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Mortgage REITs Fail to Catch a Wave

Two-Story-HouseThe Mortgage REIT sector—an investment class in which participants invest in secondary market mortgages—is unlikely to catch a break in the third quarter due to rate uncertainty, quick prepayments and spread widening, analysts with Keefe, Bruyette & Woods (KBW) said Friday.

Still, the single-family rental segment continues to look fairly solid.

KBW called the third quarter difficult and estimates mREIT book values will fall 3.5 percent quarter-over-quarter, with more mREITs reporting earning misses than positive results. To make matters worse, KBW noted that “while nearly half the group cut dividends in 3Q we expect management commentary to suggest more cuts ahead.”

Overall, the sector continues to brace for heavily discounted books, as rate uncertainty remains a challenge for mREIT investors.

Despite all of the pessimism, KBW’s report on single-family rental REITs looked more favorable, with analysts predicting improved net operating income margins on increased occupancy.

KBW rated two single-family REITs – American Homes 4 Rent and Starwood Waypoint Residential – as outperform, with price targets of $19.00 and $29.00, respectively, up from current prices of $16.62 and $24.88.

Meanwhile, Altisource Residential Corp. and Silver Bay Realty Trust ranked as market perform by KBW.

For American Homes 4 Rent, KBW placed the REIT’s occupancy at 93.5 percent in its forecast, while projecting an acquisition of 900 homes. Last month, the American Homes 4 Rent board approved a $300 million share repurchase program—a development that KBW views favorably.

Starwood Waypoint Residential is forecasted to acquire 550 homes, with management expected to pay $80 to $120 million in the third quarter on single-family acquisitions. KBW projects the REIT will have a portfolio leased rate of 93.6% and an occupancy rate of 90.7 percent.

KBW pointed to Starwood Waypoint’s merger with Colony American Homes as a boon for the firm, saying “while dilutive to book value,” the deal will resolve strategic issues that “SWAY has been facing including scale and its externally managed corporate structure.”

About Author: Kerri Panchuk

Kerri Panchuk is an attorney and financial writer with more than a decade of experience covering real estate, default servicing, residential mortgage-backed securities, retail, macroeconomics, and commercial real estate. Panchuk graduated from the Southern Methodist University Dedman School of Law and Texas Tech University. Panchuk previously served DSNews.com as online managing editor/producer and webcast anchor and is currently a contributing writer and editor for the MReport. Panchuk is a member of the State Bar of Texas.
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