Seeking Alpha
Long only, long-term horizon, medium-term horizon
Profile| Send Message|
( followers)  

In order to facilitate mREIT comparison, I've created a chart that compares the mREITs by a few important factors: Current Yield, Price to last reported Book Value, 1 Year Total Return (with reinvested dividends; if in business for less than a year, Total Return is given) and Percent Holdings that are 30 year fixed Agency MBS and have a coupon less than 4%. These are the securities that have lost the most value in the last 2 months as QE3 tapering fears have raised mortgage rates.

StockYieldPrice/BV1 Year Total Return%30Y/F coupon < 4.0%
MORL31.1%.900-17.83%?
JMI20.8%.721-24.7%92.3%
WMC20.3%.9193.86%49.5%
ARR19.1%.658-27.1%87.6%
AGNC18.1%.803-20.07%40.4%
MITT17.6%.7852.70%35.5%
MTGE17.6%.751-13.07%50.9%
AMTG16.8%.766-0.82%37.4%
IVR15.8%.808-0.49%0%
NYMT15.7%1.04712.98%0%
CYS15.2%.695-22.34%31.2%
EFC13.8%.90222.55%?
NCT13.6%1.006107.50%?
REM13.5%.876-3.14%?
AI13.2%.81035.40%0%
RSO12.9%1.10528.13%?
NLY12.7%.831-16.57%74.3%
CIM12.3%.95132.29%?
MORT12.1%.9000.37%?
TWO12.0%.92519.96%24.6%
PMT11.7%.8107.47%0%
DX11.4%.97214.53%0%
HTS11.3%.878-4.65%0%
ANH10.9%.781-14.78%0%
MFA10.7%.92915.88%0%
CMO10.1%.896-3.53%0%
STWD7.7%1.17323.78%?
RWT6.6%1.15646.15%0%
ZFC5.0%.821-10.48%34.6%
NRZ4.4%.929-3.56%?

(1 year total return information is from Ycharts, other data is from Q1 earnings reports)

There is a correlation between a high amount of 30 year fixed Agency MBS with coupons under 4.0 in a companies portfolio and a low price to book value.

Falling MBS values

Mortgage Backed Securities (MBS) have fallen in value significantly so far this quarter

  • 3.0% coupon 30 year fixed Agency MBS have fallen 7.3%
  • 3.5% coupon 30 year fixed Agency MBS have fallen 5.6%
  • 4.0% coupon 30 year fixed Agency MBS have fallen 3.7%
  • 4.5% coupon 30 year fixed Agency MBS have fallen 2.7%
  • 2.5% coupon 15 year fixed Agency MBS have fallen 4.6%
  • 3.0% coupon 15 year fixed Agency MBS have fallen 3.2%

(Data from Mortgage News Daily)

Remember these losses are compounded based on the amount of leverage used, but also offset by hedges. The companies may also have sold off some of their lower coupon Agency MBS during the quarter before some of this drop.

We could have a rebound in MBS prices, or values could fall further. There are some good choices if your are trading or investing in mREITs and if you have a firm belief as to where rates are going, and there are some good choices if you have no such convictions. This article is meant to give you a baseline understanding of the mREIT stocks for any type of investing endeavor going forward. We are in an environment where there is a significant discount to book value in the mREITs and it could be a good time to get in for the long term investor, especially if mortgage and treasury rates stabilize.

Individual Stocks

What follows is more information on each stock. The link on the name goes to the investor relations page of the company and has more detailed information on the inner workings of the company. CPR is explained here. The Last 4 Dividends category has the latest dividend on the right.

UBS E-TRACS Mthly Pay 2x Mortg REIT MORL

Start DateAverage Volume (3 months)Last 4 Dividends (monthly)
Oct '12125,764.116.1261.321.113

This is a 2x leveraged index that follows closely the holdings of MORT. The 30.1% yield will likely go down as its highest percentage holdings of NLY and AGNC have both announced dividend cuts. I calculate a 25.9% yield at current prices. This stock goes up and down twice as much as MORT but yields twice as much. I've gone into more detail on this stock here.

