Thoughts On A Handful Of mREITs And The State Of The Industry (Week 53)

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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

The new spreads were at .92 for the 7-1 and .96 for the 10-2. This was another slight steepening of the yield curve.

After a fierce decline in the prior week, the latest week was less eventful.

The selling from a week ago created opportunities and some of those opportunities are still present.

Welcome to week 53.

A week ago, the story was the decline in common stock of mortgage REITs. During that week the preferred shares also declined by an average of $.23. Over the last week common stock saw a slight recovery, but preferred shares on average declined by another $.20. This is a week where I see material opportunities existing in both the preferred stock and the common stock.

I'll continue the implications below the tables of mREITs and yield spreads.

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 (bought by ARI)

(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

Spreads became a little steeper.

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

8/12/2016

0.8

0.8

8/19/2016

0.84

0.82

8/26/2016

0.87

0.78

9/2/2016

0.88

0.8

9/9/2016

0.93

0.88

9/16/2016

0.9

0.93

9/23/2016

0.84

0.85

9/30/2016

0.83

0.83

10/7/2016

0.89

0.9

10/14/2016

0.92

0.96

Source: Data from Treasury Website

Click to enlarge

The steeper yield curve is a clear positive development. It still isn't above 100 basis points at either duration, but 92 and 96 basis point are still a material improvement compared to anything since the start of July and better than my measurements (which were only at weekends) going back until the end of May.

Higher yields across the universe of yield sensitive investments may be pushing preferred shares a little lower, but Treasuries don't suddenly become a viable investment to replace securities yielding 7% to 8.5%.

I think a push lower by the S&P 500 combined with uncertainty about the political atmosphere is weighing on investors willingness to take on risk. I'll grant that uncertainty is a risk and that risk should demand reward, but I'm convinced there is anything challenging the fundamentals on which the mortgage REITs operate.

Federal Reserve

I've got some work in progress regarding comments made the Federal Reserve's most recent event. The 60th economic conference in Boston involved comments from two members of the Federal Reserve. I found Janet Yellen's speech quite interesting as she was addressing several real issues with the way their economic models are built. Her comments suggested that the Federal Reserve might allow inflation to run at a higher level over the next few years. Further, she specifically referenced the problem of a lower labor force participation rate and the impact of marginal workers that might rejoin the labor force if working conditions (including wages) were stronger.

Positions

I'm long AGNCB, AGNCP, NLY-D, NLY-E, NYMTO, ZFC, ANH, and MTGE. I may buy or sell anything at any point.

I bought a very small position in NYMTO because it was underpriced on historical metrics relative to the rest of the mREIT sector and clearly underpriced relative to NYMTP based on fundamental analysis. I intend to exit the position soon and look for a small capital gain on the play.

Want to learn more?

The Mortgage REIT Forum is a new subscription research platform. It is nearing 100 subscribers. The first 100 subscribers will be able to lock in their subscription rates at only $240/year. After the service gets past 100 subscribers, there will be a price increase for new subscribers only. All existing subscribers will be grandfathered in at the current rate. The service includes coverage on about a weekly basis for preferred shares of almost every mortgage REIT and recalculations of current book values and discounts for common shares of a small handful of mREITs. It also includes advance previews of some of my public articles on mREITs.

Disclosure: I am/we are long AGNCB, AGNCP, NLY-D, NLY-E, NYMTO, MTGE, ANH, 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