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Mortgage REIT Discounts Remain: Recent Questions Answered


  • Uncertainty around earnings is exceptionally high. The volume of reader questions we are getting remains elevated.
  • We'll run readers through several of the best questions we've heard lately.
  • March was rough for all mortgage REITs, but it was much more difficult for the mortgage REITs taking on more credit risk.
  • Two of the mortgage REITs we are bullish on today are NRZ and CIM. Each trades at a very unusual discount and recently provided its latest earnings reports.
  • Looking for a portfolio of ideas like this one? Members of The REIT Forum get exclusive access to our model portfolio. Get started today »

As the mortgage REIT earnings reports come in, investors are finding out how different mortgage REITs can be. With so many reports coming in, we're seeing an elevated volume of questions of investors. Consequently, we want to share several of the best questions and answers we've had lately.

The topics we discuss are going to be extremely relevant to the residential mortgage REITs:

Ticker Company Name
(AGNC) American Capital Agency Corp.
(AI) Arlington Asset Investment Corporation
(ANH) Anworth Mortgage Asset Corporation
(ARR) ARMOUR Residential REIT
(CHMI) Cherry Hill Mortgage Investment
(CMO) Capstead Mortgage Corporation
(NLY) Annaly Capital Management
(ORC) Orchid Island Capital
(DX) Dynex Capital
(CIM) Chimera Investment Corporation
(EFC) Ellington Financial
(IVR) Invesco Mortgage Capital
(MFA) MFA Financial
(MITT) AG Mortgage Investment Trust, Inc.
(TWO) Two Harbors Investment Corp.
(WMC) Western Asset Mortgage Capital Corp.
(NYMT) New York Mortgage Trust
(NRZ) New Residential Investment Corp.
(PMT) PennyMac Mortgage Investment Trust

Sector Overview

The month of March was particularly hard for mortgage REITs exposed to credit risk. It was still rough for mortgage REITs focused on Agency MBS, but it wasn't as rough on average. When we get into mortgage REITs focused on credit assets, the disparity in performance is dramatic.

The Agency group:

  • AGNC
  • AI
  • ARR
  • CHMI
  • CMO
  • DX
  • NLY
  • ORC

The Non-Agency group:

  • ANH (barely, they are more agency than most listed here)
  • CIM
  • EFC
  • IVR
  • MFA
  • MITT
  • WMC

Multipurpose (too many unique aspects to toss into one category):

  • NYMT
  • NRZ
  • PMT

Note: Two Harbors started the quarter as "non-agency" and ended as "agency", consequently we didn't list TWO as part of either group. Its non-agency exposure was the overwhelming factor in its first-quarter performance, so lumping them in as Agency MBS could be confusing for some people.

With the general

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This article was written by

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Colorado Wealth Management is a REIT specialist who began his decades-long investment career in a family-owned realtor office before launching his own company and embracing his drive for deep-dive REIT analysis. He passed all 3 CFA exams. He focuses on Equity REITs, Mortgage REITs, and preferred shares.

Features of the group include: Exclusive REIT focus analysis, proprietary charts and data models, real-time trade alerts posted multiple times a month, multiple subscriber-only portfolios, and access to the service's team of analysts and support staff for dialogue and questions on the REIT space.

Analyst’s Disclosure: I am/we are long ANH, CMO, NRZ, CIM, AIC, IVR-C, NLY-F, NLY-I, CMO-E, AGNCO, MFO, NYMTM, ANH-C, NYMTN, TWO-B, MFA-C, TWO-A. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (55)

Another good article.
pauldr77 profile picture
HI. I am noting a lack of comments or questions(from readers) regarding ANH or their preferred shares. Was wondering what CWMF's current position on both were. I am long on common shares and scooped up shares @ $1.29 and 1.37. Purchased ANH-A at $20.72 from proceeds of sale of ANH-C (at $18.95),recently.

Enjoyed the article - You're more interactive and clearer on explanations than other forums
One more thing IMO, this is a once in a decade or more opportunity to pick up certain REITS at a real discount. I started really investing again late last year and got hammered in March by overvalued revenue trap stocks. Looked into REITS before they crashed. Glad I waited till most of correction happened before investing in this sector.
Great Article im Long on most of these. The common will come back as the year progresses. Ty for breaking it down in understandable categories. Like NRZ ORC ARR CLNC all trading under BV plan to add more CIM.
same here, cheers Solar express
Thanks for the great articles and analysis. I want to share a comment made by David Finkelstein of Annaly in its April 30 conference call that I don't think anyone has commented on in this discussion chain. It supports Scott Kennedy's analysis that NLY's BV will grow naturally from here. Earlier in the conference call it was state that NLY's BV was $7.50 at 1st quarter end:

"Rick Shane

Hey, guys, thanks for taking my question. And I hope everybody is well. A couple of things, I don't know if I missed it. Did you provide a quarter-to-date update on book value at this point?

