Chicago, IL – November 6, 2024 – Today, Zacks Equity Research discusses ARMOUR Residential, Inc. ARR, REDWOOD TRUST, Inc. RWT and Invesco Mortgage Capital, Inc. IVR.
The Zacks REIT and Equity Trust industry is facing volatility in mortgage rates on several evolving factors. As the Federal Reserve lowers rates, mortgage rates are likely to decrease gradually, thus improving purchase originations and refinancing activities. The mREIT industry will likely witness book value improvement in the near term as spreads in the Agency market tighten, driving asset prices.
However, the volatile scenario in MBS markets and restricted financial conditions might affect industry players. Companies like ARMOUR Residential, Inc., REDWOOD TRUST, Inc. and Invesco Mortgage Capital, Inc. are well-poised to navigate industry chaos.
The Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Industry participants invest in and originate mortgages and mortgage-backed securities (MBS) and provide mortgage credit for homeowners and businesses. Typically, these companies focus on either residential or commercial mortgage markets. Some invest in both markets through asset-backed securities.
Agency securities are backed by the federal government, making it a safer bet and limiting credit risks. Such REITs also raise funds in the debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities. The 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.
This has mainly been caused by the U.S. presidential election and mixed macroeconomic data. Though the average rate on the 30-year fixed-rate mortgage increased to 6.72% at the end of October from 6.54% at the end of September, the same declined from 6.73% at the start of August. The 30-year fixed mortgage rate hovered around 7% for most of the year.
Although uncertainty will remain, mortgage rates are cresting and are less likely to reach the highs seen earlier this year. Hence, mortgage rates are expected to fall through the end of 2024 and into 2025 from last year. With several potential inflection points happening lately, including the 2024 election and the Federal Reserve interest rate cut, mortgage rates are expected to remain volatile. However, compared with the year-ago level, mortgage rates are witnessing a declining trend. Mortgage rates will probably go down through the end of 2024 and into 2025, but the decreases should be gradual.
Moreover, a decline in interest rate will continue substantially reducing borrowing costs for mREITS, thereby driving NIM expansion.
Fed Rate Cut Came as a Breather: Over the past year, volatility in the fixed-income markets, high interest rates, and the widening of the spread between the 30-year Agency MBS and 10-year treasury rate have affected valuations of Agency mortgage-backed securities. Agency mortgage REITs are witnessing slight decreases in tangible book value currently as spreads on benchmark indices have widened but have been more stable than the volatility in 2023.
As the central bank plans to lower interest rates also into 2025, it will ease earnings pressure for highly leveraged mREITs that are facing rising funding costs. Agency markets stand to recover from the interest rate relief.
Conservative Approach to Limit Returns: The volatile scenario in MBS markets, restricted financial conditions and resultant lower fixed-income fund flows have strained credit-risky assets. Hence, companies are making efforts to de-lever and de-risk their portfolios. This is likely to lower portfolio growth. Also, numerous mREITs have resorted to higher hedge ratios to reduce interest rate risks.
While such moves may seem prudent amid the ongoing uncertainties, those will impede industry players' earnings power. Hence, robust returns are expected to remain elusive as companies prioritize risk and liquidity management over incremental returns in the short term. As interest rates come down, this will help industry players gain confidence in shifting their portfolios to high-risk investment options, resulting in high portfolio growth.
The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #82, which places it in the top 33% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright prospects 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.
Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry's recent stock-market performance and valuation picture.
The Zacks REIT and Equity Trust industry has underperformed the broader Zacks Finance sector and the S&P 500 composite in the past year.
The industry has gained 11.1% in the above-mentioned period compared with the broader sector's rise of 32.5%. Notably, the S&P Index has grown 33.1% over the past year.
Based on the trailing 12-month price-to-book (P/BV), which is a commonly used multiple for valuing mREITs, the industry is trading at 0.95X compared with the S&P 500's 7.72X. In the past five years, the industry has traded as high as 1.14X, as low as 0.39X and at the median of 0.89X.
As finance stocks typically have a low P/BV ratio, comparing REIT and Equity Trust with the S&P 500 might not make sense to many investors. A comparison of the group's P/BV ratio with that of the broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector's trailing 12-month P/BV came in at 3.63X. This is above the Zacks REIT and Equity Trust industry's ratio.
ARMOUR Residential: The company invests primarily in Agency residential MBS. ARR's securities portfolio is backed by fixed-rate, hybrid adjustable rate and 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 the third-quarter 2024 end, total economic return, which is a change in book value for the period plus common dividends paid out for the quarter, was 5.81% against negative 4.76% for the second quarter of 2024. Its book value per share increased to $20.76 from $20.30 at the end of June 30, 2024.
The company's 2024 earnings have been revised 2.1% upward to 99 cents over the past month. It indicates a year-over-year decline of 7.5%. The top line is projected to continue its increasing trend in 2024, with year-over-year growth of 34.1%. ARR has a Zacks Rank of #2 (Buy) at present and a market capitalization of $1.04 billion. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
REDWOOD TRUST: It is a self-advised and self-managed real estate investment trust. RWT specializes in acquiring and managing real estate mortgage assets, which may be acquired as whole loans or as mortgage securities representing interest in or obligations, backed by pools of mortgage loans.
As of Sept. 30, 2024, the economic return on book value was 2.1%, up from 1.3% for the second quarter of 2024. Its book value per share increased to $8.74 from $8.73 as of June 30, 2024.
RWT's 2024 earnings have been revised 12.5% upward to 18 cents over the past month. It indicates a year-over-year surge of 260%. The top line is projected to continue its increasing trend in 2024, with year-over-year growth of 37.4%. The company has a Zacks Rank of 2 at present and a market capitalization of $961.2 million.
Invesco Mortgage Capital: IVR is a real estate investment trust focusing on financing and managing residential, and commercial mortgage-backed securities and mortgage loans.
As of June 30, 2024, the $5-billion investment portfolio consisted of $4.6 billion of Agency RMBS (including Agency TBA) and $0.4 billion of Agency CMBS. The company continued to maintain a sizeable balance of unrestricted cash and unencumbered investments totaling $446 million.
As of the end of second-quarter 2024, IVR has a book value per share of $9.27 compared with $10.08 at the end of the first quarter of 2024.
The company's 2024 earnings have been revised marginally upward to 79 cents over the past month, indicating a year-over-year decline of 47.7%. The top line is projected to continue its increasing trend in 2024, with year-over-year growth of 31.3%. IVR has a Zacks Rank of #2 and a market capitalization of $441.9 million at present.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
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
[email protected]
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
ARMOUR Residential REIT, Inc. (ARR) : Free Stock Analysis Report
Redwood Trust, Inc. (RWT) : Free Stock Analysis Report
INVESCO MORTGAGE CAPITAL INC (IVR) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
