Turmoil in Funding Markets Drags Down Mortgage REITs
March 18 2020 - 5:03PM
Dow Jones News
By Ben Eisen
Shares of mortgage real-estate investment trusts declined
sharply Wednesday, reflecting growing concerns about firms that use
borrowed money to juice returns at a time when funding markets are
in turmoil.
Annaly Capital Management Inc. and AGNC Investment Corp., among
the biggest mortgage REITs, fell 47% at their lows. Redwood Trust
Inc. fell 56%, New Residential Investment Corp. dropped 56% and Two
Harbors Investment Corp. fell 64%.
They pared losses late in the session, but the stocks fell far
further than the broader S&P 500 index, which slumped 5.2%
Wednesday.
REITs typically employ borrowed money to buy up real-estate
assets. In this case, they tend to load up on mortgage-backed
securities, and they have grown their prominence in the mortgage
market in recent years. But mortgage-backed securities have been
particularly volatile during the selloff.
The spread of the novel coronavirus has sparked a financial
panic that has made short-term funding harder to come by for
some.
That is a big problem for firms, like mortgage REITs, that rely
heavily on borrowed money. Leverage allows investors to amplify
returns. Likewise, it can amplify their declines when the market
turns, leading lenders to demand more collateral to cover potential
losses. Analysts say that there has been forced selling among
mortgage investors during the recent market swoon.
One spark for the selloff, according to Keefe, Bruyette &
Woods Inc. research, was the announcement by UBS Group AG that it
was closing down two exchange-traded notes tied to mortgage REITs.
They were shut down because of requirements that they redeem shares
once their value falls below a certain threshold, according to
UBS.
Still, "today's performance appears more overdone," relative to
the small size of the UBS notes, said KBW analyst Melissa Roberts
in a research report.
Executives say the sector is still attractive and stands to
rebound once the market turmoil ends. "As the dust settles, we
expect this to be an incredibly attractive time for our business
model," said David Finkelstein, chief executive at Annaly, in a
call with investors on Monday.
Mortgage REITs in particular have been under pressure during a
market selloff that has hammered nearly every stock and investment
asset. Some are down more than 60% so far this year, more than
double the drop in the S&P 500.
Write to Ben Eisen at ben.eisen@wsj.com
(END) Dow Jones Newswires
March 18, 2020 16:48 ET (20:48 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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