Thoughts On A Handful Of mREITs And The State Of The Industry (Week 43)

|
Includes: AGNC, AI, AMTG, ANH, ARR, BXMT, CHMI, CIM, CMO, CYS, DX, EARN, MFA, MORT, MTGE, NLY, NRZ, NYMT, ORC, REM, STWD, TWO, WMC, ZFC
by: ColoradoWealthManagementFund

Summary

We finally see a nice bump higher in the 10 year rates as the economy digests some favorable news.

A slightly steeper yield curve is clearly positive, but the Federal Reserve is immediately looking for an opportunity to raise rates again.

The potential for inflation is on my mind, but I don’t like most options for protecting against it.

Welcome to week 43.

The mREITs (and two ETFs)

The table is demonstrated below:

(NYSE:NLY)

Annaly Capital Management

(NASDAQ:AGNC)

American Capital Agency Corp

(NYSE:ARR)

ARMOUR Residential REIT

(NYSE:CMO)

Capstead Mortgage Corporation

(NYSE:CYS)

CYS Investments

(NYSE:DX)

Dynex Capital

(NASDAQ:NYMT)

New York Mortgage Trust

(NYSE:ORC)

Orchid Island Capital

(NYSE:TWO)

Two Harbors Investment Corp

(NYSE:WMC)

Western Asset Mortgage Capital Corp.

(NYSE:MFA)

MFA Financial

(NYSE:EARN)

Ellington Residential Mortgage REIT

(NYSE:AI)

Arlington Asset Investment Corporation

(NYSE:ZFC)

ZAIS Financial

(NYSE:AMTG)

Apollo Residential Mortgage

(NYSE:ANH)

Anworth Mortgage Asset Corporation

(NASDAQ:MTGE)

American Capital Mortgage Investment

(NYSE:CHMI)

Cherry Hill Mortgage Investment

(NYSE:STWD)

Starwood Property Trust

(NYSE:BXMT)

Blackstone Mortgage Trust

(NYSE:CIM)

Chimera Investment Corporation

(NYSE:NRZ)

New Residential Investment Corp.

(NYSEARCA:REM)

iShares Mortgage Real Estate Capped ETF

(NYSEARCA:MORT)

Market Vectors Mortgage REIT Income ETF

Click to enlarge

Spreads

Remember that the simplest explanation of the mortgage REIT is to say that they have a leveraged portfolio of long term bonds financed with short term rates. The first starting point should be reading the steepness of the yield curve, so each week starts with this reading.

7 to 1

10 to 2

Q4 2014

1.72

1.5

Q1 2015

1.45

1.38

Q2 2015

1.79

1.71

Q3 2015

1.42

1.42

Q4 2015

1.44

1.21

1/8/2016

1.27

1.19

1/15/2016

1.3

1.18

1/22/2016

1.34

1.19

1/29/2016

1.2

1.18

2/5/2016

1.03

1.12

2/12/2016

0.99

1.03

2/19/2016

1

1

2/26/2016

0.95

0.96

3/4/2016

1.02

1

3/11/2016

1.09

1.01

3/18/2016

1.04

1.04

3/24/2016

1.07

1.02

4/1/2016

0.94

1.03

4/8/2016

0.93

1.02

4/15/2016

0.99

1.02

4/22/2016

1.11

1.05

4/29/2016

1.04

1.06

5/6/2016

1.04

1.05

5/13/2016

0.96

0.95

5/20/2016

0.98

0.96

5/27/2016

0.99

0.95

6/3/2016

0.9

0.93

6/10/2016

0.87

0.91

6/17/2016

0.9

0.92

6/24/2016

0.87

0.93

7/1/2016

0.82

0.87

7/8/2016

0.71

0.76

7/15/2016

0.9

0.89

7/22/2016

0.85

0.86

7/29/2016

0.79

0.79

8/5/2016

0.85

0.87

Click to enlarge

Rate Movements

A boost to the 10 year rates sent the spread higher, which is a positive development. On the other hand, the Federal Reserve is starting to chatter more about raising rates in the near future. I won't be surprised with either 0 rate hikes or 1 rate hike this year, which has been my stance for most of the year.

The increase in yields is positive for investors hoping to invest for income and it should ease up the pressure on agency RMBS from concerns about homeowners refinancing again.

State of the Industry

Discounts to book value, mentioned in my other column, are shrinking across the sector when comparing prices to the book values from the end of Q1. The decreasing discounts make sense in the context of domestic equity markets moving even higher, but the combination of a fairly flat yield curve with low rates 10 year rates and the potential for more rate hikes is more than a little concerning. Some investors don't seem to care, but I am looking at ways to reduce my exposure to most equity markets.

There are still some pockets of value, but they are getting much harder to find. Remember the taper tantrum? I don't want to be overly exposed to investors getting spooked that hard. My bond exposure is up substantially, but it is on short maturities with high credit quality.

With wages finally rising for the lower end of the spectrum, I'd like better protection from inflation. Equity indexes provide some protection since increasing prices eventually translate into increasing earnings, but I see some pressure on corporate earnings and the P/E ratios are already pretty high.

Credit risk could be seen as creating some protection because it would offer a high yield and relatively short maturities, but I don't see a margin of safety there. It seems like my best option may be to hold a little cash and keep digging for opportunities in individual stocks.

In a nutshell, the potential for inflation is on my mind but the cost of acquiring that protection looks too high.

Some Extra Specific Disclosures

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.

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: 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. Tipranks: Assign no ratings.