Quick And Dirty mREIT Discounts For 8/06/2019

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Includes: AGNC, AI, ANH, ARR, CHMI, CIM, CMO, DX, EARN, IVR, MFA, MITT, MORL, MORT, NLY, NYMT, ORC, REM, TWO, WMC
by: Colorado Wealth Management Fund
Summary

Discounts to book value are a major part of evaluating mortgage REITs.

We use this series to compare the latest share price with the trailing book value per share.

The ideal method utilizes current estimated book values, but using trailing book values is quick, and it still provides enough information to enhance decisions.

Prices are from 8/6/2019 during market hours. Trailing book values are as of 3/31/2018 since some mortgage REITs haven't reported Q2 2019 yet. Our subscriber series uses book values updated for projected change in book value.

One of the most important steps in evaluating mortgage REITs is finding the price to book value ratios. Using the mortgage REITs' book value gives us an idea for the general range where the mortgage REIT should trade. We expect that all mortgage REITs holding similar assets will generally be correlated with each other.

If you see several mortgage REITs trading at 15% or greater discounts to book value, you should expect comparable mortgage REITs to also trade at material discounts to book value. If a few are trading at premiums, while others trade at huge discounts, it usually represents an opportunity.

The mREITs

I put most of the residential mREITs, two ETFs, and one ETN into the table:

(AGNC)

AGNC Investment Corp.

(AI)

Arlington Asset Investment Corporation

(ANH)

Anworth Mortgage Asset Corporation

(ARR)

ARMOUR Residential REIT

(CHMI)

Cherry Hill Mortgage Investment

(CIM)

Chimera Investment Corporation

(CMO)

Capstead Mortgage Corporation

(DX)

Dynex Capital

(EARN)

Ellington Residential Mortgage REIT

(IVR)

Invesco Mortgage Capital

(MFA)

MFA Financial

(MITT)

AG Mortgage Investment Trust, Inc.

(NLY)

Annaly Capital Management

(NYMT)

New York Mortgage Trust

(ORC)

Orchid Island Capital

(TWO)

Two Harbors Investment Corp.

(WMC)

Western Asset Mortgage Capital Corp.

(REM)

iShares Mortgage Real Estate Capped ETF

(MORT)

VanEck Vectors Mortgage REIT Income ETF

(MORL)

UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN

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.

Price-to-Book Value

We tend to use tangible book value. That's like GAAP book value, but if we spot significant allowances related to tax assets or goodwill, we eliminate those from equity. Consequently, the book value we are using may be different from what you're seeing elsewhere.

We also correctly handled preferred equity. If you're seeing a value that is dramatically different than what we are presenting, the most common cause is a failure of the other tool to properly handle preferred equity. We are regularly challenged on these numbers, but we are consistently right.

Ticker

Q1 Tangible BV

Price

Price to Trailing Tangible BV

AGNC

$17.23

$16.90

0.98

AI

$8.70

$6.22

0.71

ANH

$4.76

$3.70

0.78

ARR

$21.29

$17.36

0.82

CHMI

$17.54

$14.91

0.85

CIM

$16.15

$19.43

1.20

CMO

$9.43

$8.17

0.87

NLY

$9.67

$9.34

0.97

ORC

$6.82

$6.18

0.91

CIM

$16.15

$19.43

1.20

DX

$18.72

$15.68

0.84

IVR

$16.29

$16.16

0.99

MFA

$7.11

$7.06

0.99

MITT

$17.44

$15.95

0.91

NYMT

$5.75

$6.10

1.06

TWO

$13.83

$13.15

0.95

WMC

$10.70

$9.98

0.93

EARN

$12.69

$11.11

0.88

Changes in Book Value

The REIT Forum, which currently has a sale going on for new members, provides sector updates which utilize the ratios of price to current estimated book value.

Those estimates incorporate the impact of expected changes in book value throughout the quarter. Changes in expected book value come from changes in the fair value assets and hedges, as well as net interest accrual throughout the quarter and the ex-dividend dates.

For the public article, we're providing price to trailing book value, which utilizes the book values as of 3/31/2019. We're still using tangible book value, so assets such as "Goodwill" are stripped out. We believe this creates a much better comparison.

What to Expect in Q2 2019 Reports?

So far, mortgage REIT reports have generally been met with negative reactions. However, those with more credit risk were generally performing better than those with less. For instance, AGNC Investment Corp. had a rougher time than New York Mortgage Trust.

AGNC's portfolio is built on agency securities, which have duration risk but very little credit risk. NYMT's portfolio contains several investments that take on much more credit risk. If the property owners failed to pay their mortgages, NYMT's performance would suffer.

Outlooks

We're bullish on a handful of mortgage REITs here. Recent declines in interest rates will be negative for the mortgage REITs, but share price declines more than offset the weakness.

We'll take bullish views on ARR, CHMI, and ANH.

These aren't the only mortgage REITs where we see value, but it should keep this article highly actionable.

Both REITs suffered significant declines in their share price recently and we believe they are likely to bounce back.

Trading

We see the preferred shares as a superior option for investors hunting for a long-term buy-and-hold investment. The preferred shares carry slightly lower yields but have substantially less risk. Investors who don't care about the risk level are taking excessive risks for very marginal expected returns.

We utilize the common shares as a trading investment because many investors in the sector don't understand how to project current book values or how to evaluate the spreads between mortgage rates and hedging rates. Our outlooks on the common shares should be seen as a view on the potential for trading opportunities. If you'd like to see more of our work, please take a moment to click the "follow" button next to our name.

Disclosure: I am/we are long DX, ANH, AI, ARR, CHMI, AND SEVERAL PREFERRED SHARES. 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.