Javelin Mortgage Investment JMI

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends (monthly)
Oct 2012204 million61.968.04x.23.23.23.23

Hybrid: [92% Agency MBS, 8% Non Agency MBS] The Yield on JMI is high because its price has dropped 33% since the beginning of May and it has maintained its dividend. It is managed by mostly the same people as ARR. Holding so much <4% coupon 30 year fixed in its portfolio and its managements "buy and hold" strategy" has surely hurt its book value in the last two months. A common complaint is that management is paid by the amount of capital it raises and so has incentive to do secondary offerings when it may not be accretive to shareholders.

Western Asset Mortgage WMC

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
May '12468 million3.41.968.7x.851.12.95.90

Hybrid: [88.5% Agency MBS (68.4% 30 year fixed, 20.4% 20 year fixed), 4.8% Non Agency MBS, 6.3% Interest Only] Reported a Book Value that was $19.25 as of 31 May, which is a very small drop from the $19.42 that was reported as of 31 March. Confidence should be gained from this in the companies management as a much larger BV drop was expected due to the 50bp jump in the 30 year mortgage rate in May. This stock, although relatively new, is proving itself as deserving of a high price to book and a stable, high dividend.

Armour Residential REIT ARR

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Dec '072.4 billion11.61.357.72x.30.27.24.21

Agency: [93% 30 year fixed Agency MBS, 7% Adjustable Rate Mortgages (ARM) and Hybrids] Has the lowest price to book value. Reasons for this is that it has mostly 30 year fixed Agency MBS whos values have dropped considerably over the last two months. Its dividend has been dropping since 2011 which has accelerated recently (30% drop in the last year). It has a "buy and hold" strategy which likely has hurt book value in the last two months. A common complaint is that management is paid by the amount of capital it raises and so has incentive to do secondary offerings when it may not be accretive to shareholders.

American Capital Agency AGNC

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
May '089.30 billion101.528.2x1.251.251.251.05

Agency: [50% 30 year fixed Agency MBS, 22% 15 year fixed Agency MBS, 14% 30 year fixed Agency TBA's, 12% 15 year fixed Agency TBA's, 1% Hybrid ARM, 1% CMO (includes Interest Only (IO), Inverse Interest Only (IIO) and Principal Only (PO)), <1% 20 year fixed Agency MBS] Had been the paragon of mREITs until recently when it lost 30% of its stock price in the last two months. Managements reputation has been hurt somewhat because of that. 2nd largest mREIT behind NLY. Management gave a presentation on the 12th of June where they said they were selling some low coupon 30 year fixed agency MBS and were repositioning the portfolio in light of the rising long term rates. They also said their BV drop so far in Q2 has been about the same as the drop in Q1 (which was $2.71). Since then the value of 3.5% coupon 30 year fixed Agency MBS have dropped over 2% again after the FOMC meeting press conference. The recent dividend cut was not as bad as some predicted. The undistributed income that AGNC used to have is likely almost gone. AGNC has gotten into the TBA market in the last two quarters. A TBA security is a forward contract for the purchase ("long position") or sale ("short position") of agency MBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. With TBA's they are betting on the value of the MBS going up or down before their contract is enacted. Their bets changed from Q4 when they thought rates were going to fall; to Q1 when they bet rates were going to rise. Their Q1 long bets were not high enough on the coupon rate (they were 3.0% to 4.0% coupon on 30 year fixed Agency MBS and mostly 2.5% coupon on 15 year fixed Agency MBS) to save themselves from large MBS value drops that have continued into this quarter if they havnt sold those positions early in the quarter.