David Finkelstein

I haven't Rick. But I will tell you as of yesterday, our book was up roughly 7% right around $8. Our leverage has declined modestly primarily as a consequence of higher equity value and we are right now at about 6.6 times maybe 6.5 times. And our liquidity is $5 billion in terms of cash and agency MBS.
So you guys think IVR is dead or just a hold at the moment? I've got a lot sitting there but I figured it would just take them a month or two to get out of their rut.
hi Sassriverrat, I am a seller on IVR, I do not like what I see so far and the management has been bad in selling good assets, expect a terrible Q1, with further decline in BV, cheers
Do you think they are going to go under?
idk, will have to Waite till they report, but sell IVR and move on, invest in pure MBS players, you will see better stock appreciation, long and strong buys on ORC, AI, AGNC, ARR, CHMI, CMO, NLY, CIM, TWO, NRZ, EFC and CLNC (commercial)
Any thoughts on the PMT? Are the CRT losses going to continue or the markdowns sufficient?
PMT IS A buy at these levels, solid Q1 report, sold most of their CRT, you are fine here, cheers
CHMI sold most of the CRT..PMT still has it and is doubling down and is taking fresh deliveries actually. Can you please review again? Thanks!
oops, I was refereeing to CHMI, with regards to PMT, they still do own some CRT, but exposure balanced with excess cash and fair portfolio in MBS, eventually PMT will sell all its CRT, at this time, the worst is behind them and management thinks holding on to such loans will hold value to their assets, cheers
I sure don't understand the financials being issued by companies like CIM or NRZ, and I am a CPA. Take CIM as an example. Their book value dropped from $ 16.15 at 12/31/2019 to $ 12.45 at 03/31/2020, or a decline of $ 3.70 per share. The CIM income statement only reflects a 2020/Q1 loss of $ 2.08 per share, however, and the 2020/Q1 distribution was $ .50 per share, so where did the other $ 1.12 go?

$ 3.70 BV decline - $ 2.08 reported IS loss - $ .50 distribution = $ 1.12 ??

The answer lies hidden on the balance sheet, where a $ 206K loss/debit was conveniently booked to an equity account titled "Accumulated other comprehensive income". A little more research will disclose this is a 2020/Q1 unrealized loss on securities held for sale. So why doesn't a loss like this get prominently reported/disclosed on the income statement? The CIM press release prominently reports $ 2.08 as the GAAP Net Loss Per Common Share, but the real loss in value was $ 3.18 per share if the large "unrealized loss" would be included.

My point is that some investors may not immediately realize how bad 2020/Q1 was for CIM or NRZ. CIM's BV dropped by 23% while NRZ's BV dropped by 34%. The price of the shares, however, have tanked a lot more than that.
Any thoughts on the PMT?
The problem with NRZ is - is their book value really that high. First, they sold an additional 900 million non agency and we can probably estimate the % loss they took on those was the same as what they sold in March. Second, the majority of assets on NRZ's book is MSR. No one knows how forebearance will play out (nrz spun it as positively as they could) but NRZ does not receive the fees on unpaid mortgages and they have to pay the service advances. This could be far worse than is now being stated. Third, MSRs are valued based upon their cash flows at a discount rate. Since the public doesn't know what that amount is, no one really knows what the value of the MSRs are worth or what the book value really is. NRZ has gone into originations because that is the natural hedge to MSRs but that business is much more expensive to operate. Too much risk for me at this point.
MSR have been marked down 25% by TWO which I believe is standard as per indices. As long as the MSR were not excessively levered or atleast financed by term notes it is fine. CHMI has no leverage on MSR and will not be excessively impacted. The leverage magnifies gains and in this case losses.
Is GPMT obligated to report a true fair accounting of their loans? It seems like the new GAAP rules prevent them from doing that, and just allow them to speak to the risk inside of them?

LADR just reported and DID NOT write down their whole loans, which obviously are less valuable than they were 3 months ago, except for the ones they sold and thus were explicitly marked to market when they were disposed. I would expect the same from GPMT. I think the best we can hope for is that they have provided for better liquidity so that they can run out those senior loans to completion and work-out the various issues and hopefully write-off few of them. I still think that means they are likely worth 12 or 13 bv/share even if you are discounting, and they'll likely report official BV higher than that.
oh - LADR did put in a bigger loss reserve, but it seems like it was related to a loan that was already a problem before all of this. They can allocate loan reserves as they see problems happening. But if they think theyll get par for the loan eventually, they don't have to write it down... I think once interest payments start happening they have to do something? not entirely sure, but LADR definitely did not mark down other than an old pre-covid problem.

They got 96% of par for some other loans on secondary market. I find it very hard to believe hotel loans would get anywhere near that, even over 70%, right now, at the 65-70% LTV level even. They are all work-out situations at this point.
Amalek101 profile picture
That was a very timely MITT warning - thank you for that! :D
07 May 2020
I wonder if mREITs hit as hard as MITT, IVR, etc will ever recover even half the BV they had in February..
forget about MITT, IVR, MFA, all are dead, go with the winners that I and Scott like, such as CIM, NRZ, ARR, ORC, AI, NLY, AGNC, TWO, and to some extent NYMY. CHEERS
Did you Check PMT which got the worst securites but suffered only 25% bv loss. And did not sell anything.😀
Something to be said for effective risk management.
And IVR got mostly agency but lost 80% book value.
I did not realize MFA’s outlook was as grim as what is stated in here. Been standing on the sidelines but clearly have been off on how bad things are.
Nothing grim was stated. Just uncertainty.
Colorado Wealth Management Fund profile picture
I'm going to second the comment by @Bruinfaninnewjersey This is simply an acknowledgment that there is additional data we would really like to have for assigning percentage probabilities.
CWMF, what do you make of the delayed earnings report? None of the other hybrids needed extra time... bad omen?
Great job as always.
On the Annaly preferreds, I believe the D shares are fixed rate.
The F & I shares are fixed to floating rate. Hence the price disparity.
Colorado Wealth Management Fund profile picture
You are correct. D is fixed-rate and we believe that is the reason.
Colorado- Thanks for your insights all the way through the crisis!

