Accept Your Fat Mortgage REIT Gains

Summary

• We’ve been telling investors for the last 2 months that price-to-book ratios were too good (too low) to last.
• We’ve included tables to reflect the discounts to trailing book value. Thanks to reader feedback, those tables are organized better than before.
• We’re including a few recent ratings, along with the index cards for those REITs. The estimated book value within the index cards uses current (as of this week) estimates.
• We’re going neutral several mortgage REITs and two ETFs. We’re going bearish on WMC because it is WMC and trades too close to The REIT Forum’s estimate of book value.
• Looking for a helping hand in the market? Members of The REIT Forum get exclusive ideas and guidance to navigate any climate. Get started today »

This research report was produced by The REIT Forum with assistance from Big Dog Investments.

Your feedback has improved this series week after week. Thank you, readers, for all you do.

Due to the dramatically higher than usual volatility in the sector, we’re planning to post this series a little more frequently than normal. That allows us to provide more ratings and ensure readers of our public work still have recent numbers.

The topics we discuss are going to be extremely relevant to the residential mortgage REITs. The table below uses BV as of Q1 2020 (if the company has reported earnings):

Ticker	Company Name	Focus	Price to Trailing BV	BV Q1 2020	Price
ORC	Orchid Island Capital	Agency	1.03	$4.65	$4.80
CMO	Capstead Mortgage Corporation	Agency	0.97	$6.07	$5.87
AGNC	American Capital Agency Corp.	Agency	0.96	$14.55	$13.91
NLY	Annaly Capital Management	Agency	0.94	$7.50	$7.08
DX	Dynex Capital	Agency	0.93	$16.07	$15.00
ARR	ARMOUR Residential REIT	Agency	0.86	$11.10	$9.58
TWO	Two Harbors Investment Corp.	Agency	0.84	$6.96	$5.88
CHMI	Cherry Hill Mortgage Investment	Agency	0.76	$13.73	$10.45
AI	Arlington Asset Investment Corporation	Agency	0.65	$5.28	$3.44
WMC	Western Asset Mortgage Capital Corp.	Hybrid	1.02	$3.41	$3.48
CIM	Chimera Investment Corporation	Hybrid	0.89	$12.45	$11.13
EFC	Ellington Financial	Hybrid	0.83	$15.06	$12.50
ANH	Anworth Mortgage Asset Corporation	Hybrid	0.73	$2.69	$1.96
IVR	Invesco Mortgage Capital	Hybrid			$5.63
MFA	MFA Financial	Hybrid			$3.07
MITT	AG Mortgage Investment Trust, Inc.	Hybrid			$5.78
PMT	PennyMac Mortgage Investment Trust	Multipurpose	1.02	$15.16	$15.44
NRZ	New Residential Investment Corp.	Multipurpose	0.80	$10.71	$8.56
NYMT	New York Mortgage Trust	Multipurpose	0.79	3.89	$3.06
REM	iShares Mortgage Real Estate Capped ETF	ETF
MORT	VanEck Vectors Mortgage REIT Income ETF	ETF

Click to enlarge

Note: Some mortgage REITs such as AGNC and ORC have reported material gains to book value during Q2 2020. They aren’t the only mortgage REITs that should see book value higher as of 6/4/2020 than it was on 3/31/2020.

Price-to-Book Value

The next image provides a graphical representation:

Source: The REIT Forum

Remember that these are price-to-trailing book ratios. They are not using estimates of current book value. We expect book values to generally be higher throughout the sector, which makes the actual price-to-book ratios lower.

Why Do These Ratios Matter So Much?

You may notice that we write about these topics quite frequently. Why? Because share prices swing hard, especially when there is panic in the sector. The difference in price movement can be massive. For instance, Two Harbors rallied by a tiny bit, about .3% today. However, some other mortgage REITs dipped by around 20%.

That level of volatility is not usual when we look at a period that spans years, but it is quite normal in the period that began in late February and runs through at least today.

