Quick And Dirty mREIT Discounts From June 24th, 2016

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

Summary

If you're a regular reader of this column, simply hop down to the bolded title "Table 1."

Brexit sent rates lower and suggested investors should be dramatically more cautious regarding credit risk.

Share prices have failed, again, to reflect the change in the value of the underlying assets.

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.

(NASDAQ:AGNC)

American Capital Agency Corp

(NYSE:AI)

Arlington Asset Investment Corporation

Not a REIT

(NYSE:AMTG)

Apollo Residential Mortgage

To Be Bought by ARI

(NYSE:ANH)

Anworth Mortgage Asset Corporation

(NYSE:ARR)

ARMOUR Residential REIT

(NYSE:BXMT)

Blackstone Mortgage Trust

(NYSE:CHMI)

Cherry Hill Mortgage Investment

(NYSE:CIM)

Chimera Investment Corporation

(NYSE:CMO)

Capstead Mortgage Corporation

(NYSE:CYS)

CYS Investments

(NYSE:DX)

Dynex Capital

(NYSE:EARN)

Ellington Residential Mortgage REIT

(NYSE:MFA)

MFA Financial

(NASDAQ:MTGE)

American Capital Mortgage Investment

(NYSE:NLY)

Annaly Capital Management

(NASDAQ:NYMT)

New York Mortgage Trust

(NYSE:ORC)

Orchid Island Capital

(NYSE:RSO)

Resource Capital Corporation

(NYSE:TWO)

Two Harbors Investment Corp.

(NYSE:WMC)

Western Asset Mortgage Capital Corp.

(NYSE:ZFC)

ZAIS Financial

To be "purchased" in a merger

(NYSE:ARI)

Apollo Commercial Real Estate Finance, Inc.

(NYSE:OAKS)

Five Oaks

(NYSE:MITT)

AG Mortgage Investment Trust, Inc.

(NYSEARCA: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.

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.

I want to emphasize that GAAP book value is not necessarily the metric that I believe is most relevant. For CIM, I believe the "economic book value" provided by management is an excellent tool. CIM's economic book value was materially lower than GAAP book value.

Table 2

The next table demonstrates the change in discount to book value relative several other points in time.

Click to enlarge

Discussing Last Week's Changes

Clearly Brexit was the major story last week and the impacts are still felt this week. Yields are down dramatically across the treasury curve. The mortgage REITs with positive duration should have outperformed while those with dramatic credit sensitive portfolios should be suffering.

It is important to point out that many mortgage REITs go ex-dividend near the end of the quarter and that these charts are "quick and dirty." They don't incorporate the dividends into the share price movements.

ARR has been an interesting story. Their price performance was bad again, despite their portfolio updates indicating that they are doing just fine. The declining price has been a story of an increasing discount rather than a problem with the portfolio. I'm not very emotional about mortgage REITs, so I bought some common shares of ARR earlier in June.

BXMT took a hit with Brexit, that makes sense. Whether investors like the name or not, they are holding some credit sensitivity.

CYS appeared to take an undeserved beating, but they went ex-dividend on 06/20/2016 so their performance wasn't so bad.

NYMT was the worst performer by a mile. Their dividend was fairly huge at around 4% of the share price, but the rest of the decline was still larger than any other mortgage REIT. Even if we ignored that other mortgage REITs also went ex-dividend, none of them were falling as hard as NYMT fell.

On 06/17/2016 in an article on New York Mortgage Trust I wrote:

"I still expect a dividend cut within a year and I still expect to see share prices decline materially. This looks like a bubble to me."

The average discount widened by about 2%, but that ignores that many of the mREITs were going ex-dividend. Adjusting for that, I would estimate that this was only around .5% to 1% increase in average discounts. The more interesting story could be Annaly Capital Management saw their share price increase. They also had a great start to this week. With Brexit I was so busy that this piece is being prepared on 06/28/2016.

My total movement in response to Brexit was to buy the dip on MTGE. That new position shows at a capital loss, but the shares went ex-dividend after I bought them so the net position has been fine.

Conclusion

Brexit was the major market mover and it favored mREITs with agency securities or high credit quality securities. Positive duration was also a big win since it meant mortgage REITs had the potential to gain more than they were losing on their hedges. My response was to simply buy some MTGE. I spent a good chunk of time researching the event and implications, but the only change to my portfolio was a small addition.

Pitch for Subscribers

Since the Mortgage REIT Forum is a new exclusive research platform, the first 100 subscribers will be able to lock in their subscription rates at only $240/year. My investment ideas emphasize finding undervalued mortgage REITs, triple net lease REITs and preferred shares. With the market at relatively high levels, there is also significant work on finding which securities are overvalued to protect investors from losing a chunk of their portfolio.

Disclosure: I am/we are long ARR, MTGE, PREF SHARES OF DX.

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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