and liquidity management over incremental returns, at least in the short term. As interest rates come down, this will help industry players gain confidence in shifting their portfolios to high-risk investment options, which will result in high portfolio growth.
Zacks Industry Rank Paints a Rosy Picture
The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #46, which places it in the Top 18% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector and S&P 500
The Zacks REIT and Equity Trust industry has lagged the broader Zacks Finance sector and the S&P 500 composite in the past year.
The industry has gained 0.5% in the above-mentioned period against the broader sector’s rise of 21.1%. Notably, the S&P Index has grown 21.2% over the past year.
One-Year Price Performance
Industry's Current Valuation
Based on the trailing 12-month price-to-book (P/BV), which is a commonly-used multiple for valuing mREITs, the industry is trading at 0.89X compared with the S&P 500’s 7.71X. In the past five years, the industry has traded as high as 1.14X, as low as 0.39X and at the median of 0.89X.
Price-to-Book TTM
As finance stocks typically have a low P/BV ratio, comparing REIT and Equity Trust with the S&P 500 might not make sense to many investors. A comparison of the group’s P/BV ratio with that of the broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector’s trailing 12-month P/BV came in at 3.1X. This is above the Zacks REIT and Equity Trust industry’s ratio, as the chart below shows.
Price-to-Book TTM
3 mREIT Stocks Worth Betting On
Starwood Property: The Greenwich, CT-based company operates through four segments — Commercial and Residential Lending, Infrastructure Lending, Property and Investing and Servicing.
Starwood Property had a $14.7-billion diverse loan portfolio as of Jun 30, 2024. Multifamily loans, U.S. office loans and hotel loans accounted for 21%, 10% and 8% of its $26-billion asset base.
STWD leverages its global multi-cylinder platform to make investments. The company had primarily floating-rate assets, positioning it well to navigate the current rate environment.
The Zacks Consensus Estimate for the company’s 2024 earnings has been revised marginally upward to $2.06 in the past month. Its 2024 earnings are expected to rise 0,5%. Starwood Property carries a Zacks Rank of #2 (Buy) at present. STWD has a market cap of $6.12 billion.
Price and Consensus: STWD
Arbor Realty Trust: This New York-headquartered REIT primarily focuses on originating and servicing loans for multi-family, single-family and other commercial real estate assets
Arbor manages a multibillion-dollar servicing portfolio specializing in government-sponsored enterprise products. Loans held for sale were $342.9 million, with financing associated with these loans totaling $335.2 million as of June 30, 2024.
The Zacks Consensus Estimate for the company’s 2024 earnings has been unchanged at $1.75 in the past month. The company surpassed estimates in each of the four trailing quarters, the average surprise being 7.48%. Arbor Realty carries a Zacks Rank of #2 at present. ABR has a market cap of $2.50 billion.
Price and Consensus: ABR
Apollo Commercial: The New York-based REIT company focuses on originating, acquiring, investing in, and managing performing commercial mortgage loans, subordinate financings and other commercial real estate-related debt investments.
The company’s $8.3-billion portfolio of loans is secured by properties located in the United States and European gateway cities. Moreover, 96% of lending books consist of floating-rate loans. This is a key tailwind for the company amid the current high interest rates.
The Zacks Consensus Estimate for ARI’s 2024 earnings has been revised marginally upward in the past month to $1.38. Its 2024 earnings are expected to rise 26.6%. ARI has a market cap of $1.38 billion.
The company has a Zacks Rank of 2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: ARI