AG Mortgage Investment Trust MITT

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Jul '11530 million8.82.255.38x.77.80.80.80

Mix: [73.5% Agency MBS (35.5% 30 year fixed, 4.8% 20 year fixed, 12.6% 15 year fixed, .5% ARM, 14.1% IO) 32.4% Other Assets (19.4% Non Agency MBS, .3% Asset Backed Securities (ABS), 2.4% Commercial MBS (CMBS), 9.8% IO, .5% Commercial Loan)] With $2.12 in undistributed income, this company can pay its dividend for two more quarters and half of the 4th quarter without earning anything in that time. That is dividend security you can hang your hat on. However, in the first quarter, it increased its exposure to 30 year fixed MBS and seemed to be convinced rates were going down.

American Capital Mortgage Investment MTGE

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Aug '111.10 Billion6.32.017.3x.90.90.90.80

Hybrid: [55.4% Agency MBS (37.3% 30 year fixed, .6% 20 year fixed, 13.9% 15 year fixed), 38.1% TBA's (27.8% 30 year fixed TBA,10.2% 15 year fixed TBA), 6.2% Non Agency] Managed by the same team as AGNC. Significantly increased TBA positions in Q1. It may deserve having a lower price to book valuation than AGNC because of its increased exposure to 30 year fixed Agency MBS with coupons less than 4.0%, even if it has Non Agency MBS to hedge them.

Apollo Residential Mortgage AMTG

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Jul '11548 million72.85.1x.851.05.70.70

Hybrid: [59% Agency MBS (57.5% 30 year fixed, 1.4% 15 year fixed) 21% Non Agency, 4% Securitized Mortgage Loans, 16% Cash and Other] Normally maintains this amount of cash in order to pay repurchase agreements (repo's). Likes the opportunities going forward with increases in mortgage rates.

Invesco Mortgage Capital IVR

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Jun '092.39 billion12.51.646.4x.65.65.65.65

Mix: [70.7% Agency MBS (55.9% 30 year fixed, 11.9% 15 year fixed, 2.3% Hybrid ARM .4% ARM), 16.4% Non Agency, 10.9% CMBS, 2% Other investments] Their 30 year fixed Agency MBS have an average coupon of 4%, which are down in value about 3.7% in Q2.

New York Mortgage Trust NYMT

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Aug '04433 million8.973.483.2x.27.27.27.27

Mix: [58.3% Agency MBS (41% 15 year fixed rate MBS, 17% ARM), 8.5% Agency IO, 14% Multi-Family CMBS, 4% Distressed Residential Loans, 12.1% Residential Securitized Loans, 3% Other] The companies 15 year fixed rate Agency MBS have an average coupon of 3%, which are down 3.2% since the end of the quarter.

CYS Investments CYS

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
June '091.63 billion17.51.167.8x.40.52.32.34

Agency: [46% 15 year fixed MBS, 31.2% 30 year fixed MBS, 5.5% 20 year fixed MBS, 17.2% hybrid ARM] increasing the dividend and recent talk about buying up the higher yielding MBS gives a picture of an increasing Net Interest Margin for CYS. However their 30 and 15 year fixed rate Agency MBS have lost a lot of value (5% and 3% respectively).

Ellington Financial LCC EFC

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Oct '10460 million9.1 (agency only)4.661.86x.70.701.52.77

Mix: [59.5% Agency (58.5% Fixed Rate MBS (53% 30 year fixed MBS, 4.1% 15 year fixed, 1% Fixed IO), 1% ARM), 39% Non Agency, 1% CMBS and Commercial Mortgage Loans, .4% Other ABS (Not inclusive of Swaps, IO, and TBA's which are part of the hedging)] I have not been able to find the coupon rates on its MBS holdings. It is a portfolio more complicated than most, but seems to be able to maintain book value very well and is increasing its dividend. Considerable hedging activity seems to work.

