Mortgage REITs raising money, may focus sights on agency MBS
Agency mortgage real estate investment trusts have raised about $6.6 billion of new capital since December 2010, according to a Barclays Capital securitized product research report released Friday. "Since mortgage REITs aim to capitalize on the spread differential between their MBS (mortgage-backed securities) assets and funding, it is no surprise that the current environment would be viewed as attractive," the research said. This should translate into $40 billion to $65 billion of agency mortgage-backed security demand, the report said. "Over the past few months, mortgage REITs have been aggressively raising equity, which should translate into significant demand for MBS," the research said. American Capital Mortgage Investment filed on Friday with the Securities and Exchange Commission to raise up to $500 million in an initial public offering. And on Thursday, Preferred Apartment Communities, a new REIT that formed to acquire multifamily properties in the U.S., raised $45 million by offering 4.5 million shares. Although a significant amount of REIT buying has already occurred, Barclays Capital said REIT demand for agency MBS should continue into the second quarter. However, Barclays Capital said there are a number of potential risks to the mortgage REIT business model such as higher short rates, which could force REITs to take on more leverage in order to prevent their earnings and dividend yields from falling. Another risk is reduced availability of term funding, where if financing becomes scarce it could become more challenging for REITs to grow and/or roll their current financing. Also, sharp spread widening and/or spread volatility could be a risk to the REIT model because changes in the mark-to-market of assets could result in margin calls. This could also act to reduce earnings or drive up hedging costs. This risk, however, is probably less of a concern compared with rising short rates or a reduction in the availability of term financing, Barclays Capital said. Hybrid adjustable-rate mortgages have been a traditionally popular investment with agency REITs, yet limited supply and tight valuations are likely to spur purchases in fixed-rate collateral and collateralized mortgage obligations. Write to Shaina Zucker.