瑞信-美股-房地产行业-居民按揭REIT2019年展望：收益比去年有所提高但仍低于平均水平-2019.1.4-21页.pdf

Credit Suisse Equity Research Americas/United States Residential Mortgage REIT 2019 Outlook:Returns to Improve From Last Year,but Still Below Average;NRZ,PMT Top Picks January 4,2019 RESEARCH TEAM Douglas Harter,CFA Research Analyst(212)538-5983 douglas.hartercredit- Sam Choe,CFA Research Associate(212)325-5957 samuel.choecredit- Josh Bolton,CFA Research Associate(212)325-8963 joshua.boltoncredit- DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.1 Key Themes for 2019 Across Residential Mortgage mREITs 1.Economic Return Expectations In 2019 we expect the residential mREITs to deliver a 5.5%economic return comprised of an 11.3%dividend yield and a 5.8%decline in book value.We are expecting less dispersion of BV results than witnessed in 2018,as we expect MBS and rate volatility to be modestly lower year over year after a volatile 2018.The key assumptions behind our book value decline are:1)10 bp widening of Agency MBS spreads,2)a modest decline in non-Agency MBS prices,and 3)a 35 bp rise in 10-year Treasury rates.2.Investment Returns As is the case with mREITs,what is bad for book value is good for incremental investments.To date this is most noticeable with Agency MBS,where a minimal duration gap ROE has improved by 100+bps given the widening of spreads(larger duration gap returns have improved less given the impact from the flatter curve).Credit assets have shown less weakness and therefore the return pickup is more modest.The mREITs with modest leverage heading into 4Q18 will be better positioned to withstand the book value moves and potentially take advantage of new investments by modestly increasing leverage.3.Valuation Following the recent stock weakness the residential mREITs are trading at a 3%discount to 4Q18 estimated book value compared to a long-term average of a 2%discount.Given our expectations for a 5.8%decline in book values in 2019 we do not expect the sector to trade at or above current book values despite the continued high dividend yield.As we roll forward our 2019 economic return assumptions we have lowered our target prices by 2%on average,changing TPs for 8 out of 16 mREITs;see slide 6 for our changes.2018 was a challenging year for the mREITs,with a 2.4%estimated economic return for the year.Many of the challenges(Fed balance sheet unwind,increased recessionary concerns)that were present in 2018 will remain in 2019 and keep expected returns below the long term average.The recent sell-off in the sector has improved valuations and puts the risk/reward for the sector as more balanced.Despite the likely Fed pause,we are not more positive on the sector given the expected decline in book value in the coming year.We continue to favor the mREITs with better risk-controls and less historical volatility in returns.Our top picks for residential mREITs in 2019 are NRZ and PMT.2-0.10.00.10.20.30.40.50.60.70.8Aug-13Aug-14Aug-15Aug-16Aug-17Aug-18MSR,52.7%Residential Securities,36.2%Residential loans,8.9%Consumer Loans,2.1%$18 Target Price,$5.2B Mkt Cap NRZ P/B Spread vs Peer Average Equity Allocation by Strategy Valuation Our$18(from$20)target price represents 1.10 x 4Q18E book value and a 11.1%dividend yield.Source:Company data,Credit Suisse estimates CS Thesis Investment opportunities:With continued challenges in the mortgage banking industry we expect there to be opportunities for NRZ to acquire additional MSRs or expand its origination footprint.The$430 million capital raised in 4Q provides NRZ with the necessary liquidity.Slow CPRs to continue:The recent decline in interest rates is unlikely to cause a meaningful pickup in