Quick And Dirty mREIT Discounts From April 14, 2016

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Includes: AGNC, AI, AMTG, ANH, ARI, ARR, BXMT, CHMI, CIM, CMO, CYS, DX, EARN, HTS, JMI, MFA, MTGE, NLY, NRZ, NSM, NYMT, OAKS, ORC, REM, RSO, STWD, TWO, WMC, ZFC
by: ColoradoWealthManagementFund

Summary

Some investors like to throw around the discount to the last quarter's book value.

The measure can be useful, but it should be observed with great care.

The best use for this kind of table is to find which opportunities warrant further inspection.

Discounts to trailing book value (from Q4 of 2015) range from 39.57 % to a premium of 10.41%.

I covered the quick and dirty discounts to book value previously and found it was a hit with investors, because it allowed them to rapidly get a rough idea of which mREITs they might want to investigate further. If you haven't seen the original piece, it is worth a read simply for the cautions provided regarding the excessive reliance on discounts to a past value.

The mREITs

I put most of the mREITs, two corporations, and one ETF into the table because I wanted to get a more complete estimation.

AGNC

American Capital Agency Corp.

AI

Arlington Asset Investment Corporation

Not a REIT.

AMTG

Apollo Residential Mortgage

To be bought by ARI.

ANH

Anworth Mortgage Asset Corporation

ARR

ARMOUR Residential REIT

BXMT

Blackstone Mortgage Trust

CHMI

Cherry Hill Mortgage Investment

CIM

Chimera Investment Corporation

CMO

Capstead Mortgage Corporation

CYS

CYS Investments

DX

Dynex Capital

EARN

Ellington Residential Mortgage REIT

JMI

Javelin Mortgage Investment

To be bought by ARR.

MFA

MFA Financial

MTGE

American Capital Mortgage Investment

NLY

Annaly Capital Management

NSM

Nationstar Mortgage Holdings

Not a REIT

NRZ

New Residential Investment Corp

NYMT

New York Mortgage Trust

ORC

Orchid Island Capital

RSO

Resource Capital Corporation

STWD

Starwood Property Trust

TWO

Two Harbors Investment Corp

WMC

Western Asset Mortgage Capital Corp.

ZFC

ZAIS Financial

To be "bought" in a merger.

ARI

Apollo Commercial Real Estate Finance, Inc.

REM

iShares Mortgage Real Estate Capped ETF

Click to enlarge

The goal here is to have a fairly large sample size so we can identify trends and similarities throughout the sector. The mREIT sector only contains about 25 total organizations, but the investing and hedging strategies have very material differences.

Unfortunately, when I was initially working on the tools for this analysis, I left out Hatteras Financial Corp. (NYSE:HTS), which is now being sold to Annaly Capital Management. I also left out Five Oaks (NYSE:OAKS), which is a small mREIT with a large discount. I'm struggling to decide on my opinion there.

Big Table

The following table contains most of the information, though part of the table is built with calculations that are not demonstrated within the table:

Click to enlarge

I added the light blue coloring simply to help readers scan the chart faster while keeping their eyes on the intended line. The green squares for two headings are included to emphasize that these are some useful metrics that can be analyzed with more certainty about their values.

The prices used are taken during the trading day on April 14th, 2016.

It is also worth emphasizing that I opted to use the GAAP book value for each mREIT. Most of the time, this was available from the earnings release, but occasionally, I had to pull up the 10-K documents and calculate it.

Things I See

The discount on ZFC looks fairly large, but the company has already signed a merger agreement that I find less than impressive. It is merging with a company that was not previously publicly traded and is taking charges to its own equity to make it work. There is no reason I can see to believe that the new company will not trade at a discount and shareholders choosing to take the tender offer of cash for their shares will have to accept a further discount to book value.

The discount on AI is huge, but part of the book value is deferred tax assets. I haven't decided what I think of AI, but I've put some hours into digging through the company's statements and working on an opinion.

The discount on CHMI is also fairly large, but it is also a small REIT that will require more due diligence. I put off CHMI and AI in favor of researching Five Oaks over the past few days.

The discount on ANH is very interesting at over 24%. The company started moving into holding some physical real estate as well, and I believe the strategy there was to acquire assets that are dramatically more difficult to liquidate.

New York Mortgage Trust has a reasonable trailing discount around 25%. It was dramatically larger earlier in the quarter, when the shares dipped under $4 for a short time. The challenge with a buyout offer here is the multiple external management agreements for an mREIT that is officially internally managed.

STWD trades at a premium to book value, but the company has enough complexities in its operations that it is fairly different from the typical mREIT.

Active Orders

I've left a few open limit orders on preferred shares by a few of the mREITs. Due to poor liquidity, I'm not mentioning which preferred shares are on my list. I may add a few more preferred shares to the list of open orders. If I find some of these mREITs at huge discounts are great buyout candidates or can see another way for the value to be unlocked, then I may buy shares of their common or preferred stock.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ANYTHING IN THIS ARTICLE over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. This article is prepared solely for publication on Seeking Alpha and any reproduction of it on other sites is unauthorized. Ratings of "outperform" and "underperform" reflect the analyst's estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information, it could be incorporated into my analysis.