Talking concerns going forward on the MReit sector using the March experience-

The potential for interest rate volatility or hedging losses is keeping me up due to the potential for bv losses. If china dumped treasuries and interest rate went up by 2% overnight would bv be wiped out?
The March incidents have made think more about how fragile these mreits are. You are essentially investing in the margin account of a hedge fund. If the margin account drops the assets get sold and the mReit does not even own the securities. This short term repo funding is scary.

I know you are getting 8 to 10% or even more on an underlying investment which returns less than half .

But how does this compare to other risk assets of similar nature.

There are preferreds of equity reits which have long term funding. Some are collecting 80% rent and secured by long term funding. Even when bonds dont be paid off they negotiate and extend them. They dont have this margin account fragility. Even preferred of gas shippers seem less fragile compared to this. Most of them did not suffer these crazy overnight BV losses.

Just how fragile are these MReits?. What is the potential for future harmful book value events? is the March event one in a 10 year event or one that will happen every 2 years?
Those are the questions investors will have to think if they compare the preferreds of this sector with similar preferreds of other sectors returning similar yields now.
Colorado Wealth Management Fund profile picture
If China was dumping Treasuries I would expect the Federal Reserve to begin buying hard.

Huge changes in rates can seriously hurt mortgage REITs, but such huge changes rarely occur overnight.
Landlord Investor profile picture
Why do you only like/own NRZ and CIM common and not the preferreds?
Colorado Wealth Management Fund profile picture
I wasn't providing ratings on any preferred shares in this article. Might be reading a bit much into our non-mention of the preferred shares.
Could you comment on WMC ? BV 3.42 is far below update on March but portfolio value rises on April.
Colorado Wealth Management Fund profile picture
Haven't looked into WMC results yet. Scott will look at them soon. We pick our exposures very carefully. Didn't buy any shares in WMC. We had other opportunities to target.
Thank you so much for this helpful Q&A. Would you be willing to opine on NRZ’s likelihood of remaining a REIT? They seem more committed to their operating model and have sold most of their “good” REIT assets. As it is, I think they are taking a chance by counting servicing advances as REIT-eligible assets without a PLR.
Colorado Wealth Management Fund profile picture
An interesting question. As this gets into accounting regulation, Scott would be far more qualified than I.
Thanks, detailed as always. I am up with NLY and AGNC, down with ARR, NRZ and CHMI, but hope to see recovery in the second half of the year.
Expect less bad things with the book value on CHMI. Which in this environment post march is actually good.

As you saw TWO reported only a 25% loss on book value on MSRs. CHMI should not expect a really bad bv loss as they are not levered up on MSRs and only levered on agency mbs. So MSR fair value losses will not be magnified.
Colorado Wealth Management Fund profile picture
Thanks for a great comment. CHMI remains pretty attractive.
whiplash542 profile picture
Thank you very much for this insightful article.
Colorado Wealth Management Fund profile picture
Thank you for the comment and choosing to read our work.
Hidden Rock Capital profile picture
Thank you for the comments. Are NRZ, CIM still undervalued today ($6/share, $8/share) or was this from previous date?
@Joungfan Based on BV given during the Q1 conference calls, both CIM and NRZ appear to be significantly undervalued when considering their prior trading ranges.

CIM - BV of 12.45
5/6 Close of 7.84 gives a P/BV of .63

NRZ - BV of 10.71
5/6 Close of 6.11 gives a P/BV of .57

I have not reviewed their balance sheets and CWMF/Scott have a much better understanding of how these work and other key factors than I do so hopefully they will chime in. Based on my understanding and pre-COVID scorecards from CWMF with trading ranges of .90 - 1.1 for buy/hold/sell recommendations, I would expect these both to fall into the strong buy. That being said, I am not sure how much adjustment needs to be made for those scorecards to factor in COVID and the current economic environment. I personally have bought both within the past couple of weeks.
Colorado Wealth Management Fund profile picture
In my opinion, both are still undervalued today. I picked which ratings to use yesterday evening, so the data is extremely recent.
Colorado Wealth Management Fund profile picture
We will have updates soon, but I can confirm that at least very recently both were in our strong buy ranges and that I have more than a tiny allocation to each (more than 2% of portfolio value for each).

Targets throughout the sector change at least a little bit each time Scott updates his models. I'm not expecting to change either position in the immediate future, but we do trade actively and rely very heavily on Scott's research.
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