Quick And Dirty mREIT Discounts From August 7th, 2016

by: ColoradoWealthManagementFund


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

Last week I told investors that the three mortgage REITs I definitely wouldn’t be buying at the prevailing prices were ORC, CIM and RSO.

Those three mREITs all reported negative price returns over the last week, despite the average performance for sector being a gain.

Starting next week I hope to have the tables rebuilt with new book values from the end of Q2.

The two mREITs I was holding at the start of the week both landed in the top 3 for performance on the week.

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

The volume of mREITs trading at a premium to their Q1 reported book values decreased from 6 to 5, but the value is still pretty high. Overall the price to book value ratios across the sector increased significantly from 90.29% to 92.29%. That improvement of 2% makes it more difficult to find compelling opportunities, but it also made it much easier for investors to see share prices rising over the week.

Table 2

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

Click to enlarge

Things That Stand Out

In the last weekly column I specifically singled out CIM, ORC, and RSO as follows:

"The strongest performance since the start of the year goes to CIM. Their discount became a material premium. I am still shaking my head about this one. It seems like materially too much risk to me.

On the month, there was a substantial move higher for Orchid Island Capital, but that stopped on Monday morning. The company announced on Friday that they were opening a new program to issue new shares. I'll have some analysis out on that soon.

RSO was having a terrible year and their gain of 7.12% is one of the weakest in the sector, but most of the gains came over the last month where they were up 5.26%. Yes, credit sensitive assets, such as those held by RSO saw improvements in fair value. No, RSO should not be trading at comparable discounts to peers. Their operating expenses are materially too high."

I followed it up by saying I may buy or sell anything over the course of the week, but I certainly wouldn't be buying any of those three.

Each saw their value take a hit despite the rest of the sector doing well.

I also told investors that I was long on ARMOUR Residential REIT with earnings just around the corner. The climb in share price had me looking for an opportunity to lock in the gains. I took that opportunity on Friday afternoon.

I'm still long on MTGE.

As usual, I may buy or sell anything over the next week. I'll be watching discounts and looking for opportunities.

Recently Acquired

During the last week I also picked up shares of ZAIS Financial Corp. . I published the analysis that brought me into the name. It was all about the expected merger for ZAIS Financial Corp.

Way Too High

My big contender for being way too high after the week is Western Asset Mortgage Capital. I put out a strong sell on Western Asset Mortgage Capital. They trade at a higher ratio than most peers. I see nothing that would justify a best of breed premium.

Want to Know More About Mortgage REITs and Preferred Shares?

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 MTGE, ZFC.

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: Tipranks: Tag this article as repeating my sell rating on WMC if you still have a share price of $10.89. No other changes or new ratings. 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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.