- Anworth Mortgage Corporation could call one of their preferred shares.
- Investors holding ANH-A are exposed to a significant capital loss as soon as a call is announced.
- ANH-A is now insanely overvalued; there is a better option with a higher dividend yield.
- ANH has a strong portfolio, but that doesn’t mean they won’t call their ANH-A shares.
One dividend yield has been called. Will another follow?
There was a rare occurrence recently (preferred shares for mortgage REITs are rarely called) when Apollo Commercial Real Estate Finance (ARI) announced they were going to be calling their preferred share ARI-A. I had purchased the fat yield of Apollo Commercial’s preferred share and was able to harvest my gains of ARI-A.
Why is this material information?
Anworth Mortgage Asset Corporation (ANH) currently has a preferred share that is materially overvalued. The recent call that just came out for ARI-A is driving up the likelihood of a call because that call on ARI-A supports that the higher yielding preferred shares will in fact get called, if the company has sufficient capital. The issuance of a large volume of new shares of ANH-C should provide the capital the company needs to get the job done.
The chart below will compare ANH-A to ANH-C:
These are the prices I’d consider a buy:
- ANH-A: $25.27
- ANH-C: $24.87
ANH-C has dipped significantly into the green for me recently, but right now it’s comfortably in the hold range. I had a position in ANH-C until it was coming out of my buy zone and I needed to free up capital for another investment. ANH-A, on the other hand, is ridiculously overpriced. The price would have to drop $1.33 for me to consider it a buy. As of now, I would’ve sold it $0.93 ago.
I can understand where some investors may find the yield for ANH-A more appealing than ANH-C. However, there is a much better alternative:
One of the preferred shares from AG Mortgage Investment Trust (NYSE:MITT) has a higher yield and a price that is materially cheaper.
There isn’t a material difference in the next call date either:
The only good call protection for any of these preferred shares is ANH-C. The yield is materially lower, but it comes with some nice call protection.
For investors looking for the higher yield, MITT-A has a stripped yield of 8.20%. MITT-B has slightly more call protection compared to MITT-A and ANH-A. However, between MITT-A and MITT-B, the 19 basis point difference in stripped yield makes me lean toward MITT-A as a more reasonable choice.
ANH-A is too expensive compared to the MITT preferred shares:
ANH-A does carry a nice yield, but the worst-cash-to-call is -$1.40. MITT-A is a lot cheaper, has a higher stripped yield, and has a worst cash to call in the positive by a penny. ANH-A is in the lower end of its price range for the last 52 weeks, but seeing a call from ARI may give ANH a push towards calling ANH-A.
There is another upside to the preferred shares in ANH:
The common equity to preferred equity ratio for ANH is materially better than MITT. If ANH-A is never called, they have two benefits. One is having a portfolio strategy that should be able to withstand a recession. Two, in the event of a liquidation of both companies, ANH’s preferred shareholders are more likely to get their full amount. I do not consider liquidation events to be even remotely probable for either company.
Anworth Mortgage Asset Corporation is overvalued on the common shares as well. I liked them as an investment for quite a while. They used to trade at a substantial discount to book value. The discount gave investors a better dividend yield and more protection from downside risk. With the discount gone, ANH no longer has a sufficient margin of safety.
ANH-A is insanely overpriced compared to ANH-C. ANH-C has dipped well into my buy zone recently and is currently well into my hold range. For investors who are just looking for a higher yield, I find MITT-A to be superior to ANH-A. It has a higher stripped yield and a lower price. The lower price makes MITT-A a much safer investment if an investor is worried about preferred shares being called. To be clear, a call on MITT-A could deliver a negative total return. There is not enough dividend accrual to fully protect shareholders from the possibility of a loss on call.
This article was written by
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Analyst’s Disclosure: I am/we are long MO, WMT, TGT, PM, FSIVX, FSITX, BMNM, WPG, GPMT, SFM. 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.
No financial advice. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints. CWMF actively trades in preferred shares and may buy or sell anything in the sector without prior notice. Tipranks: Sell ANH. I am also long DX-A, CBL-D, and GBLIL.
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