Though real estate investment trusts (REITs) have been a popular vehicle for investments in the past, they have suffered over the past year. At current levels, Credit Suisse sees mortgage-based REITs as an attractive investment opportunity, based on stabilized book values and earnings outlooks. Perhaps the most attractive part of these REITs is their distribution yield. Credit Suisse’s top picks each has a distribution yield in the range of 9% to 15%.
Credit Suisse continues to favor the mortgage REITs that are creating operating businesses and can create their own investments. Additionally, the firm favors these mortgage REITs with more stable book values and earnings outlooks in the current volatility. Credit Suisse listed the top picks among its REIT coverage as: New Residential Investment Corp. (NYSE: NRZ), PennyMac Mortgage Investment Trust (NYSE: PMT), Two Harbors Investment Corp. (NYSE: TWO) and Starwood Property Trust Inc. (NYSE: STWD).
With mortgage REITs being off close to 20% from their highs, investors have to be considering what lies ahead for the sector, as rising interest rates may come into play sooner rather than later.
Considering the large and sustained discount to book values, the brokerage firm expects to see increased share repurchase activity in the third quarter. This will be one of the factors that differentiates management team performance in the quarter.
The brokerage firm said in its report:
While we acknowledge the risk, the risk/reward opportunity for mREITs is attractive as the possibility of further, substantial book value declines has moderated, with MBS spreads already wide of long-term averages, and the risk of interest rates rising has eased. This reduced book value risk, combined with the current 29% discount to book value, provides the attractive opportunity. However, with the volatility likely to persist, we don’t see a catalyst for the valuation to improve in the near-term and expect the majority of the return coming from the 14.4% dividend yield.
New Residential shares were up 1.3% on Monday, at $12.98, within its 52-week trading range of $11.78 to $17.91. The stock has a consensus analyst price target of $18.85. It has a distribution yield of 14.4%.
Shares of PennyMac were up 0.5% to $15.44. The stock has a consensus price target of $18.85 and a 52-week trading range of $14.68 to $23.08. Its distribution yield is 12.2%.
Two Harbors shares were up 1.5%, at $8.98 in its 52-week range of $8.00 to $11.00. The consensus price target is $10.82. The distribution yield is 11.8%.
Shares of Starwood were up 0.3% to $21.00. The consensus analyst price target is $25.69, and the 52-week range is $20.01 to $24.79. The distribution yield is 9.2%.