Newcastle Investment NCT

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Dec '021.27 billion18??.22.22.22.17

Mix: [76.8% Real Estate Debt, 10.5% Agency MBS, 7% Senior Housing, 5.6% Cash] The spinoff of NRZ occurred on May 15th. NCT is transitioning to a majority senior housing portfolio and its yet to be seen if they will maintain any MBS. NRZ is more focused on MBS. Couldn't find details on NCT's Agency MBS holdings. Next Quarters earnings should clarify. Their combined dividends increased in this quarter compared to last quarter (.24 vs .22) and they expect it will continue to do so as they position their portfolios in their chosen assets. This is a company on the move that has returned, and continues to return, a decent dividend and large increases in share price.

iShares FTSE NAREIT Mort. Plus Capp ETF REM

Start DateAverage VolumeLast 4 Dividends
Apr '071,466,490.44.41.46.43

REM is the most traded mREIT index. Holdings are similar to MORT except it includes AMTG, MITT, WMC, ABR, ACRE and doesn't have FUR, RSO. Its also slightly more weighted in NLY and AGNC and slightly less weighted in the rest of the mREITs except STWD, TWO, NRZ. Indexes are good for diversification in the mREIT space. mREITs do trade slightly differently based on their holdings and prospects for profit. Diversification in an index fund takes out some of the stock picking based on the economic situation, but you still do need to know the basic situation for mREITs (such as rising interest rates cause book value declines for the majority of mREITs). The higher volume on the mREIT will make it more likely you will get near the price you are looking for when you trade it.

Arlington Asset Investment AI

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Dec '97454 million8.64 (Agency only)1.9 (Agency only)7.5% (Agency only).875.875.875.875

Hybrid: [85.2% Agency (all 30 year fixed MBS), 14.7% Non Agency] Agency 30 year fixed rate MBS had an average coupon of 4.08% and its Non Agency had an average coupon of 4.2%, which protects their BV to some degree from the recent plunge in MBS values.

Resource Capital RSO

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Feb '06651 Million?3.72?.20.20.20.20

Mix: [.3% RMBS, The rest is CMBS and financial loans with 3.4% invested in Real Estate] Very small allocation to MBS. It is a little over 1% of the index of MORT, MORL and lends stability to them with its CMBS holdings.

Annaly Capital Management NLY

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Oct '9711.99 Billion18.916.6x.50.45.45.40

Mix: [80.1% Fixed Rate Agency MBS (67.5% 30 year, 9.9% 20 year, 2.3% 15 year), 7.6% Agency ARM, 6.9% Collaterized Mortgage Backed Obligations , 5.3% IO CMO's, ? Crexus CMBS] . This is the largest mREIT and the most well known. If you follow the news on NLY, you will to a large degree know the status of the entire mREIT space. NLY acquired Crexus (NYSE:CXS) on the 23rd of May, which will add CMBS exposure to NLY. CMBS have been doing well recently and have been a stabilizer to mREITs books and income. It is the largest holding of MORT, MORL, REM. It has been through a lot in its 16 years of public trading, which is frequently mentioned as a strength of the company. It has weathered most interest rate environments and continued to pay big dividends.

Chimera Investment CIM

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Nov '073 billion?4.88?.09.09.09.09

Hybrid: [59% Non Agency MBS, 41% Agency MBS] Chimera is a subsidiary of NLY and has not filed an annual report or a quarterly report since the 3Q 2011 (the numbers above are from that report). It has been under considerable criticism and possible delisting from the stock exchange for failure to file reports with the SEC. This has kept the price down on a presumably well positioned stock with a large holding of Non Agency MBS that have been giving great returns recently.

Market Vectors Mortgage REIT ETF MORT

Start DateAverage VolumeLast 4 Dividends
Aug '1173,520.703.648.78.726

MORT is a newer index of mREITs that has a slightly lower yield than REM. UBS started a 2x leveraged version of this called MORL. Lesser weights to NLY, AGNC than REM, and higher weights to the rest of the mREITs in the index. Does not have AMTG, MITT, WMC, ABR, ACRE in the index, but does have FUR, RSO (I want it to add WMC, it recently added MTGE). Read REM's summary above for the benefits/detractors of an index of mREITs.

