Quick And Dirty mREIT Discounts From November 29th, 2016

by: ColoradoWealthManagementFund


I picked up a large position in RSO and RSO-B after their earnings miss. Since then, I’ve been adding to the position as shares went back on a slide.

Valuations continue to move higher though I expect many mortgage REITs to reporting disappointing book values.

I’m repeating my sell rating on ARR and buy rating on RSO.

Add a sell rating to AI and OAKS.

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

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.

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


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.


Sutherland Asset Management


Apollo Commercial Real Estate Finance, Inc.


Five Oaks


AG Mortgage Investment Trust, Inc.


iShares Mortgage Real Estate Capped ETF

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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.

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Yes, you're reading that correctly. Relative to 11/20/2016 and even relative to 11/6/2016, the mortgage REIT valuations are higher. This is a bit problematic because the bond market has been undergoing what can best be described as the "Trump Tantrum". This follows on the Taper Tantrum Ben Bernanke launched years ago by saying they might consider reducing the rate of buying bonds.

The irony in this case is that the book values of several mortgage REITs are getting hammered now. They were hedged enough to withstand the first increases without must damage. In a few cases, I even saw book values moving higher during the earlier part of the quarter. That is no longer the case, as demonstrated in my latest sell rating for ARR. ARR's book value got smashed during the November due to a combination of high leverage and positive net duration. For the investors not familiar with net duration, it is the level of interest rate risk that remains after the hedging.

Table 2

Table 2 helps us assess the change during the quarter and for the month so far:

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I really want to hammer this home. The single top performer for Q2 to now is AI. I think AI is overpriced, but that is the topic for an entirely different article. It is also worth pointing out that I think OAKS is materially overpriced and that these quick and dirty discounts don't do justice in that regard. OAKS paid out a huge dividend in shares of their own common stock. In other words, shares outstanding increased significantly but the discount to trailing book value won't reflect the change. I consider OAKS one of the most compelling short opportunities I've ever seen. The article is limited to pro subscribers for the first 24 hours and was available to members of the Mortgage REIT Forum about a week ago. Think it is trading at a 67% discount as shown in the chart above? You might want to reconsider that theory.

You can take that as bearish views on both, but OAKS gets the bigger bear.

I picked that image for the bear because I think shareholders in OAKS may have that kind of mystified expression when they see the company's Q4 reports. It should be a solid quarter for their assets (at least relative to other mREITs), but the book value after the dividend should be fun.


The market loves Blackstone Mortgage Trust. That has been the case for quite a while, but it is even more impressive now since BXMT climbed by 4% since early October (using 10-02-2016). Nice work BXMT. That comes in shy of Apollo Commercial Real Estate Finance because ARI climbed a very impressive 6.78% since then. Other mortgage REITs doing CRE transactions are doing great as well. Just take a look at RSO, they're up a massive negative 29% since then…

Wait, RSO got hammered into the ground while investors threw money at BXMT and ARI? That should be a pretty big flag. While RSO declared a painful third quarter, investors also ended up completely confused on how the company works. I'm going through a series showing how the company should be transitioning over the next few quarters. After thorough analysis and seeing shares dip back to around $8.50, I'm returning to the Strong Buy Rating for RSO.

Other Analysts Really Don't Understand It

Remember Summer of 2016? It was a great time. While shares of RSO were running up over $13, I was using terms like "Zombie Dividend". Perhaps instead of "terms like", I should say that was exactly my phrase. See the Q3 Dividend Announcement:

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The next quarter management chopped the dividend to $.05 per share.

It wasn't just shareholders that missed the boat. There was a remarkable (don't bother clicking) upgrade by JMP Securities. The article on the other side simply states there was an upgrade to "Market Outperform" and a price target of $14.00. The actual research report isn't available unless you're a customer. I'm sure those customers got their money's worth…

My Positions

I am long SLD, ANH, NLY, DX, RSO for the common stocks mentioned in this article. I'm also long Bimini Capital Management (OTCQB:BMNM). For preferred shares, long NLY-D, CMO-E, RSO-B.

I may close any of those positions or increase any of them in the immediate future.

The Mortgage REIT Forum is a new exclusive research platform. Rates will go up soon, but I'm still allowing subscribers to automatically lock in their rates when they purchase a subscription. Those subscriptions are only $240/year. How do subscribers earn their money back? How about getting a call out just past 10AM Eastern time (about 10:03AM on the day of the crash) that RSO was on sale? They had the opportunity to buy just before me and I got in at $7.88. Those shares were around $8.50 today, down significantly from last week but up significantly from the call out. I expect them to move higher. How about the call out on the preferred shares of RSO. I called it out before acquiring RSO-B at $20.40. Those shares are trading around $22 now. Dynex Capital just broke over $7 after my callouts at $6.60 and $6.50. I've got more research on RSO that is currently restricted to subscribers. It'll come out to the public over the next week or two.

Disclosure: I am/we are long SLD, ANH, NLY, DX, RSO, BMNM, NLY-D, RSO-B, CMO-E.

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 sell to ARR, AI, and OAKS. Assign BUY to RSO.

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.