Quick And Dirty mREIT Discounts From September 2nd, 2016

by: Colorado Wealth Management Fund


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

The average price to book ratio increased by 1.59% compared to last week.

Blackstone Mortgage Trust continues to shine with an exceptional 113% price to trailing book ratio.

The only two mortgage REITs to see a double-digit improvement in their price to book ratios since the end of Q2 were AI and WMC.

I’m predicting an equally weighted portfolio of AGNC, NLY, MTGE, TWO, and CYS would beat WMC over the next 3 years.

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

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.

While preparing the tables for the rest of the quarter, I made some changes to the layout. I think the new format will be more efficient. Several of the changes are behind the scenes, but readers will notice the discounts to book value will move from left to right, rather than from right to left. As usual, the red box indicates the most recent data. I also updated the discounts for the end of June to use the BV for the end of Q2. In prior weeks, that information was not available for all mREITs. Consequently, the discounts shown for 06/30/2016 will be slightly different from those shown in prior articles.

The average price to book ratio of 91.58% is pretty high given the enormous discounts seen earlier in the year. There was a strong case for thinking discounts might shrink during the year, but I don't believe many rational analysts were willing to believe that the average discount would shrink this rapidly. It is worth pointing out that during the third quarter the book values for most of the sector should have moved higher relative to the end of the second quarter.

Table 2

I redesigned table 2 to provide two different viewing options. One shows the total change since each period (on the left) and the other shows the change in discount to book value during each period (on the right).

The average price to book ratio increased by 1.59% over the last week. Overall it was a fairly easy week to see position values increase. AGNC had a lower value, but I think they went ex-dividend at the start of the week. Since the values for the prior week would've been just prior to the ex-dividend factor, none of the mREITs saw their ratio decline adjusted for ex-dividend dates.

Blackstone Mortgage Trust continues to shine with an exceptional 113% price to trailing book ratio. I've looked into them a few times and considered buying them when they were much cheaper earlier in the year. It would've been an excellent move with the benefit of hindsight, but I didn't like their calculations for "Core" metrics. It looks like I missed out on that one. Their portfolio should be having a rock solid quarter so far.

The only two mortgage REITs to see a double-digit improvement in their price to book ratios since the end of Q2 (Using 06/30/2016 for both sets of calculations) were AI and WMC. I haven't been keeping a very close eye on AI, but I'm finding that curious. The company previously traded at a fairly wide discount to GAAP BV, but I believe that is because investors were putting a lower value on the intangible book value.

The strength for WMC leaves me scratching my head as well. They trade at 97.55% of trailing book value. That is materially higher than the sector average, higher than Annaly Capital Management, higher than Two Harbors, higher than CYS Investments, higher than MTGE, and higher than AGNC. Modeling their book value in prior quarters was virtually impossible because active management of positions meant the ending positions may have limited resemblance to the starting positions and the positions during the quarter might resemble neither. How confident can investors be to assign such a high valuation?

If we want to look three years into the future, I'll predict that a portfolio composed of 20% each in NLY, AGNC, CYS, TWO, and MTGE would easily beat a portfolio that solely comprises WMC. I'm not talking about on a "risk adjusted basis". I'm talking in simple absolute returns. For the sake of being precise, I'll assume dividend reinvestment. If anyone wants to check back on this prediction at 9/2/2019, feel free to throw it in my face if I'm wrong. No rebalancing necessary. Simply measure the percentage return on each stock.

Don't take that to be a sudden endorsement on each of those stocks at current prices. I'm simply noticing that those are five mREITs that I would consider superior to WMC all trading at larger discounts to trailing book value.

My Positions

I am still long on ZFC and MTGE. I also own preferred shares from NLY.

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.

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