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Wells Fargo downgrades 5 mortgage REITs on cautious sector view

Wells Fargo analyst Joel Houck in an April 11 note downgradedInvesco Mortgage Capital Inc.,MFA Financial Inc., ,Capstead Mortgage Corp.and Apollo Commercial Real EstateFinance Inc., saying he continues to be cautious toward mortgage REITsin 2016.

Houck said the concern is warranted in light of the anticipatedturbulence related to first-quarter earnings in spite of an improvement in creditspreads in March. The analyst said he is particularly cautious of companies withbook value that show above-average downward volatility, saying those companies arelikely to face pressure.

In the residential subsector, the analyst lowered his ratingson Invesco, MFA Financial and Western Asset Mortgage Capital to "underperform"from "market perform." Houck said that under his model, Invesco and WesternAsset will see first-quarter book values drop more than 6%, while MFA Financial'sbook value is projected to decrease 3.5%. The analyst noted, however, that MFA Financialhas the most expensive stock on a price/book basis in the subsector.

In the agency subsector, Houck downgraded Capstead to "marketperform" from "outperform" as its shares trade at a premium valuationcompared with other companies in its subsector.

The analyst downgraded Apollo Commercial to "underperform"from "market perform," saying that under his model, the company's bookvalue per share will drop 3.5% in the first quarter, setting it apart from othercompanies in the commercial subsector. Houck attributes the decline to a fundamentaldeterioration in the company's investment portfolio. He also said that the companysees additional risk from its exposure to North Dakota's Bakken shale and New York'shigh-end condominium market.