With an upcoming interest rate hike cycle and with economic uncertainty, many investors might shy away from the mortgage-related real estate investment trusts (mREITs). Just don’t bother telling that to Credit Suisse, as the firm has a report that highlights favorable valuations for what has historically offered very high-dividend yields to investors.
Credit Suisse’s Douglas Harter pointed out that the mREIT subsector’s book value was flat through the month of May, and he increased his estimates on a delayed Federal Reserve rate hike scenario. Because mREITs can have volatile earnings, their dividend payments can fluctuate as well. That means the dividend yield is often a snapshot rather than a static fixed amount you might see elsewhere.
Harter’s top picks favor mREITs that are creating operating businesses and can create their investments.
New Residential Investment Corp. (NYSE: NRZ) was the first mREIT mentioned. Shares are now near $17.07, with an $18.50 consensus analyst target and a 52-week trading range of $11.44 to $17.91. Its yield is represented as being 10.4%. Harter’s last report was on May 14, and he had an Outperform rating and $19.00 price target. New Residential Investment was said to have attractive total return potential with a near-term catalyst of a dividend increase.
PennyMac Mortgage Investment Trust (NYSE: PMT) was the second top pick, and at about $18.50, it has a consensus analyst target of $21.60 and a 52-week range of $17.69 to $23.08. Its yield is represented as 13%. Harter’s last report on PennyMac was on May 6, when he said the outfit had weak earnings, but with cash flows remaining strong. Harter lowered his target to $23 from $24 in that call.
Two Harbors Investment Corp. (NYSE: TWO) was the third on the list, with a 9.7% yield being represented. Trading around $10.69, Two Harbors has a consensus price target of $11.23 and a 52-week range of $9.60 to $11.00. Credit Suisse’s last report was May 6 on Two Harbors, with an obvious outperform rating and an $11.50 price target.
Trading at a 16% discount to second quarter estimated book value and yielding 12.6%, we see the mREIT sector offering an attractive risk/reward. The discount provides a cushion to the book value risk from rising rates allowing for the dividend to provide an attractive return.