Investor Interest in REITs Should Stay Up

The analysts at Keefe, Bruyette Woods predict investors would be willing to take on more interest rate risk in light of the Federal Reserve Board’s intention to keep rates low through 2014 and that should keep their interest in mortgage real estate investment trusts growing.

Still, the risk for this sector remains declining interest rates leading to an increase in refinancings and a reduction in incremental spreads.

As for the fourth quarter earnings from these companies, Bose George, Jade Rahmani and Ryan O’Steen believe they will come in with mildly weaker results when compared with the third quarter, driven by lower rates resulting in higher prepayment speeds and narrower spreads on new investments.

“Dividends for most of the sector have been flat to down, and dividends are generally a good indicator of earnings. We expect slightly higher book values for the Agency MBS REITs (in the 1-3% range) and lower book values for those that invest in credit risk,” the report said.

As for the non-agency REITs, which include Chimera, PennyMac, Invesco, MFA Financial and Two Harbors, KBW said book values for these companies declined during the fourth quarter driven by declining asset values. “We estimate that non-Agency MBS prices declined roughly 2 to 5% during the quarter, depending on collateral. However, non-Agency MBS have rallied since year end, so we believe book values are likely up thus far in the first quarter,” the analysts said.

The report also notes that Redwood and Chimera were the worst-performing mortgage REITs in the fourth quarter last year with negative returns of 6.4% and 5% respectively, but in the first quarter they are the best performing companies.

Article source: http://www.nationalmortgagenews.com/dailybriefing/2010_529/investor-interest-reits-1028642-1.html

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