Quick And Dirty mREIT Discounts From June 10th, 2016

by: ColoradoWealthManagementFund


Last Week I predicted: “Declining yields should provide positive relative performance for mREITs with significant positive duration” – This was mixed.

Last Week I predicted: “The increase in the S&P 500 suggests even more bullish attitudes in the market which should raise fair values for non-agency MBS” – Nailed it.

I’m holding some ARR based on estimated discount to current (unreported) book value.

SPY moved a little lower on the week but junk bonds moved a little higher.

If you’re a regular reader of this column, simply hop down to the bold title of “Table 1”.

If you have any challenges reading the charts in this article, check out the first article on quick and dirty discounts to book value for mortgage REITs. This piece is designed to be short and to emphasize providing easy charts that help investors identify opportunities for further inspection. Some of these mREITs recently reported their Q1 book value. The changes aren't worked in yet, but I'll reference some of them.

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.


American Capital Agency Corp.


Arlington Asset Investment Corporation

Not a REIT


Apollo Residential Mortgage

To Be Bought by ARI


Anworth Mortgage Asset Corporation


ARMOUR Residential REIT


Blackstone Mortgage Trust


Cherry Hill Mortgage Investment


Chimera Investment Corporation


Capstead Mortgage Corporation


CYS Investments


Dynex Capital


Ellington Residential Mortgage REIT


MFA Financial


American Capital Mortgage Investment


Annaly Capital Management


New York Mortgage Trust


Orchid Island Capital


Resource Capital Corporation


Two Harbors Investment Corp


Western Asset Mortgage Capital Corp.


ZAIS Financial

To be "purchased" in a merger


Apollo Commercial Real Estate Finance, Inc.


Five Oaks


AG Mortgage Investment Trust, Inc.


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.

Table 1

If you're primarily using this article for the quick discounts to book value, use the column with the red heading in this table.

Click to enlarge

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.

Table 2

The next table demonstrates the change in discount to book value relative to a week ago, relative to about 16 days ago, relative to Q1 of 2016 and relative to Q4 of 2015. The pink cells highlight the mortgage REITs that saw their discount to Q1 2016 book value decrease the most.

Click to enlarge

Performance was great for Chimera Investment Corporation, MFA Financial, New York Mortgage Trust, and Western Asset Mortgage Capital. The thing these mortgage REITs have in common is high amounts of credit risk in their portfolio. It is worth noting that Two Harbors also holds a material amount of credit risk but did not see the same kind of rally.

Portfolios that are all or overwhelmingly agency MBS did not get the same level of respect from the market. AGNC ended down almost 1%, ARR was up less than 1%, and CYS Investments fell by nearly 2%. Note that ARR has a material level of positive duration, at least in theory. After their last portfolio update, the net positions were designed to gain if interest rates moved lower.

During the week, the 10-year treasury yield fell by about 9 basis points of yield so you're looking at a price movement of about 0.8% to 0.9%. The 30YR FNMA 4.0 had a price movement of 0.05%. Clearly, it didn't gain in fair value at anything close to the same rate. The yield on a 2-year treasury fell by 5 basis points, so there the gain in price is about 0.1%. Essentially, the 30YR FNMA 4.0 was demonstrating a slightly larger price movement than the 1-year treasury and about half of the movement of the 2-year treasury. Since LIBOR swaps are likely to show better correlation with treasuries, there should be an unrealized book value loss. On the other hand, the environment for reinvesting looks more favorable so long as the mortgage REIT is immediately hedging new purchases. Investors have grown used to the idea of very high hedging costs on LIBOR swaps. New swaps carry fairly low net interest payments because the long rates are so low.


Last week was a great week for the mREITs with substantial credit exposure. Their price movement was fairly solid but it also substantially outpaced the gains on junk bonds and those gains appeared to be strengthened by the treasury rates falling rather than by credit spreads tightening.

If a mortgage REIT officially has "positive duration," it still won't do much when a normal 30-year agency MBS moves less than a 2-year treasury. If yields stay this low on treasuries, I would expect some gains to the MBS over the next week or two.

Disclosure: I am/we are long ARR.

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.

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