As interest rates likely rise over the next five years, lending rates are expected to increase as well.
Unlike equity REITs, mortgage REITs generally don’t own properties.
Instead, they invest in debt by originating or buying mortgage securities that they manage in a loan portfolio.
Almost 90% of the 56 loans in the $3.6 billion loan portfolio are at floating rates, positioning the company for higher interest rates.
Estimated earnings of $2.54 per share in 2017 give a 98% payout ratio.
If we see a volatile equity market, their portfolio of mortgage-backed securities should provide steady income to support the $1.20 dividend that is covered by earnings.
True, the company must continue to navigate a more volatile interest rate environment that could include an even flatter yield curve, but management generally has proven adept thus far, supporting the dividend, while buying back stock at favorable times — such as when it trades below book value.
Mortgage guarantee losses typically peak 3-6 years into the mortgage and Essent’s rapid growth means its average mortgage has been in force for only 18 months.
Essent has a broadly diversified, low-risk investment portfolio, which is 99.6% investment grade.
Essent Group’s growth should be augmented by its rising market share.