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Credit Suisse Updates Mortgage REIT Sector, Names Top 3 mREIT Picks

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Credit Suisse Updates Mortgage REIT Sector, Names Top 3 mREIT Picks

Credit Suisse on Wednesday published a comprehensive note on the mREIT sector, "Book Value Improved From January Lows; 10.8% Discount to Book Attractive."

As the title suggests, Credit Suisse analysts believes that the risk/return on mREITs has improved, making the sector's 12 percent average yield more appealing for income investors.

Book Value Estimates

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That said, Credit Suisse also noted the "challenging operating environment," which makes them inclined to favor "mortgage REITs, which are building out operating businesses and can create their own investments."

3 Top Picks

  • PennyMac Mortgage Investment Trust (NYSE: PMT) $1.6 billion market cap.
  • Starwood Property Trust, Inc. (NYSE: STWD) $5.4 billion market cap.
  • Two Harbors Investment Corp (NYSE: TWO) $3.9 billion market cap.

cs_-_ychart_3_top_mreit_picks_apr_2.jpg

While PennyMac's dividend yield has been the highest during the past 12 months, its total return has lagged significantly behind Starwood and Two Harbors.

5-Year Risk-Adjusted Returns

However, when Credit Suisse took a longer view on risk adjusted performance PennyMac has notably been a top performer, returning 205 percent over the past five years, as can be seen on Exhibit 11, below.

cs_-_mreit_ex_11_5-yr_returns.jpg

Notably, Starwood Property Trust performance was not included for comparison although it has been publicly listed since August 2009.

PennyMac: Overweight, $24 Target Price

  • Shares closed on April 1, at $21.40 per share.
  • Credit Suisse new EPS estimates for 2015 - 2017 are $2.60, $2.58 and $2.50, respectively.

Starwood: Overweight, $26 Target Price

  • Shares closed on April 1, at $24.26 per share.
  • Credit Suisse new EPS estimates for 2015 - 2017 are $2.15, $2.25 and $2.35, respectively.

Two Harbors: Overweight, $11.50 Target Price

  • Shares closed on April 1, at $10.64 per share.
  • Credit Suisse new EPS estimates for 2015 - 2017 are $1.02, $1.06 and $1.10, respectively.

The consensus estimates and old Credit Suisse estimates can be reviewed in the table below as a basis for comparison.

Updates mREIT Sector EPS

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Investor Takeaway

While most investors are familiar with equity REITs that own office, retail, industrial and other commercial real estate asset classes -- mREITs are an entirely different animal.

Mortgage REIT strategies can vary widely, and while most mREITs benefit from interest rate decreases, others would actually benefit from rate increases. Asset classes, hedging strategies and leverage can vary widely from company to company.

It is crucial for a beginning investor to understand that a high mREIT dividend, can actually become a "sucker yield," if the book value of its assets declines, and/or the dividend is cut, resulting in a disappointing total return.

Latest Ratings for PMT

DateFirmActionFromTo
Feb 2019Keefe Bruyette & WoodsUpgradesMarket PerformOutperform
Nov 2018JMP SecuritiesMaintainsMarket OutperformMarket Outperform
Sep 2018Credit SuisseMaintainsOutperformOutperform

View More Analyst Ratings for PMT
View the Latest Analyst Ratings

Posted-In: Credit SuisseAnalyst Color REIT Price Target Reiteration Analyst Ratings General Real Estate Best of Benzinga

 

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