refinance activity and therefore unlikely to lead to a deterioration in NRZs profitability on the MSR portfolio.A move towards 2%on the 10-year would be needed to spur a meaningful pick up in CPRs.Relative valuation:NRZ is trading at a 2%discount to the residential mREIT peer group compared to a long-term average of a 30%premium.NRZ is deserving of a premium relative multiple because of(1)higher expected ROE,(2)less book value sensitivity,(3)the value of call rights not captured in book,and(4)higher barriers to entry to replicate NRZs business.Catalysts Risks Deployment of capital into new servicing related investments Stabilization and/or increase in interest rates Meaningful decline in interest rates leading to increased refinance activity Weakening of the US housing market Inability to execute call rights profitably Top Pick New Residential(NRZ)3 0%10%20%30%40%50%60%70%80%Distressed LoansCRT/MSRMBS/Other24%11%12%-12%-40.0%-30.0%-20.0%-10.0%0.0%10.0%20.0%30.0%CRTMBS/OtherMSRDistressed3Q18 ROEMgmt Expected ROE$22 Target Price,$1.1B Mkt Cap 3Q18 ROEs vs Mgmt 2019 Expected ROEs Equity Allocation Valuation Our$22 target price represents a 9%premium to fourth quarter estimated book value.At our target price PMT yields 8.5%.Source:Company data,Credit Suisse estimates CS Thesis Capital rotation:PMT is finishing the wind down of the distressed loan portfolio,having reduced the equity allocation by 16%over the past 12 months.This portfolio will continue to decrease in 2019 helping to fund MSR and CRT investments.Attractive new returns:As capital is being freed up from the distressed portfolio it is redeployed into CRT and MSR,flow businesses where PMT controls the process.The returns on these businesses are in the 10-20%range.Given the attractiveness of returns we expect PMT to look to raise incremental capital in 2019,if attractively priced.Higher,more predictable earnings:The MSR and CRT investments produce both higher and more predictable core earnings for PMT than the distressed portfolio.This improved earnings profile should lead to a better valuation.Catalysts Risks Sustained level of core earnings above the current$0.47 dividend Book value stability in periods of volatility Weaker GAAP earnings on wider CRT spreads Inability to continue to grow MSR/CRT portfolios due to lack of access to new capital Top Pick PennyMac Mortgage(PMT)4 We expect the residential mREITs to generate a 5.5%economic return in 2019 compared to an average 11%return over the past 10 years.The 2019 economic return is expected to be generated with a 5.8%decline in book value and 11.3%dividend yield.Our book value estimate is based on the following assumptions:We expect persistent volatility in the current environment around the path of interest rates and the health of the economy.The following slides show our base case as well as the sensitivities around the key assumptions.Improved Economic Return,But Still Below Average 1.Rates 10-year Treasury yield increases to 3.0%(35 bps lower than prior estimate).Our estimates continue to assume 2 rate hikes in 2019,which would result in further yield curve flattening.2.Agency Spreads Agency MBS spreads widen 10 bps(same as prior estimate)this is consistent with our recent survey of mREIT management;link to survey results HERE 3.Non Agency Spreads We expect non-Agency MBS spreads will widen modestly as economic concerns increase(versus prior estimate of unchanged).5 15.4%17.9%25.3%-6.0%19.2%0.8%8.1%16.0%2.4%5.5%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%25.0%30.0%2010201120122013201420152016201720182019Improved Economic Return,But Still Below Average Historical Economic Return Source:Company