Sector Overview

Some discounts to book remain pretty large, while some do not. A few REITs trade above estimates for current book value.

As a reminder, Scott Kennedy also is an author for the REIT Forum. You may see his commentary featured in our articles and may notice an extremely high amount of overlap in our ratings, so subscribers reading this article should see Scott’s latest REIT Forum sector update for more detail.

Index Cards

We’re sharing a few index cards for ratings. After our last article, some readers ask for some neutral ratings. This seems like a great time to bring out a few of them. We start with ORC:

Source: The REIT Forum

We’re going neutral here. Shares trade at a premium to trailing book value but about 9% under our recent estimate for book value. This has been a good quarter for book values. ORC invests in agency RMBS and the spreads have tightened a bit, so gains to book value are not unusual this quarter.

Next, we will highlight MFA:

Source: The REIT Forum

With a projected NAV slightly over $4, MFA still trades at a sizeable discount. However, the discount narrowed dramatically over the last few weeks. MFA takes on more credit risk to generate returns, but it has an excellent internal management team which helped the company avoid the worst losses.

We’re switching over to EFC next:

Source: The REIT Forum

EFC is also taking on some credit risk. Shares are still at a meaningful discount to NAV, but they’ve roared much higher. They are up 285% from their 52-week low. It seems small compared to MFA’s rally over nearly 900%, but that’s simply because EFC didn’t get the same level of panic as MFA.

Another share that just reached our neutral range over the last few days is CIM:

Source: The REIT Forum

You may notice the value for CWMF’s allocation is 0%. We unloaded our allocation very recently between $11.54 and $11.56. With the magnitude of the rally in the sector, we decided it was time to reduce exposure. Our returns are shown below:

Source: The REIT Forum

We’ve been actively reducing our risk over the last two days, so our cash allocation is growing and several of our “trading positions” are being reduced.

For good measure, we will add in a bearish one also. WMC rallied too hard, in our view:

Source: The REIT Forum

We see WMC trading too close to NAV for comfort. That’s not our cup of tea. We think investors have some much better options available to them in the sector, so we’re going bearish here.

What About ETFs

We’re going to take a neutral outlook on REM and MORT (the sector ETFs) as well. They are up over 110% from their 52-week lows. That’s good enough. We always prefer individual mortgage REITs so we can carefully pick our risks and grab the best valuations, but there was an opportunity where the sector was so cheap that even the ETFs offered a viable choice. Not as good as picking individual shares, mind you, but not bad.

Conclusion

The sector is filled with opportunities. Some of those opportunities are much more attractive than others. If you aren’t careful, you could wind up with one of the very few mortgage REITs trading at a premium to current book value. If you want to learn more about opportunities in the sector, start by clicking the "Follow" button beside my name.

Ratings:

• Neutral on common shares: ORC, MFA, EFC, CIM, REM, MORT.
• Bearish on common shares: WMC.

Analyst’s Disclosure: I am/we are long NLY-F, NLY-I, AGNCO, MFO, NYMTM, TWO-B, MFA-C, ANH, NLY, AGNC, NRZ. 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.

Comments

[#4]

@Colorado Wealth Management Fund
NYMTM and NYMTN - suspended dividends. That's no fun.

[Colorado Wealth Management Fund]

Suspended quite a while back. Earnings call sounded positive. Wouldn't be surprised if they bring them back this quarter. It isn't guaranteed, but it is still quite possible.

[simply2fly]

Thanks for the thoughtful article! What do you think of DX? This is the 2nd time they have lowered the dividend in the past year? Time to bail?

[Colorado Wealth Management Fund]

Valuation looks pretty good, momentum is scary at the moment.

[pace2001]

You timed that CIM sell pretty well. New warrant and Debt issued.

[Colorado Wealth Management Fund]

Thanks. I rather liked it. Decided I needed to send the information public quickly. Had a full trade alert for subscribers in real-time.

