B. Riley FBR Inc. analyst Tim Hayes chose Ellington Financial Inc., New Residential Investment Corp., Starwood Property Trust Inc. and Jernigan Capital as his top picks for 2020 in the commercial and residential mortgage REITs and business development company sector for 2020.
The analyst lauded Ellington Financial and New Residential's ability to take advantage of potential market volatility, and he expects 2020 to be a "breakout year" for Jernigan as its embedded acquisition pipeline drives stronger net asset value creation than peers. For Starwood Property, "a low-rate environment, coupled with modest economic growth, is a very supportive backdrop," the analyst wrote. All the companies are rated "buy."
Broadly, Hayes expects "accommodative Fed policy to continue to drive demand for yield, which should support strong valuations for mREITs and BDCs." The current macro environment is supportive of commercial real estate transaction activity and fundamentals, which should benefit mortgage REIT valuations and earnings power.
The analyst is "constructive" on the commercial mortgage REIT space and "more cautious" on the BDC sector as it now trades near historically high valuations. Still, he is "constructive" on select BDCs that appear well-positioned to weather a cycle.
"We also continue to favor hybrid residential mREITs that have the ability to take advantage of potential volatility and allocate capital across different strategies," Hayes wrote.