data,Credit Suisse estimates Economic Return by Company 20122013201420152016201720182019EAGNC31%-13%18%-3%4%12%-2%7%AI7%11%13%-14%-5%20%-16%8%ANH12%-11%17%6%5%9%-7%-1%ARR29%-27%5%-10%0%18%-9%4%CIM23%11%34%0%13%18%8%8%DX24%-4%15%-4%4%14%-4%7%EARN-1%10%0%8%3%-1%4%EFC20%12%9%5%-1%6%10%5%IVR39%-2%15%0%12%19%-7%2%MFA43%9%11%2%13%11%7%4%MITT28%-6%17%0%11%20%5%4%NLY12%-15%18%-1%6%12%-3%6%NRZ-10%27%23%22%31%19%9%NYMT23%14%28%7%9%12%8%9%PMT17%16%13%6%9%9%10%6%TWO43%11%15%0%6%10%-2%7%6 Target Price Changes Source:Company data,Credit Suisse estimates Prior PriceCurrent%ChangeTargetTargetin TargetAGNCNEUTRAL$17.00$17.000.0%AINEUTRAL$8.50$8.00-5.9%ANHNEUTRAL$4.25$4.250.0%ARRUNDERPERFORM$20.00$20.000.0%CIMOUTPERFORM$19.00$18.50-2.6%DXNEUTRAL$5.75$5.750.0%EARNNEUTRAL$11.00$11.000.0%EFCOUTPERFORM$17.00$16.50-2.9%IVRNEUTRAL$15.00$15.000.0%MFANEUTRAL$7.00$6.75-3.6%MITTNEUTRAL$18.00$17.50-2.8%NLYNEUTRAL$9.50$9.752.6%NRZOUTPERFORM$20.00$18.00-10.0%NYMTUNDERPERFORM$5.50$5.500.0%PMTOUTPERFORM$22.00$22.000.0%TWOOUTPERFORM$14.50$13.00-10.3%Mean-2.2%Rating7-0.2%-0.2%-1.0%-1.7%-1.8%-2.5%-3.1%-3.1%-3.5%-3.9%-4.2%-4.2%-7.4%-8.0%-7.0%-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%MFANYMTCIMTWOMITTIVRDXARRANHNLYAGNCEARNAIThe biggest component of our estimated book value decline for the sector in 2019 comes from further widening of Agency MBS spreads.Our estimates assume 10 bps of additional spread widening;the sensitivity is fairly linear should the move be different than our expectations.In addition we are also assuming modest weakening of non-Agency prices as concerns about the health of the economy continue to build.Fundamentally we remain comfortable with the health of the US housing market given the supply/demand dynamics in the market.Book Value Outlook MBS Spread Risk Book Value Sensitivity to 10 bps of Agency MBS Spread Widening Source:Company data,Credit Suisse estimates,Credit Suisse Locus 8 7%-1%-1%-1%-2%-2%-3%-3%-3%-3%-4%-4%-5%-5%-5%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%NRZNYMTEFCCIMAIMFAMITTTWOARREARNIVRANHNLYDXAGNCOur book value estimate assumes a 35 bp increase in 10-year Treasury yields over the course of 2019.Given the uncertainty in the rates outlook(Fed policy,trade war,etc.)we show the book value sensitivity to an increase of 50 bps(our base case)as well as a 25 bp decline in rates.Importantly(especially to NRZ,PMT,TWO)this level of decline would not trigger a significant increase in refi activity;this would take a much larger 50+bp decline in rates.Book Value Outlook Rate Sensitivity Book Value Interest Rate Sensitivity(Up 50 bps)Source:Company data,Credit Suisse estimates Book Value Interest Rate Sensitivity(Down 25 bps)2%2%2%1%1%1%1%0%0%0%0%0%0%-2%-2%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%ANHNLYDXAGNCMITTIVRMFAARRCIMEFCNYMTTWOEARNAINRZ9 6.0%7.0%8.0%9.0%10.0%11.0%12.0%13.0%0.00.51.01.52.02.53.03.54.04.55.0Legacy non-Agency MBSAgency MBS Jumbo AAAsCRTCMBSIncremental returns on new Agency MBS purchases has improved over the past 2 quarters as a result of the spread widening.With relatively low CPRs the key to accessing these wider returns will be the ability to access incremental capital.Our recent survey of mREIT managements showed that legacy non-Agency MBS was expected to deliver the highest return in the coming 12 months,followed closely by Agency MBS.Jumbos,CRT,and CMBS were viewed less favorably;link to survey results HERE Earnings Outlook Incremental Returns 30 year 4.0%Agency MBS Incremental ROE Source:Company data,Credit Suisse estimates,LOCUS,Credit Suisse Survey,SurveyMonkey MBS Survey Ave Rank of Returns(1-5,1 best ranking)10 2.90%3.10%2.00%2.20%2.40%2.60%2.80%3.00%3.20%1Q192Q193Q194Q191Q202Q203Q204Q20CS