Quick And Dirty mREIT Discounts From October 22nd, 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”.

Several sources of financial data no longer function properly. GoogleFinance() does not work for REITs. Even the quote pages are wrong.

The earnings season has hit several parts of the market and is on the doorstep for mortgage REITs.

As I work on my estimates for the different mortgage REITs, I entered new positions in CMO and NLY.

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.


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.

The latest discounts to trailing book value moved a bit higher again. The net result suggests that prices were advancing by 1.2% to 1.3% on average. With the earnings season on the doorstep, there should be a higher probability of corrections on relative value since investors will have more data to digest. Consequently, this is one of my favorite points in the quarter. This is when we see how much of our analysis was able to hit the nail on the head.

I bought shares of Capstead Mortgage Corporation and Annaly Capital Management. As you may notice in the next chart, both saw their price to trailing book value ratios decline materially. Since Q2 ended, on average the ratios have increased by about 1.34%, but two of the strongest mortgage REITs saw their ratios get hammered. That is interesting and my work on their portfolios suggests that they didn't have a bad quarter.

Table 2

Table 2 helps us assess the change during the quarter.

My Positions

I am long MTGE, ZFC, ANH, NLY, CMO for the common stocks.

I believe each of these common shares is in for a solid performance on the earnings release, though CMO could easily have a worse reaction initially if investors focus on the trailing income figures. Amortization could hit them pretty hard for the quarter because of the way they record amortization charges. Regardless, I think when the dust settles CMO will be rising and I think MTGE, ANH, and NLY will have positive reactions as well.

I also own shares of AGNCB, and NLY-D. I had to harvest a few positions to clear up capital for buying NLY and CMO. Each performed quite well.

I am contemplating changing some positions so I may buy or sell anything.

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 NLY, CMO, ZFC, ANH, MTGE, AGNCB, NLY-D.

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: New buy ratings are for CMO and NLY.

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.