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.
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Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses, consider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.