EstFed Funds FuturesFed Dots(Dec Meeting)Our base case estimates assume that the Fed will increase rates 2 times(March and June)in 2019 compared to the market pricing in-0.25 hikes.If the market is correct and the Fed will be on an extended pause we anticipate to see 2%upside on average to our EPS estimates.Earnings Outlook Short-Term Rate Assumptions(as of 12/31)Source:Company data,Credit Suisse estimates,Credit Suisse Locus 11 As mentioned on the prior slide incremental returns are higher today given the spread widening.The 2 ways to access those higher returns are through raising incremental capital or increasing leverage:While incremental returns have improved the mREITs are at the mercy of the market for what returns are available.As a result we have a preference for the mREITs that can source and create their own investments,like NRZ(MSRs,call rights),PMT(CRT,MSR)among our Outperform rated names.Earnings Outlook Asset Growth 1.Capital Raising We expect capital raising activity to remain relatively robust,like 2018,given the relative attractiveness of new investments,with the stock price/valuation being the main gating factor.2.Leverage Leverage levels will increase in 4Q given the decline in book value.We see modest leverage increases continuing in 2019,especially for the mREITs that do not have access to raise new capital.12 7461,3003244,7524,665-272-1,153-450-110-52-2,000-1,00001,0002,0003,0004,0005,0006,00020142015201620172018IssuanceBuybacks12.99.78.87.77.67.27.17.05.55.34.13.73.62.32.11.40.02.04.06.08.010.012.014.0AIEARNAGNCARRANHNLYDXIVRTWOCIMMITTNRZPMTEFCMFANYMT3Q18 LeverageExpected Incremental Leverage in 4Q18Earnings Outlook Asset Growth mREIT Common Equity Issuance($M)Source:Company data,Credit Suisse estimates Leverage 13 41%10%26%15%18%16%17%21%33%13%14%10%10%10%7%4%-4%-4%-6%-3%-5%-4%-7%-6%-8%-8%-10%-7%-7%-7%-12%-12%-20%-10%0%10%20%30%40%50%NRZMFAPMTTWOEFCCIMEARNMITTAIIVRANHDXNLYAGNCARRNYMTOur outlook for 2019 reinforces our long held preference for mREITs with an ability to protect book value in periods of volatility.The biggest differentiator among our ratings is not the upside potential,but rather the ability to protect the downside.In addition we have a preference for mREITs that can source and structure their own investments.Our current Outperform rated names among the residential mREITs are NRZ,EFC,PMT,CIM,and TWO.While MFA screens attractively from a risk perspective we dont see enough upside to justify an Outperform.Better Value in Risk Protection Upside to our Target Price vs Downside to our Grey Sky Scenario(including dividends)Source:Company data,Credit Suisse estimates,Thomson Reuters;Grey Sky scenario assumes a 70 bp increase in interest rates,a 5%decline in credit asset prices,and 25 bps of MBS spreads widening.14 184%162%160%134%126%100%66%49%47%45%44%37%37%20%10%-1%-50%0%50%100%150%200%PMTNRZCIMMFANYMTMITTEFCEARNNLYIVRTWODXAGNCANHARRAIOur preferred metric to judge the historical performance is the average economic return divided by the standard deviation of the returns.The historical data tells a similar story(on a relative performance among the mREITs)to the downside scenario and reinforces our confidence in our risk/reward forecasts.Risk-Adjusted Returns Average economic return divided by standard deviation of returns(past 12 quarters,including 4Q18E)Source:Company data,Credit Suisse estimates,Thomson Reuters 15 0.700.610.700.720.550.600.700.670.590.810.750.560.620.670.630.691.161.061.041.021.021.001.010.950.950.950.950.960.910.850.860.811.311.271.151.131.431.071.211.071.141.601.141.071.041.361.061.080.000.200.400.600.801.001.201.401.60