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As inflation declines and the economy may be coming in for a soft landing, there’s more focus on the potential for a second rate cut. In remarks earlier this week, Federal Reserve Chairman Jerome Powell said, “the economy is in solid shape,” and that the Fed plans to use its tools to keep it there.
That type of comment should be an overall boost for mortgage real estate investment trusts (mREITs). Mortgage REITs typically borrow short-term to invest in long-term mortgage assets. When interest rates are low, their borrowing cost decreases, improving their net interest margin. That margin is the difference between the income from their mortgages and the borrowing cost. This boost in profitability can increase the REIT’s earnings and dividends.
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While some mREITs, such as Ready Capital (NYSE:RC), have recently dropped their dividends, that appears to be more of a response to individual loan distress rather than the state of the mortgage REIT market in general. Donald Fandetti, an analyst at Wells Fargo who specializes in mortgage and financial markets, upgraded two mREITs that deliver high yields for investors.
Why Now For AGNC?
AGNC Investment Corp. (NASDAQ:AGNC) invests in mortgage-backed securities (MBS). It primarily invests in agency mortgage-backed securities issued or guaranteed by government-sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac or Ginnie Mae. These are considered lower-risk since the government backs them. It earns income from the interest payments made by homeowners on the underlying mortgages. AGNC has been on the public markets since 2008 and has returned over $13.4 billion to investors in the form of dividends during that time, as of the second quarter. It has a current dividend yield of 13.8% and an annual payout of $1.44 monthly. In September, Fandetti upgraded AGNC from Equal Weight to Overweight and raised the price target from $10 to $12.
Naturally, AGNC’s performance is heavily influenced by interest rates, mortgage rates and the overall housing market. When interest rates rise, the value of AGNC’s assets can decline, while lower rates generally benefit the company. Speaking to analysts on the second-quarter earnings call in July, CEO Peter Frederico said he expects the demand for mortgages to improve after the election. “I think bank regulation will ultimately prove to be less onerous than we had feared and that actually may lead to demand for mortgages.”
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Time To Take A Look At Annaly Capital Management?
Annaly Capital Management, Inc. (NYSE:NLY) is similar to AGNC, investing primarily in MBS and other real estate-related assets. It is one of the largest mortgage REITs in the U.S. and has heavy exposure to the GSEs. It also invests in residential credit, commercial real estate and corporate debt. Annaly’s Residential Credit Group is the largest non-bank issuer and the second-largest prime jumbo and jumbo credit MBS issuer. It has a current dividend yield of 13% and pays an annual dividend of $2.60 quarterly. Fandetti upgraded Annaly from Equal Weight to Overweight and raised the price target from $19 to $23.
One area of growth for Annaly is mortgage rights servicing (MSR). Annaly just announced a partnership with Rocket Companies (NYSE:RKT). Rocket Mortgage will be the sub-servicer of the Annaly portfolio.
On the July earnings call, CEO David Finkelstein said, “We remain well-positioned to grow our MSR business given our structure and partnerships and we believe we have constructed one of the most durable and high-quality portfolios within the MSR sector.”
These two upgrades may signal positive signs emerging in the residential real estate market. With mortgage rates falling, there is hope that mortgage originations will rise and the housing market will regain strength.
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This article Wells Fargo Analyst Upgraded These Two Very High-Yield Mortgage REITs, What’s Behind The Move? originally appeared on Benzinga.com