Two Harbors Investment TWO

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Oct '093.96 billion7.0 (Agency Only2.53.3x.36.55.32 +.92.31

Hybrid: [79.3% Agency (53.7% 30 year fixed MBS, 12.2% second mortgage loans, 4.3% Other Fixed, 3.3% IO and IIO's, 1.2% Hybrid ARM, .6% 15 year fixed) 19.3% Non Agency, 1.5% Other] TWO spunoff SBY in Q1 of this year (shown as the .92 addition to the Q1 dividend). SBY is a single family rental REIT. TWO likes to mention that it has an attractive dividend with lower leverage, less interest rate exposure, and less prepayment risk than its peers. Now you can judge for yourself using this article. This is the largest Hybrid mREIT.

Pennymac Mortgage Investment Trust PMT

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Jul '091.19 billion??1.3.55.57.57.57

Distressed Mortgage Loans: [38.4% Mortgage Loans Acquired for Sale at Fair Value, 46.6% Mortgage Loans at Fair Value, 6.1% Mortgage Servicing Rights (MSR), 1.5% Short Term Investments, 2.8% Real Estate Acquired in settlement of Loans, 4.6% Other] Pennymac is unique in that is focuses on distressed mortgage loans. "The Company seeks to maximize the value of the distressed mortgage loans that it acquires through loan modification programs, special servicing and other initiatives focused on keeping borrowers in their homes." Sounds like they are doing good in the world as well as making a profit. They recently had to defend themselves from a New York Times article.

Dynex Capital DX

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Jun '89561 million19.31.896.3x.29.29.29.29

Mix: [64% RMBS (ARM and Hybrid ARM), 7.7% CMBS, 13.2% CMBS IO, 13.6% Non Agency, 1.4% Securitized Mortgage Loans] Dynex Capital has been around the second longest of the mREITs. It has a loss on its books from 1998 (expires in 2020) that allows it some flexibility by being able to work around the 90% distribution rule for mREITs (it can use income to grow its business if it sees opportunity, I wouldn't worry about that effecting the dividend, its been the steadiest dividend grower of the mREITs). That loss is long past as it has been increasing in value and dividends since 2008.

Hatteras Financial HTS

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Apr '082.48 billion191.117.4x.80.70.70.70

Agency: [89.6% Agency ARM, 10.4% of 15-year fixed rate Agency MBS] Having most of your portfolio in Adjustable Rate Mortgages (ARM) allows HTS to reset its yield as the interest rates rise. Well positioned to deal with a tapering of QE3 or the rumor of it.

Anworth Mortgage ANH

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
May '98816 million24.897.12x.18.15.15.15

Agency: [39% ARM 2-5y reset, 19% ARM <1y reset, 18% ARM >5y reset, 18% 15 year fixed MBS, 3% ARM 1-2y reset, 3% 30 year fixed MBS] Average coupon for the 30 year fixed MBS is 5.57%, in relatively safe territory. ANH is heavily weighted in Adjustable Rate Mortgages (ARM) and can weather rates rising better than most other mREITs.

MFA Mortgage Investments MFA

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Apr '982.97 billion17.342.323.09.23.21.71.22

Hybrid: [58% Agency (37.3% ARM, 22% 15 year fixed rate MBS) 39% Non Agency (31.2% ARM,13.8% Fixed rate (mostly 30 year)), 5% Cash] Prices on Non Agency MBS have been rising as supply diminishes. MFA has been a steady, high dividend payer since inception and has no 30 year fixed Agency MBS to speak of.

Capstead Mortgage CMO

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Nov '871.18 billion19.651.158.06.36.30.31.31

Agency: [57% current reset ARM 43% longer to reset ARM] Another Adjustable Rate Mortgage REIT. This one has been around the longest of all the mREITs. It has always paid a dividend, but fluctuates that dividend slightly over time.

