Turmoil in Funding Markets Drags Down Mortgage REITs

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 [e-mail]

(END) Dow Jones Newswires

March 18, 2020 16:48 ET (20:48 GMT)

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