The Preferred Mortgage REIT Roundup (Week 1)

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Includes: AGNC, AMTG, ANH, ARI, ARR, CMO, CYS, DX, HTS, MFA, MITT, MTGE, NLY, NYMT, OAKS, RSO
by: ColoradoWealthManagementFund

Summary

Preferred shares for mortgage REITs offer some fairly attractive yields.

There is a significant amount of risk when investing in preferred shares and that is certainly the case for mortgage REITs.

I'm highlighting several of the preferred shares to discuss the relative pricing.

Since my weekly series have generally done fairly well, it seems like a good time to look at another potential series. This series is focused on the preferred shares of mortgage REITs. These investments are generally unrated and there is very little coverage on them despite some very interesting plays in the sector. The mortgage REITs on my radar that have preferred shares are demonstrated below:

American Capital Agency Corp.

(NASDAQ:AGNC)

Apollo Residential Mortgage

(NYSE:AMTG)

Anworth Mortgage Asset Corporation

(NYSE:ANH)

Apollo Commercial Real Estate Finance

(NYSE:ARI)

ARMOUR Residential REIT

(NYSE:ARR)

Capstead Mortgage Corporation

(NYSE:CMO)

CYS Investments

(NYSE:CYS)

Dynex Capital

(NYSE:DX)

Hatteras Financial Corp.

(NYSE:HTS)

MFA Financial, Inc.

(NYSE:MFA)

AG Mortgage Investment Trust

(NYSE:MITT)

American Capital Mortgage Investment

(NASDAQ:MTGE)

Annaly Capital Management

(NYSE:NLY)

New York Mortgage Trust

(NASDAQ:NYMT)

Five Oaks

(NYSE:OAKS)

Resource Capital Corporation

(NYSE:RSO)

Click to enlarge

Feel free to suggest any company you think should be added. I'll try to have each mortgage REIT on the list but I don't want to include companies that generate a substantial amount of their earnings from activities that are not related to being a mortgage REIT.

Since I became very interested in using the preferred shares of mortgage REITs to generate reliable yield and take advantage of some occasional pricing failures, it made sense to spend more time on developing the models I wanted for my own analysis. The models I'm using are fairly huge so I'll be pulling out portions of the data and occasionally highlighting cells for further analysis. The first table is below:

Click to enlarge

The thing that stands out to me here is the irony of the position for RSO. The preferred shares yield over 10% which is higher than RSO's dividend yield on book value. If we use the market share price for RSO, the common yields about 3% higher, but it should be signaling a problem when the current yield on preferred shares materially exceeds the dividend rate on common shares as a percentage of trailing book value.

Second Slide

The next slide has quite a bit more highlighting. Some of the information is the same but the combination of information is materially different and it helps with a different kind of analysis.

One last note, the "Worst Cash to Call" values are estimated and investors should always do their own due diligence.

Click to enlarge

The share prices on AGNCB and AGNCP moved to a reasonable level that reflects the appropriate difference in yield that the two securities should have.

The current yield on ARR-B continues to materially exceed the current yield on ARR-A. Investors should really be aiming to acquire the B shares rather than the A shares.

DX-A and DX-B (long DX-A) are trading at a fairly reasonable yield spread now. The yield is higher on A to reflect the call risk and it is already trading at par value so further increases in share price would be difficult. If the market is tanking, I think it would be reasonable for B to fall further since the yield on A would provide stronger support. On the other hand, in a strong pricing environment, DX-B can certainly gain more. I believe the strong yield on the DX preferred shares remains quite attractive. When I get more cash out of my current positions, I may take a look at putting some limit orders on again.

MFO and MFA-B are highlighted because they create an interesting scenario. It looks like MFO is eligible to be called first, but it has less credit risk. It is effectively a low grade bond with a very long potential call window. As I recall, it looked like MFO was structurally senior to MFA-B, which is pretty nice for shareholders in MFO.

I'm pretty interested in shares of MFO. They do trade above par value but the total return through the call date would still suggest around a 4% return. That isn't great but it also won't make me lose any sleep. Based on the yield on shares of MFA-B, I wouldn't be surprised if MFO was called and new preferred shares were issued.

It seems interesting to me that NYMTP and NYMTO offer different yields. NYMTO offers the stronger yield with longer call protection and a slightly larger discount to par value. I haven't looked through the prospectus for each issue to try to find any underlying difference in the series. At a glance, it appears that NYMTO is a materially better investment than NYMTP.

Ironic

The highest yielding preferred shares are clumped at the bottom of the chart, but the chart is simply sorted alphabetically. There should be no connection, but it is ironic to see.

Conclusion

I'm looking to do more coverage on preferred shares because I want to nudge my portfolio towards a higher allocation to preferred shares. The broad equity market remains quite high and I'd like a way to earn a respectable yield with risks that I feel comfortable taking. There are some significant risks for investing in preferred shares, but the overall picture looks pretty solid to me.

Beware the liquidity risk. This is an area where investors need to be comfortable with putting in their target price and taking the risk that an order won't be filled.

Disclosure: I am/we are long DX-A AND COMMON OF 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.

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.

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