While July proved to be a trying month for agency mortgage real estate investment trusts, August is shaping up to be worse.
The underperformance in agency mortgage-backed securities continues to push REIT portfolio volumes lower, with current levels setting new annual lows – just above September 2011 volumes, according to Royal Bank of Scotland (RBS).
"Most individual names are down 25% to 30% on the backup and widening," explained RBS analysts Ashley Gam and Jeana Curro.
The summer proved to be a challenging season for REITs given rising mortgage rates, uncertainty when the Federal Reserve will begin to ease off its monetary stimulus and heightened volatility, Compass Point director of research Jason Stewar points out.
Such factors have made it difficult for REITs to bring new deals to market in July and August, leading to the third consecutive month where no notable capital was raised from REITs that invest in agency MBS.
"As a result of rising rates and wider spreads, many REITs have been better sellers of agency MBS over the past few months," RBS analysts noted.
They continued, "Furthermore, some REITs have altered their investment strategies somewhat. Additionally, some REITs are opting for shorter duration via 15 year pass-throughs or hybrid ARMS and showing less of a preference for specified paper."
Interestingly, when looking at the financial universe, the sectors performing the worst since interest rates started to rise in May, are homebuilders and mREITs at 27% and 23%, respectively, according to Compass Point.
"Within mREITs they have been relatively weak," Stewart said.
He added, "Agency mREIT companies described in their earnings a closing duration gap on their balance sheet. And as spreads move out, it makes sense why investors are very focused on book value right now and not anything else."
mREIT stocks took a beating Monday with including American Capital Agency Corp. (AGNC); Armour (ARR); Apollo (AMTG); Ellington (EARN);Answorth (ANH); Western Asset Mortgage Capital(WMC); Dynex (DX) and Newscastle (NCT).
Going forward, both mortgage data companies maintain that until market volatility dies down, it’s unclear how much demand will actually happen within the REIT sector.
