Wunderlich Mortgage REIT Update: 5 Big Moves Since April

On June 22, Wunderlich Securities analyst Merrill Ross published a research update on 13 mREITs under coverage by the firm.

Overall, Ross is not a fan of the sector right now, giving mREITs an Underweight recommendation, noting "a dim look for multiple expansion," and mREIT dividends under pressure from "market volatility."

Notably, mREITs use interest rate spreads and leverage to generate revenues from mortgage assets, which are notoriously sensitive to economic reports and market sentiment regarding interest rates.

However, there are still three Buy rated mREITs for investors to consider:

• American Capital Agency (NYSE: AGNC)
• CYS Investments, Inc. (NYSE: CYS)
• Invesco Mortgage Capital Inc. (NYSE: IVR)

On June 15, Wunderlich downgraded two mREITs from Buy to Hold:

• AG Mortgage Investment Trust (NYSE: MITT)
• Two Harbors Investment Corp. (NYSE: TWO)

Tale Of The Tape - Performance 2015 YTD

A Look Back - Wunderlich 5 Buy Rated Picks April 6

A Benzinga article published in early April (see link below), summarized Wunderlich views on macroeconomic trends, interest rates, and other factors that might influence mREIT performance in 2015.

Related Link: How Will mREITs Perform In Tomorrow's Economy?

The risk factors and performance caveats noted by Wunderlich back in April, were quite prescient, and worth reviewing.

Tale Of The Tape - April 7 to June 22, 2015

Wunderlich - mREIT Price vs Book Value Per Share

The informative table below shows the relationship between the price of shares and estimated BVPS for the 13 mREITs under coverage.

Ross noted that the Friday's closing price for AGNC of $19.82 equated to "… 79% of trailing BVPS, a level where [Wunderlich] think[s] the shares could get some support from share repurchase activity, which could provide price support through the end of the month."

Wunderlich - AGNC: Buy Rated, $21 PT

• The current Wunderlich target price represents a ~6 percent price upside to AGNC shares based upon the recent close of $19.82 per share; a total return of over 18 percent including the dividend, currently yielding 12.1 percent.
• Notably, the Wunderlich American Agency target price on April 6, was $26.50 per share.

Wunderlich - CYS: Buy Rated, $9 PT

• The current Wunderlich target price represents a ~7 percent price upside to CYS shares based upon the recent close of $8.41 per share; a total return of over 20 percent including the dividend, currently yielding 13.3 percent.
• Notably, the Wunderlich CYS Investments target price on April 6, was $10.00 per share.

Wunderlich - IVR: Buy Rated, $17.50 PT

• The current Wunderlich target price represents a ~9.8 percent price upside to IVR shares based upon the recent close of $15.93 per share; a total return of just over 20 percent including the dividend, currently yielding 11.3 percent.
• Notably, the Wunderlich-Invesco Mortgage target price on April 6, was $19 per share.

Wunderlich - mREIT Bottom Line

When it comes to investing in mortgage REITs in 2015, Wunderlich sees a "… dim outlook for multiple expansion."

Ross feels "…that, on average, the companies will generate returns on invested capital averaging 11.3%," at a projected average of 5.5 turns of leverage.

"Operating an agency MBS portfolio at high financial leverage in a volatile market is probably a risk that is not worth taking in 2015," was a key takeaway from Wunderlich's research note.

Investor Takeaway

Investors unfamiliar with mortgage REITs are often seduced by the high dividend yields.

However, the dividend distributions can be volatile due to levered asset portfolios which are sensitive to the rate environment. Wunderlich noted that five covered mREITs had cut dividends in 2015 YTS, with one Hold rated mREIT cutting dividends twice.

Additionally, changes in book value per share and mREIT earnings multiples can result in significant share price erosion -- risking a loss of capital.