Advertisement
UK markets close in 7 hours 20 minutes
  • FTSE 100

    7,956.02
    +24.04 (+0.30%)
     
  • FTSE 250

    19,783.47
    -27.19 (-0.14%)
     
  • AIM

    741.88
    -0.23 (-0.03%)
     
  • GBP/EUR

    1.1682
    +0.0013 (+0.11%)
     
  • GBP/USD

    1.2600
    -0.0038 (-0.30%)
     
  • Bitcoin GBP

    56,224.41
    +961.15 (+1.74%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • DOW

    39,760.08
    +477.75 (+1.22%)
     
  • CRUDE OIL

    81.85
    +0.50 (+0.61%)
     
  • GOLD FUTURES

    2,215.10
    +2.40 (+0.11%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,494.65
    +17.56 (+0.10%)
     
  • CAC 40

    8,239.13
    +34.32 (+0.42%)
     

Zacks Industry Outlook Highlights AGNC Investment, Ladder Capital and ARMOUR Residential REIT

For Immediate Release

Chicago, IL – November 8, 2022 – Today, Zacks Equity Research discusses AGNC Investment Corp. AGNC, Ladder Capital Corp. LADR and ARMOUR Residential REIT, Inc. ARR.

Industry: REIT and Equity Trust

Link: https://www.zacks.com/commentary/2014631/3-mreit-industry-stocks-to-bet-on-amid-mortgage-market-mayhem

The Zacks REIT and Equity Trust continues to bear the brunt of tighter monetary policy, heightening interest rate volatility, below-average market liquidity and limited fixed-income demand. Amid this backdrop, a rise in mortgage rates has significantly reduced originations, while spread widening has eroded book value for industry players. Going forward, companies are expected to see higher costs of funds while a conservative approach and hedging moves temper growth expectations.

ADVERTISEMENT

Nonetheless, receding prepayment spreads offer respite by supporting asset yields and margins, whereas business diversification will help keep companies afloat. We view the increase in mortgage rates as a positive for mortgage servicers while companies with primarily floating rate loan books will see a rise in net interest income. Hence, industry players like AGNC Investment Corp., Ladder Capital Corp. and ARMOUR Residential REIT, Inc. 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 MBS, thereby providing mortgage credit for homeowners and businesses. Typically, these companies focus on either residential or commercial mortgage markets although some invest in both markets through the respective asset-backed securities. Agency securities are backed by the federal government, making it a safer bet and limiting credit risk.

Also, such REITs raise funds in both debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities. 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?

Cooling Housing Activity to Affect Residential mREITs: The mortgage market mayhem has worsened with mortgage rates rising dramatically throughout the year, with an accelerated pace in the recent quarters. The housing market is cooling down, with residential originations likely to continue their free fall. In fact, the MBA forecast now calls for a 50% decline in mortgage originations in 2022.

Also, it expects the 30-year fixed rate mortgage rate to end at 6.7% in 2022, a notable leap from 3.1% in 2021. This poses additional challenges for residential mREITs and might reduce the gain on sale margin and new investment activity.

Net Interest Spread & Book Values Erosion to Persist: High volatility in fixed-income markets, the spike in 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. Hence, mREITs will continue to see book value pressure in the upcoming period. Also, liability-sensitive mREITs will see funding costs repricing faster than assets yields.

Hence, we anticipate the cost of funds to be a headwind and reduce net interest spreads and profitability. This may discourage mREIT investors and result in capital outflows from the industry, potentially resulting in even greater book value declines for companies in the upcoming period. Besides this, the majority of commercial mREITs have floating-rate liabilities, implying an increase in interest expenses when rates go up.

Conservative Approach to Temper Returns: The Federal Reserve’s aggressive pace of tightening monetary policy to slow persistent inflation has made financial markets extremely volatile, restricting financial conditions and resulting in negative fixed-income fund flows. Given these macro worries, as strain grows on credit-risky assets, we expect mREITs to be selective in their investments and add assets to portfolios.

Also, numerous companies have resorted to a higher hedge ratio to reduce interest rate risks. While such moves might seem prudent in the ongoing uncertain times, it will temper mREITs growth expectations. In fact, as companies prioritize risk and liquidity management over incremental returns, at least in the short term, we expect robust returns to remain elusive.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #174, which places it in the bottom 30% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of the disappointing earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. The industry’s current-year earnings estimate has moved 1.8% down since November last year.

Before we present a few stocks that you may want to consider for your portfolio, let’s 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 slumped 36.5% in the above-mentioned period against the broader sector’s decline of 17.2%. The S&P Index has fallen 21.5% over the past year.

