Two Harbors Investment Corp. (TWO) has large exposure to nonagency RMBS and the underlying improving home prices and delinquency rates, leading this hybrid REIT to post double-digit upside year to date as the overall economic environment seems to firm up, says Daniel Altscher, Research Analyst and Vice President at FBR Capital Markets & Co.
“Two Harbors, which is actually my top pick, that stock is up 18% year to date. You’re really seeing the benefits there of the hybrid flexibility model, because those names are also tied to an overall improvement in the economy. A lot of these names own nonagency RMBS that was purchased during the crisis; a name like Two Harbors owns their book at $0.50 on the dollar, which is obviously very, very cheap,” Altscher said.
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Altscher says names like TWO with a hybrid flexibility model are outperforming their agency mortgage REIT peers, because they are also tied to macroeconomic improvements.
“Those names are benefiting from an improvement in the economy and improvement in credit; they really are a credit reflation trade, if you will, versus the agency mortgage REITs, where obviously there is no credit risk, so you’re not playing the credit trade there, you’re just playing the shape of the yield curve, which has been more troublesome, you could say, to some investors. So I largely prefer the hybrid mortgage REITs over the agency REITs, and you’ve seen investors follow as those stocks perform much better versus the pure-play agency REITs,” Altscher said.
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