With first-quarter earnings kicking off this week, mortgage-backed securities real estate investment trusts are slated to ‘outperform’ the broader market due to modestly above book values and forward dividend yields, according to analysts with Keefe Bruyette & Woods.

As a result, nonagency-mortgage REITs are set up to produce more opportunities for investors. This is due to nonagency MBS providing a good hedge against interest rates and offering optionality to a mortgage credit recovery.

MBS REITs common stock price performance outperformed the sector for Q1, with an average total return of 14.7%, compared to 10.5% for the Standard & Poor’s 500 Index. 

“Returns reflected both strong share price appreciation and dividends (the average dividend yield came in at 2.9% unannualized),” analysts noted in their latest equity research report. 

Two Harbors (TWO) and Chimera (CIM) were the best performers in the sector with total returns of 27.9% and 25%, respectively.

As a result, there are still various attractive opportunities in the majority of the residential mortgage REITs sector. 

“Our positive view of the space reflects valuation and dividend yields, which are in the high single digits or low double digits. While we do not expect much book value appreciation from current levels, we believe that the current dividends still constitute an attractive total return,” KBW explained.

Meanwhile, uneventful earnings surprises for MBS REITs are expected this quarter. 

“While we expect mixed earnings results for the residential MBS REITs in first quarter 2013 versus fourth quarter 2012, all of the companies in our coverage have announced their dividends, so we would not expect any major surprises,” the report said. 

As net spreads on new investments have increased since last year, Q1 will come to mark trough earnings and dividends for most companies. 

Furthermore, higher net spreads on new investments reflect a combination of positive trends, including higher average asset yields, generally lower funding costs driven by low swap rates and modestly lower prepayments.


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