Mortgage REIT Earnings Begin

Summary

  • Like most publicly traded companies, the Q3 earnings results are underway.
  • While mortgage REITs carry high dividend yields, investors need to look much deeper for analysis.
  • ORC’s results were in line with expectations on book value. Earnings dipped a little and came in below estimates.
  • Looking for a helping hand in the market? Members of The REIT Forum get exclusive ideas and guidance to navigate any climate. Learn More »

dividends concept

MarkgrafAve/iStock via Getty Images

Get ready for charts, images, and tables because they are better than words. The ratings and outlooks we highlight here come after Scott Kennedy’s weekly updates in the REIT Forum. Your continued feedback is greatly appreciated, so please leave a comment with suggestions.

One of the first REITs to update investors was Orchid Island Capital (ORC). They haven’t officially delivered Q3 2021 results. ORC scheduled their Q3 2021 earnings release for 10/28/2021 with the call on 10/29/2021. However, they did provide management’s estimated results. While these results are technically estimated, historically they have been extremely close. They are close enough that we can use them to evaluate Q3 2021 earnings and that’s precisely what we’ve done. Scott Kennedy went through the earnings release and compared the data to his projections and to consensus projections:

ORC earnings update for Q3 2021

Regarding the results, I’ll share part of Scott’s note:

Hi subscribers, after the market close ORC disclosed the company estimates its BV as of 9/30/2021 was $4.77 per share. This is a 1.3% or $0.06 per share increase when compared to 6/30/2021. As previously projected, I estimated ORC's BV as of 9/30/2021 was $4.75 per share. When calculated, this was a variance of only $0.02 per share or 0.4%. This was well within my projected $4.50 - $5.00 per share range. As such, basically an exact match on ORC’s BV as of 9/30/2021 (at or within a 0.5% variance).

So, from a BV perspective, no “surprises” per se. I would also point out ORC continued to have some accretive common stock issuances throughout the quarter (mentioned in a previous monthly chat note/update). The 0.4% variance was directly the result of even more shares of common stock being issued in September 2021 when compared to my expectations (further discussion below).

When looking over ORC’s MBS and derivatives sub-portfolios, there were really no surprises that “jumped out”. This typically occurs because this particular mREIT provides monthly updates; including showing MBS values and derivative instrument notional amounts. As such, it’s generally easier to track intra-quarter strategies. There are still a few valuation surprises that have occurred over the years with ORC but this particular quarter was not one of them. Management really did not make any drastic changes to ORC’s investment portfolio and risk management strategies in September 2021.

The full version of ORC's Q3 2021 earnings assessment provides additional detail.

Our current outlook on ORC is bearish as the price-to-current-estimated-book ratio is a bit too high. As of this weekend, our estimated book value for ORC is $4.80, up $.03 from the reported value for 9/30/2021. Therefore, we see a price-to-current-estimated-book ratio of 1.04, which is above our target range.

Other Developments

Franklin BSP Realty Trust (FBRT) completed the buyout of Capstead (CMO). We’ve categorized FBRT as a commercial mortgage REIT for the charts. Shares of CMO-E became shares of FBRT-E (FBRT.PE). We own a small position in these shares, though we may close it out if prices are satisfactory. We don’t expect to continue covering FBRT-E since we won’t be covering the common shares.

To replace CMO, REIT Forum subscribers picked Ready Capital (RC). We may add coverage of RC’s preferred shares to capitalize on the work Scott Kennedy is already performing on the common shares. RC is a somewhat unique mortgage REIT. We’ve decided to classify it under the “Originator and Servicer” category.

Q3 2021 Earnings Adjustment

As the Q3 2021 earnings announcements flow out, we will modify the layout for this series to provide subscribers with an alternate batch of charts that use Q3 2021 book value. That allows readers to get the latest announced information without comparing Q3 2021 values for one REIT with Q2 2021 values for another.

Earnings Yield

Our table for the “Earnings Yield” metric is using the consensus analyst estimate. This is the “Wall Street” figure. However, we want to disclose that in some cases we believe the consensus estimate may be off by a material amount. We build analysis around price-to-book ratios and use several metrics to decide where the target price-to-book ratios should be. Consequently, the consensus analyst earnings estimate is not particularly relevant to our targets or analysis. However, we find it is still useful to provide the charts for readers to make their own decision.

Stock Table

We will close out the rest of the article with the tables and charts we provide for readers to help them track the sector for both common shares and preferred shares.

We’re including a quick table for the common shares that will be shown in our tables:

Type of REIT or BDC

Agency

Hybrid

Originator and Servicer

Commercial

BDC

AGNC

CIM

PMT

BXMT

MAIN

NLY

EFC

NRZ

GPMT

TSLX

DX

NYMT

RC

TRTX

NEWT

ORC

MFA

ARI

ARCC

ARR

MITT

LFT

GAIN

CHMI

WMC

ACR

GBDC

TWO

SLRC

IVR

ORCC

AAIC

TCPC

EARN

PFLT

OCSL

AINV

FSK

PSEC

Let the images begin!