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 currently trading at 0.87X compared with the S&P 500’s 5.27X. It is also below the sector’s trailing-12-month P/BV of 2.99X. Over the past five years, the industry has traded as high as 1.16X, as low as 0.41X and at the median of 0.96X.

3 mREIT Stocks Worth Betting On

Ladder Capital: This commercial REIT with $5.9 billion of assets as of third-quarter end is a preeminent commercial real estate capital provider, specializing in underwriting commercial real estate and offering flexible capital solutions within a sophisticated platform. It originates and invests in a diverse portfolio of commercial real estate and real estate-related assets, with a focus on senior secured assets.

The company’s balance sheet is well positioned to benefit from a rising rate environment. Its lending book consists of 89% floating-rate first mortgage loans while more than 50% of liabilities are fixed-rate. With this, its earnings seem positively correlated to rising interest rates. We see Ladder’s conservative capital structure and modest leverage a favorable fit amid the ongoing market disruption. Also, its negligible losses on originated investments since 2008 underline an impressive credit track record.

In contrast to certain mREITs resorting to dividend cuts to navigate the choppy waters, LADR announced a 4.5% dividend hike by 1 cent in September, indicating its commitment to improving shareholder value.

The company currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for Ladder’s 2022 earnings has been revised 4.6% upward to $1.13 in the past week. Moreover, 2022 NII estimates of $63.6 million indicate a year-over-year uptick of 6.4%. For 2023, earnings are projected to grow 4.4% year over year to $1.18.

You can see the complete list of today’s Zacks #1 Rank stocks here.

AGNC Investment: This internally-managed REIT invests primarily in Agency residential MBS. As of Sep 30, 2022, 68% of the company’s $61.5-billion investment portfolio consisted of Agency MBS. In light of the Fed’s sooner-than-expected balance sheet reduction, the company aims to operate with a more defensive position with significant hedge protection and lower leverage.

Over the recent quarters, the company has made pronounced efforts to reposition its portfolio to offset risks related to interest rates and prepayment uncertainty. While wider spreads have affected the investment proposition of existing Agency securities, it enhances the go-forward return on any new portfolio, thereby boosting the future value of AGNC’s business. The improving supply outlook of Agency MBS and lack of credit exposure in a recession scenario add to the attractiveness of this fixed-income alternative, thereby making a case for AGNC’s performance in the upcoming period.

The Zacks Consensus Estimate for the company’s 2022 earnings has been revised 11.5% upward to $2.90 over the past month. This indicates a year-over-year decline of around 4%. Moreover, AGNC’s 2022 NII is pegged at $1.30 billion, indicating a year-over-year fall of 27.4%. AGNC currently carries a Zacks Rank of #2 (Buy) at present.

ARMOUR Residential: The company too invests primarily in Agency residential MBS. ARR’s securities portfolio is primarily backed by fixed rate, hybrid adjustable rate, adjustable-rate home loans as well as unsecured notes and bonds issued by the GSE and the United States treasuries, and money market instruments.

As of third-quarter 2022 end, the portfolio composition was 96.3% Agency MBS, net of To Be Announced ("TBA") security short positions, while 3.7% was invested in U.S. treasury securities.

The rise in interest rates and mortgage rates significantly brought down ARR’s Agency portfolio constant prepayment rates ("CPR"). This decline in prepayment rates might be a near-term tailwind to book value growth, NII, spread and asset yield. Lower premium amortization costs borne by slower prepayment expectations and portfolio turnover being reinvested at higher prevailing asset yields are likely to lead to asset yield growth in the upcoming period.

In the recently reported quarter, the company repurchased 780,000 shares of common stock, at an average cost of $4.96 per share, thereby indicating its commitment to enhance shareholder value.

Its 2022 earnings have been revised 2.5% upward to $1.20 over the past month. It indicates a year-over-year rise of 25% on an 87.3% increase in NII. The top line is projected to continue its increasing trend in 2023, with year-over-year growth estimated to be 13.9%. It carries a Zacks Rank of #2 at present.

Why Haven’t You Looked at Zacks' Top Stocks?

Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.

See Stocks Free >>

Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/

Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.

Media Contact

Zacks Investment Research

800-767-3771 ext. 9339

support@zacks.com

https://www.zacks.com

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
AGNC Investment Corp. (AGNC) : Free Stock Analysis Report
 
ARMOUR Residential REIT, Inc. (ARR) : Free Stock Analysis Report
 
Ladder Capital Corp (LADR) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research