[pace2001]

I sold off 1/3 of my MREIT holdings on the run up and probably getting back in today. Sold calls on NLY insteading of selling outright, I still think 10% to 20% Discount to book should be good price for most Agency MREITs. You can add your CIM back on the Fed Discount today.

[DKB2]

And that alert was timely indeed! Thanks again and Happy Trails...

[AndreasGul]

Hi. I really like your articles. I am invested in two mREITs that have a good discount to book value, approximatly 50% if taking company statements from Q1 reports. These companys are Granite Point Mortage Trust and Exantas Capital. I wonder why you don't mention these companys in your articles?

[Colorado Wealth Management Fund]

This series does residential mortgage REITs, those two are commercial mortgage REITs. I haven't streamlined a process for doing a similar series on commercial mortgage REITs. I've just been running this one and making observations on what works and what doesn't work for the presentation.

[madbeachman]

Wild trading in MITT today, after hitting a high of $7.89 yesterday morning, it fell 43% to a low of $4.50 this morning. Now it is up 35% from the low to be up for the day at $6.07.
It's like someone knew something... but then they were wrong.

Note: I have no position in the common but a medium sized position in the preferred-A.

[trader201102]

Thank you for the helpful article CWMF...I noticed on your chart that AI is trading at the biggest discount to BV amongst the agency-backed mREITs. What’s your position on AI?

[Colorado Wealth Management Fund]

High risk than most investors think. Can be a useful tool for trading though.

[BartAtTheRanch]

Thanks for the article. Do you guys ever cover STWD (Starwood)? Bart

[Colorado Wealth Management Fund]

We do not cover STWD. Nothing against the company, just not in our coverage group.

[User 51492857]

With AI trading at one of the largest discounts to book value is there a reason there's not more said about them? Using the BV metric it would seem like one to buy. Thoughts? Thanks in advance.

[trader201102]

I have the same questions about AI...I just noticed that they just declared no 2Q dividend for common shares. That’s surely holding it back from trading at a valuation closer to its peers. But I’m unsure if there are other factors as well.

[pace2001]

They sold lots of the assets and kept lots of dry powder. Hard to earn money with low amount of assets. G&A Expense probably more than net interest income for Q2. Also Management has not done well in the past.

[User 6141041]

Thanks for the update. Very useful, as usual. 
Are you sure about the 0.30$ dividend for CIM? The dividends for the preferreds have been declared by the company, but I didn’t see an announcement regarding the common stock yet.

[Colorado Wealth Management Fund]

I guess the company answered this one for my with the declaration last night. We were pretty confident that would be the number so we had it plugged into the sheets already. Great question. I forgot to mention in the text that the dividend rate for CIM was our projected rate (now official).

[samiamdj]

MFA is still in forbearance, It's third forbearance. They're on the hook for a $100 million if they can't satisfy the forbearance they agreed to with their counter-party's. Very much high risk still.

[Colorado Wealth Management Fund]

Still high risk. The improved availability of the credit markets over the last two weeks should be a huge boost though.

[Bruinfaninnewjersey]

Getting the forbearance was a boon. I'm way up on my common shares and the only question now for me is do I take the profits or hold out for more. Q1 earning coming 6/16. This is the first Index Card I have seen from CWMF on MFA common and it gives me some numbers to consider... so many thanks!

[jluns0616]

@Colorado Wealth Management Fund Thanks for keeping the non-professional small money traders informed. Really appreciate the information you provide. ORC +71%, AGNC +26%, CIM +49% with limit stops set on all to preserve some gains.

[Colorado Wealth Management Fund]

Congrats. Excellent returns on those positions. You managed to buy when fear was high, giving you great entry prices.

[shaxmatist1]

The only reason MREITs did not follow MORL on the road to zero is fast intervention by the Federal Reserve. If Powell acted just 2 weeks later, every non-agency MREIT would be insolvent. These are extremely leveraged instruments. Know what you own.