Residential Mortgage REIT Charts

Residential Mortgage REIT Charts

Residential Mortgage REIT Charts - Dividend

Residential Mortgage REIT Charts - Earnings yield

Source: The REIT Forum

Commercial Mortgage REIT Charts

Commercial Mortgage REIT Charts

Commercial Mortgage REIT Charts - Dividend

Commercial Mortgage REIT Charts - Earnings yield

BDC Charts

BDC Charts

BDC - Dividend yield

BDC - Earnings yield

Notes on Price-to-Trailing Book Ratios - Using Q2 2021 Book Value

Remember that these are price-to-trailing-book ratios. They are not using estimates of current book value. Book values continue to change every day. Scott Kennedy provides frequent updates on estimated book value, ratings, and price targets through The REIT Forum.

Repeated Note: There are two points we need to highlight here:

  • AG Mortgage Investment Trust - We are using the Q2 2021 book value reported by management and classified as “adjusted book value per share”. Adjusted book value of $14.72 is lower than GAAP book value of $15.19.
  • MFA Financial reports “GAAP book value” and “economic book value”. We’ve chosen to use the GAAP book value to remain consistent. GAAP book value per share of $4.65 is lower than economic book value per share of $5.12.

Unfortunately, we have to repeat those bullet points every time we publish because it regularly comes up if we don’t mention it.

Notes on Common Share Dividend Yield

Dividend yield often comes up in the comments, but picking based on dividend yield is stupid and regularly results in terrible performance. Don’t do it.

This chart is still in the same order as the prior charts. Consequently, you know the highest price-to-book ratios (using trailing GAAP book value) for each segment will be at the top. If you see a mistake, please feel free to say something. Occasionally the data for dividend rates requires a manual update.

Notes on Earning Yields

One of the next things investors may ask about is the yield using core earnings. This chart puts together the core earnings based on the consensus analyst estimate. Beware that the consensus estimate may not always be the best estimate. Further, there are ways to increase “Core Earnings” through accounting decisions or modifying hedges. Consequently, investors should still take these values cautiously. We do not depend on the consensus estimate to make decisions.

Preferred Share Charts

Preferred Share Charts

Preferred Share Charts Yield

Preferred Share Charts Floating Yield on Price

Preferred Share Prices

Preferred share stripped yield

Preferred Share Charts Floating Yield on Price

Notes on Preferred Share Prices

This chart gives you a pretty quick feel for which shares are trading at a discount to call value. Each of these preferred shares has a call value of $25.00, but that doesn’t mean a share will be called. The company decides if they want to issue a call or not.

Notes on Dividend Yield / Stripped Yield

Stripped yields are vastly more useful than “current” yields for preferred shares. The stripped yield uses the stripped price. That’s different from using the current price because it means we already adjusted for dividend accrual. This makes the process easier for investors.

We can talk about shares using “regular prices”. Those are the prices an investor would actually use when entering an order.

However, we will provide the stripped yield to adjust for the dividend accrual. In the spreadsheets we host for subscribers, we include the actual ex-dividend date, or the projected ex-dividend date if the actual date isn’t yet known. If you’re planning to buy a share, it’s always wise to check if the shares just went ex-dividend so you can adjust your targets accordingly.

Notes on Floating Yield on Price

Since many of these shares switch over to floating rates, we also want to consider what the yield would be if the floating rate was in effect and shares were still at the current price. To demonstrate that, we use the “Floating Yield On Price”. If the share remains at a fixed-rate indefinitely, then the value doesn’t change.

One point we need to emphasize here is that we are dealing with yields. A yield must involve the share price. We aren’t simply showing the new “rate” if the share began floating, we are adjusting the new rate for the stripped price.

Floor

ACR-C has a floor that interferes with the eventual floating rate. The floor prevents the floating rate from being less than the initial fixed-rate. Consequently, while ACR-C is one of the FTF shares, it doesn’t exhibit the same decrease as other FTF shares when we switch over to the “Floating Yield on Price”. However, it remains a higher-risk share because of the type of assets the REIT owns.

Called

AIW, IVR-A, and NYMTO were called. They are no longer in the charts or tables. We’ve added NRZ-D, AAIN, NYMTL, PMT-C, and ACR-D to the tables.

CMO-E became FBRT-E following FBRT’s purchase of CMO.

Preferred Share Data

Beyond the charts, we’re also providing our readers with access to several other metrics for the preferred shares.

After testing out a series on preferred shares, we decided to try merging it into the series on common shares. After all, we are still talking about positions in mortgage REITs. We don’t have any desire to cover preferred shares without cumulative dividends, so any preferred shares you see in our column will have cumulative dividends. You can verify that by using Quantum Online. We’ve included the links in the table below.

