The Back to Work Trade Is On

One ETF that I have followed closely over the past 9 months has been the Credit Suisse X-Links Monthly Pay 2xLeveraged Mortgage REIT (REML – NASDAQ)

REML is a levered way to play the REITs.  It tracks the iShares Mortgage Real Estate ETF (REM -NASDAQ), which tracks the FTSE Nareit All Mortgage Capped Index, but with 2x leverage.

I bought REML as a trade back in April when I saw that the residential housing market appeared to be coming out of the lockdown on stronger footing than ever.  That turned out to be the case and REML moved from $2.50 to $4 over the next few months.

Since then I have been watching REML but the ETF has been trading in a channel since August–until Monday, when Pfizer’s news on a potential vaccine for COVID was announced.
Monday REML broke out of its long-held channel–and Tuesday that that break out was extended.

What happened to REML the last two days?

Simply put, the stay-at-home trade just became the back-to-work trade.

With the announcement of positive results from the Pfizer vaccine trial the market has gained confidence that COVID will end.  The expectation now is  that a vaccine will be available by year end and administered to the majority of those who need it in 9-12 months.  We should see life returning to some kind of normal by this time next year.

What does that have to do with REM and REML?  Well these ETFs are really made up a few different kinds of REITs.

The first type of REIT in the index is the reason I bought REML back in April.  These are residential mortgage REITs. 

The two biggest positions in the underlying REM ETF are Annaly Capital Management (NLY – NYSE) and AGNC Investment REIT (AGNC – NYSE).

These are companies that investment in residential mortgage securities.  Looking further down the list and you will find that other residential mortgage REITs like New Residential (NRZ – NYSE)PennyMac (PFSI – NYSE) and Two Harbors Investment (TWO – NYSE) are also 3% holdings in the ETF.

These stocks have done well the last two days, but they are not where the real moonshots lie.  That comes from the other kind of REIT that the ETF is composed of – the commercial REITs.

REM’s third biggest position (at 7.5%) is Starwood Property Trust REIT (STWD – NYSE).   Starwood is a commercial real estate REIT.  Loans on office space makes up 34% of their lending book.  Another 22% of their lending book is hotels.

Starwood’s stock has soared on the Pfizer news.

The fourth biggest position in the fund, with a 5.6% weighting, is Blackstone Mortgage Trust REIT (BXMT – NYSE).

Like Starwood, Blackstone is a commercial REIT.  60% of their loan portfolio is office space.  Another 13% comes from hotels.

Blackstone’s chart looks a lot like Starwood’s.

Scroll down the list and there are several other commercial REIT’s with 2-3% weighting in the index that have exploded on the vaccine news.

On top of that, the fifth largest position in REM is Hannon Armstrong Sustainable Infrastructure REIT (HASI – NYSE).  Hannon is not a pure-play on commercial real estate, but they are into something just as good – they make loans on renewable energy and energy efficiency projects.  Which is a now a Biden play.

You can see why REML has exploded.  Up until now the REIT index has been supported by a single leg – the residential REIT’s in the index.  But now the commercial REITs have added their own rocket fuel.

This may just be the start.  The commercial real estate stocks remain well off their pre-COVID levels. 

Blackstone was $35 stock pre-COVID and even after the two-day pop it is only $26.  Likewise, Starwood was worth $23 in February versus $17 right now.

There is plenty of room for these stocks to run on more good vaccine news.

Keith Schaefer