Quick And Dirty mREIT Discounts From July 10, 2016

by: ColoradoWealthManagementFund


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

AGNC looks like they got punished for prepayment expectations.

DX was down as if the market was scared of IO strips, but RMBS IO strips and CMBS IO strips are very different.

NLY was great prior to this week but suffered last week, that harms the positive momentum for the sector.

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.

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 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

Table 2

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

Click to enlarge

Orange highlighting reflects that I'm leaving out the changes since 06/24 and measuring changes from 07/01 and changes from 06/17.

Many mortgage REITs go ex-dividend near the end of the quarter and therefore the mREITs that went ex-dividend during the final weeks should appear to have materially worse performance since their prices should drop by the amount of the dividend, all else equal.

Things That Stand Out

OAKS is on quite a rally. For now I'm simply pointing out that there is a rally, but I do have deeper thoughts on it that I'll try to put into an article within the next week or two.

The top performing REIT so far other than OAKS was ARR. That seems perfectly reasonable to me given the discount to book value being exceptionally large and the portfolio being designed for positive duration. I'm long ARR, so I can't complain about the market recognizing some value exists there.

NLY had a great week recently, but didn't do so hot the following week. That hampers my thesis of money being ready to flow into the rest of the names after NLY performed so well. On the other hand, the other names didn't get hit as hard when the money flowed back out. This is simply following the expectations that NLY tends to move first.

AGNC had a fairly rough week. The flattening of the yield curve and decline in treasury rates should be particularly difficult for an agency mREIT. This would've hit CYS as well but they positioned the portfolio on the expectation of rates moving lower for longer.

DX had a bit of a rough time. It could be taken as random fluctuations and perhaps it should be. The natural theory would be that the market is concerned that the agency ARMs (Adjustable rate mortgages) in their portfolio would be exposed to more prepayment risk, but CMO has the same risk with more of the portfolio in that part of the market. If DX was punished for that, CMO should've shared in the pain. Yes, DX has some IO strips (interest only strips), but last I knew they were holding CMBS IO strips which have protections against prepayment. Those are a very different derivative compared to RMBS IO strips. The RMBS IO strip is designed to give the portfolio some negative duration by creating prepayment risk. The CMBS IO strip is there to provide some stronger yields for net interest income. Perhaps traders simply saw "IO strip" in the portfolio and became scared?

Extra Disclosure

In the coming days and weeks, I may buy into any mortgage REIT or their preferred shares.

I may also exit positions if the price is high enough that I cease to like the position.

If I could be more specific, I would be. The choice to go in and out of securities is based on relative attractiveness so a decline in portfolio values or an increase in prices could cause me to exit a position. A new position would be acquired for the exact opposite reasons, either an increase in the value of the portfolio or a decrease in relative prices.

I'm long MTGE, ARR, and DX-A.

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, DX-A.

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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