JP analyst ups estimates on mortgage REITs

JPMorgan Chase & Co. analyst Andrew Wessel has raised earnings estimates and price targets on several mortgage real estate investment trusts in the wake of the Fed’s latest rate cut InvestmentNews, Dec. 15. In a research note released today, he boosted his outlook for MFA Mortgage Investments Inc. of New York and Annaly Capital Management Inc., also of New York, both of which buy mortgages that are backed by Fannie Mae of Washington and Freddie Mac of McLean, Va. The Fed’s decision to cut the target federal funds rate from a range of 0% to 0.25% will mean cheaper funding costs for mortgage REITs, and therefore bigger profits on the mortgages they purchase, Mr. Wessel wrote. The bigger the spread between funding costs and yields on mortgages they purchase, the bigger the profit. Mr. Wessel expects Annaly’s portfolio spread to expand to 3.25% and MFA’s spread to widen to 2.65% by the fourth quarter of 2009. He raised his 2009 earnings estimate for MFA to $1.18 a share, from 88 cents, and increased his projection for Annaly to $3.10 a share, from $2.21 a share. “We believe these estimates may prove conservative,” Mr. Wessel added. And since the two entities invest in agency mortgage REITs, the portfolios hold less risk. “Given the lack of credit risk in these portfolios, the stable access to repo funding and sizable return opportunities, we reiterate our overweight ratings,” Mr. Wessel wrote. Both will benefit from much lower funding costs available in the repo market today, which he estimates will average 30 basis points over London interbank offered rate, which is the rate banks charge each other for overnight, through 2009. Mr. Wessel raised his price target on MFA to $7.50 and Annaly’s to $20. MFA’s shares recently traded at $6.09 a share, while Annaly’s recently changed hands at $15.70 a share. Both REITs offer dividend yields of between 13% and 15%.