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REITs raise $54 billion in mortgage buying power: RBS

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Real estate investment trusts are on a money-raising spree. According to a research note from the Royal Bank of Scotland (RBS), REITs raised $9 billion of equity capital this year alone. This translates into $54 billion in buying power, assuming a leverage ratio of six times. The record REIT equity issuance is based on projections through Tuesday, assuming all obligations close (see chart below): RBS said this assumption does not include recent activity in the REIT sector, especially as in regards to new participants. PIMCO, for example, is creating a REIT. "We think it is a good time for REITs to invest in MBS," write RBS asset backed securities strategists Jeana Curro and Greg Reiter. "In spite of a fairly heavy net supply forecast for the near future, we remain mildly positive on the agency MBS basis over the next year." MBS investors are desperate for investments. Many sit on large cash holdings and are likely to invest in government-sponsored enterprises as the bonds can withstand further spread tightening. Additionally prepayment risk, when a borrower refinances their mortgage for example, is exceptionally low, RBS finds. Tighter credit standards, increased costs of mortgage servicing, decreases on capital returns and loan putback and litigation risks make lending more expensive and push out eligible refinancings. Drilling down to the collateral-level performance, the analysts see relative value in investing in bonds backed by adjustable-rate mortgages. On a rate of return basis, these ARMs are currently outperforming the pass-through market. REITs, by nature, must invest predominately in real estate. REITs are required to hold 75% of total assets in real estate-related investments, and dividending out at least 90% of annual net income. REITs also do not have to mark their assets to market each quarter. These entities enjoy a level of tax relief as incentive. Write to Jacob Gaffney. Follow him on Twitter @JacobGaffney.

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