Starwood Property Trust STWD

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Aug '093.17 billion???.44.54.44.46

Mix: [27% first mortgages 8% subordinated mortgages 25% mezzanine loans 7% CMBS 9% loans held for sale 11% RMBS 2% loans transferred 11% other investments] Starwood is more of a large scale commercial mortgage player. It says it owns RMBS but I have no details on them other than that they are 11% of the portfolio.

Redwood Trust RWT

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Aug '951.44 billion???.25.25.28.28

Mix: [62% Residential Loans, 8% Commercial Loans, 26% Real Estate Securities 2% Cash, 2.5% Other] Plans to increase its Mortgage Servicing Rights (MSR) business. This is a mix of Comercial Real Estate Loans and Residential Loans and Securities. It is known to have a market leading role as an issuer of private label RMBS. Q1 earnings had this statement: "Generally speaking, tighter spreads and lower premiums are better for Redwood. Conversely, wider spreads are worse for Redwood, all things being equal." We have lower premiums but wider spreads on MBS, sounds like a mixed bag for RWT.

ZAIS Financial ZFC

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
Feb '13145 million5.2 (Agency Only)1.58(Agency Only)2.05n/an/an/a.22

Hybrid: [60% Non Agency, 40% Agency (35% 30 year fixed MBS, .4% 30 year ARM)] "As of March 31, 2013, the Company had fully deployed the IPO proceeds but it was not fully invested in its long-term target assets and was not leveraged to the extent contemplated by its long-term business plan. Consequently, the Company's results for this quarterly period are not indicative of the results expected to be achieved once the Company is fully invested in its long-term target assets and leveraged to the extent contemplated by its long-term business plan." This new mREIT has some cash to put to work in a higher interest rate environment and is focused on Non Agency MBS. That is a good combination. If only it had waited to buy its 30 year fixed Agency MBS it could have been trading at Book Value or higher.

New Residential Investment NRZ

Start DateMarket CapCPRSpreadLeverageLast 4 Dividends
May '131.64 Billion???n/an/an/a.07

Mix: [34% Agency MBS, 15% Non Agency MBS, 19% Excess MSR, 28% Consumer Loans, 1% Residential Mortgage Loans, 2% Investable Cash] This new mREIT was spun off from NCT on 15 May 2013. It is focused on increasing its Non Agency MBS portfolio. It's targeting 15-20% returns. The dividend will increase as it gets a full quarter this time to generate income. Consumer loans are expected to return 20% on the investment.

Conclusions

I see a trend toward higher yielding mREITs being more involved in 30 year fixed Agency MBS. These have also had the largest hits in price to book value recently. ARM's seem to be more able to weather the interest rate spikes. Non Agency MBS have been increasing in value as the supply of them diminishes and make a hedge against the Agency MBS part of a portfolio. CMBS are doing well right now and will be doing well when QE3 tapers. They add stability and profit to a portfolio. You have a variety of management techniques, from the active (AGNC, NCT, NRZ) to the steady (CMO, MFA) and from the well diversified (EFC, DX) to the one track focus (ARR, HTS). There are other criteria to compare mREITs that can be found on the investor relations sites of the various mREITs. Some of these are the hedging activities, repurchase agreements, CPR protection choices in MBS, Management experience and current outlook, Operating expenses, strategies for dealing with rises in rates, breakdown of types of mortgages in the Non Agency MBS holdings, and predicted changes to Net Interest Margin and Net Asset Value with changes in interest rates. I think the most undervalued mREIT at the moment is ANH. If your looking for a really high dividend and book value preservation, WMC is the obvious choice. mREITs with the best growth potential are NCT and NRZ. ZFC is the most exciting new mREIT. DX wins for rock solid dividend and stability of price.

(Much of the Market Cap data was from Yahoo Finance. Five Oaks Investment is too small to be included in a SA article)

Source: Comparing Mortgage REITs

Additional disclosure: I may initiate a long position in DX and ANH over the next 72 hours.