When analysts initiate coverage on a stock, it means they will begin to provide research on it and make investment recommendations for it for the first time. It typically leads to an increase in trading volume and interest among investors. It can help shares of those stocks to move higher.
Typically, analysts initiate coverage on two or three similar stocks at a time. But consider this somewhat unusual scenario where a single analyst initiated coverage on eight different mortgage real estate investment trusts (mREITs) on the same morning:
On Dec. 6, UBS analyst Douglas Harter initiated coverage with a Neutral rating on the following mREITs and announced price targets for each (year-to-date return included):
The performance of different mREITs varies even though they're in the same subsector. Investors in MFA Financial are a lot happier this year than those holding shares of Invesco Mortgage Capital.
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Despite performance variations, the analyst rated all eight as Neutral, most likely pending further research and assessments of each. Yet three of these mREITs stand out from the pack this year in total returns:
Starwood Property Trust Inc. (NYSE:STWD) is a Greenwich, Connecticut-based mREIT that acquires, finances and manages first mortgages, mezzanine loans and other types of loans for commercial and residential real estate. Starwood Property Trust operates throughout the U.S., Europe and Australia.
On Nov. 8, Starwood Property Trust reported its third-quarter operating results. Adjusted earnings per share (EPS) of $0.49 beat the estimate of $0.47 but was below EPS of $0.51 in the third quarter of 2022. Revenue of $521.55 million missed the estimate of $523.77 million but was a 33.54% increase over revenue of $390.54 in the third quarter of 2022.
Starwood's 18.36% represents the highest year-to-date total return among the eight mREITs covered by the analyst.
MFA Financial Inc. (NYSE:MFA) is a New York-based mREIT that invests in residential mortgage-backed securities (MBS) and residential whole loans. In April 2023, Mfa celebrated its 25th anniversary on the New York Stock Exchange.
In September, MFA Financial announced the appointment of Michael Roper as chief financial officer, succeeding Stephen Yarad.
On Nov. 7, MFA Financial reported its third-quarter operating results. Non-generally accepted accounting principles (GAAP) earnings per share of $0.40 beat the estimates of $0.38. Revenue of $46.14 million beat the estimates of $44.86 million but was lower than third-quarter 2022 revenue of $52.29 million.
On Nov. 21, Raymond James analyst Stephen Lewis maintained MFA Financial with an Outperform rating while lowering the price target slightly from $13 to $12.50. MFA's recent closing price was $10.50.
The quarterly dividend of $0.35 imparts an annual dividend of $1.40, which presently yields 12.77%. The question is whether the dividend is sustainable, given that the payout ratio is a risky 95.8%. Still, that has not put a damper on its year-to-date performance of 18.21%.
Ellington Financial Inc. (NYSE:EFC) is an Old Greenwich, Connecticut-based mREIT that invests in diverse financial assets, including residential and commercial mortgage loans, residential and commercial mortgage-backed securities, consumer loans, collateralized loan obligations, nonmortgage and mortgage-related derivatives and other strategic debt and equity investments.
Ellington Financial takes on certain risks that other mREITs won't, but only if it feels the return adequately compensates for that risk. For example, loans are often made to underserved niche market segments that cannot procure loans elsewhere. Ellington Financial uses a risk-management infrastructure system to assess the risks involved in any deals it makes and charges higher interest rates to compensate for potential losses.
One risk Ellington Financial took this year was to actively pursue the acquisition of other mREITs. In May, Ellington announced it was merging with Arlington Asset Investment Corp. (NYSE:AAIC), and on July 3, it announced it also is acquiring Great Ajax Corp. (NYSE:AJX). The Arlington acquisition is pending a vote by shareholders on Dec. 12, but in October the Great Ajax acquisition was terminated by the mutual agreement of both company boards. The termination of the Ajax deal helped Ellington Financial's share price rebound by 21% since touching a low on Oct. 25.
The recent price rise is interesting, considering that on Nov. 7, Ellington's third-quarter operating results were disappointing. Earnings per share of $0.33 were 21.43% below the estimates of $0.42 per share and even further below its third-quarter 2022 EPS of $0.44 per share. Revenue of $27.51 million was 46.59% below estimates of $51.51 million and third-quarter 2022 revenue of $36.51 million. Wall Street is more concerned with the Federal Reserve's moves right now than with the earnings reports of mREITs.
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