[MDN1]

Not quite old boy. MORL went to ZERO because of the acceleration clause that the hired hands of UBS worked into the prospectus.

[noelahg]

As a bag holder of WMC, I appreciated your comment.
I've actually had thoughts about how wonderful it must be to have Jennifer Murphy's job and sit around watching money go up in flames, knowing you get a fat check either way.

[Colorado Wealth Management Fund]

It does sound quite nice. Can't argue with that.

[Charles Catalano]

Thanking readers for their input is awesome. Sub for life here. I'm sitting on almost 500 shares of IVR at a cost basis of $3.63. I think even if the Q1 2020 earnings results which come out on June 22nd (confirmed) are really bad, I'm staying where I am. If we're paid that 90% share dividend on June 30th with the per share price of $7.00-$8.00, that's fine too. KBW can say anything they want, I'm not changing my position.

[Colorado Wealth Management Fund]

KBW's analysis appears to match up with ours reasonably well. I would run away from IVR.

[madbeachman]

I was able to sell IVR short yesterday at $6.50 and only a 5% borrow cost. I plan to close it after they report and IVR trades down below NAV.
If management was correct on the last NAV estimate even big upside since then should have NAV below $3.80 when they report. Something can always go wrong but I'm comfortable with this one.

[Jon_000]

I sold credit spreads with a 6 to 7 range for about 0.40 with July expiration. Seems very low risk also but now I am having second thoughts in the low probability the stock pops and someone exercises the call and I can't exit quickly enough. I should have shorted, didn't expected such a low borrowing cost.

[GearDownBigShifter]

I made quite a bit on morl for a while with its 26-30% dividend during peak months. However I certainly agree that it’s wasn’t for faint of heart- and always read the fine print! (Recall). Keep learning every day, thanks for the great articles and informative comments.

[PBev37]

Ha ha hah...! Even though I recently bought WMC, have seen some appreciation and was hoping for more, I loved your snide, "...because it is WMC" slam. I also own IVR and MAC from their recent lows, so please don't deep-six them, too, okay? Joking of course, read your posts with full consideration from beginning to end.

[Colorado Wealth Management Fund]

Thank you. I wouldn't want to be long IVR here. Valuation looks very stretched.

[galicianova]

Colorado, what is thy current stand on NRZ?

[Colorado Wealth Management Fund]

A little bullish, but far less than a week or two ago. We lowered our allocation from 6.4% (rounded) to about 1.25%. Gains between 71% and 153%.

[galicianova]

yes, i got at 4$ and left at 6.60$. Seems far too early. so the leading present goodies at this time are NLY and CHMI?

[Colorado Wealth Management Fund]

Don't forget AGNC. That is our most recent purchase. Not a large position, as we are reducing risk and raising cash. However, we did use some of the proceeds from selling CIM to open an AGNC position.

[haleakala]

Thanks for the consistent superb analysis, and level-headed approach during the crazy days of March and April, through today. After 2+ years of following you, from theory to battle testing, I can safely say you really know your stuff. Kudos.

[MailboxMoney86]

thank you so much for your great articles. since the crash I've grabbed ORC and GPMT for great gains. also did well with puts with MITT when it undeservedly exploded to 8. keep up the well written concise articles.

[Colorado Wealth Management Fund]

Thank you! I've been enjoying this format. Keeps it brief and easy to understand. Hoping to start running a series like this on equity REITs. They haven't been volatile enough to warrant several articles per week though.

[7204681]

MORL used to be a big mortgage REIT’s. Without notice closed and the stock was worthless. I wouldn’t touch these mortgage REIT’s.

[Hockeyzan]

LOL It was a stupid ETN that should not have been allowed to trade.

[valleyside]

Exactly. At least I had enough self control to steer clear of that "winner".

[LoStInvestor]

Uninformed commentary at it's finest... Morl was a leveraged structured product. No retail investor should have been touching that with a ten foot pole. Completely different from investing in an individual company.