To better organize the table, we needed to abbreviate column names as follows:

  • Price = Recent Share Price - Shown in Charts
  • BoF = Bond or FTF (Fixed-to-Floating)
  • S-Yield = Stripped Yield - Shown in Charts
  • Coupon = Initial Fixed-Rate Coupon
  • FYoP = Floating Yield on Price - Shown in Charts
  • NCD = Next Call Date (the soonest shares could be called)
  • Note: For all FTF issues, the floating rate would start on NCD.
  • WCC = Worst Cash to Call (lowest net cash return possible from a call)
  • QO Link = Link to Quantum Online Page

Ticker

Price

BoF

S-Yield

Coupon

FYoP

NCD

WCC

QO Link

P-Link

AGNCM

$25.49

FTF

6.77%

6.88%

4.39%

4/15/2024

$3.81

AGNCM

Prospectus

AGNCN

$25.32

FTF

6.94%

7.00%

5.19%

10/15/2022

$1.43

AGNCN

Prospectus

AGNCO

$25.27

FTF

6.46%

6.50%

5.08%

10/15/2024

$4.61

AGNCO

Prospectus

AGNCP

$25.30

FTF

6.08%

6.13%

4.78%

4/15/2025

$5.06

AGNCP

Prospectus

NLY-F

$25.36

FTF

6.92%

6.95%

5.10%

9/30/2022

$1.38

NLY-F

Prospectus

NLY-G

$25.27

FTF

6.49%

6.50%

4.29%

3/31/2023

$2.16

NLY-G

Prospectus

NLY-I

$25.74

FTF

6.62%

6.75%

5.02%

6/30/2024

$3.90

NLY-I

Prospectus

ARR-C

$25.65

6.84%

7.00%

6.84%

1/28/2025

$5.04

ARR-C

Prospectus

DX-C

$25.69

FTF

6.74%

6.90%

5.46%

4/15/2025

$5.34

DX-C

Prospectus

FBRT-E

$25.23

7.47%

7.50%

7.47%

11/23/2021

-$0.04

FBRT-E

Prospectus

EFC-A

$25.98

FTF

6.51%

6.75%

5.13%

10/30/2024

$4.09

EFC-A

Prospectus

NRZ-A

$25.35

FTF

7.41%

7.50%

5.86%

8/15/2024

$4.82

NRZ-A

Prospectus

NRZ-B

$25.08

FTF

7.12%

7.13%

5.76%

8/15/2024

$4.83

NRZ-B

Prospectus

NRZ-C

$23.14

FTF

6.90%

6.38%

5.51%

2/15/2025

$7.05

NRZ-C

Prospectus

NRZ-D

$25.26

FTF

6.94%

7.00%

7.00%

11/15/2026

$8.50

NRZ-D

Prospectus

PMT-A

$26.17

FTF

7.85%

8.13%

5.76%

3/15/2024

$3.91

PMT-A

Prospectus

PMT-B

$26.06

FTF

7.76%

8.00%

5.93%

6/15/2024

$4.44

PMT-B

Prospectus

PMT-C

$25.22

6.79%

6.75%

6.79%

8/24/2026

$8.22

PMT-C

Prospectus

AIC

$25.28

Bond

6.74%

6.75%

6.74%

11/23/2021

$0.02

AIC

Prospectus

AAIN

$24.83

Bond

6.05%

6.00%

6.05%

8/1/2023

$2.79

AAIN

Prospectus

CIM-A

$25.25

7.99%

8.00%

7.99%

11/23/2021

$0.04

CIM-A

Prospectus

CIM-B

$25.56

FTF

7.89%

8.00%

5.83%

3/30/2024

$4.43

CIM-B

Prospectus

CIM-C

$25.29

FTF

7.72%

7.75%

4.85%

9/30/2025

$7.46

CIM-C

Prospectus

CIM-D

$25.49

FTF

7.91%

8.00%

5.44%

03/30/2024

$4.50

CIM-D

Prospectus

Second Batch:

Ticker

Price

BoF

S-Yield

Coupon

FYoP

NCD

WCC

QO Link

P-Link

TWO-A

$26.25

FTF

7.76%

8.13%

5.52%

04/27/2027

$9.91

TWO-A

Prospectus

TWO-B

$25.46

FTF

7.51%

7.63%

5.39%

07/27/2027

$10.49

TWO-B

Prospectus

TWO-C

$25.00

FTF

7.27%

7.25%

5.15%

1/27/2025

$5.89

TWO-C

Prospectus

CHMI-A

$25.76

8.00%

8.20%

8.00%

8/17/2022

$0.88

CHMI-A

Prospectus

CHMI-B

$25.40

FTF

8.17%

8.25%

5.70%

4/15/2024

$4.68

CHMI-B

Prospectus

IVR-B

$25.33

FTF

7.73%

7.75%

5.29%

12/27/2024

$5.99

IVR-B

Prospectus

IVR-C

$25.34

FTF

7.48%

7.50%

5.40%

9/27/2027

$10.93

IVR-C

Prospectus

NYMTM

$25.58

FTF

7.74%

7.88%

6.44%

1/15/2025

$5.82

NYMTM

Prospectus

NYMTN

$25.69

FTF

7.83%

8.00%

5.69%

10/15/2027

$11.30

NYMTN

Prospectus

NYMTL

$24.97

FTF

6.91%

6.88%

6.29%

10/15/2026

$8.62

NYMTL

Prospectus

NYMTP

$25.35

7.68%

7.75%

7.68%

11/23/2021

-$0.15

NYMTP

Prospectus

MFA-B

$25.23

7.50%

7.50%

7.50%

11/23/2021

$0.02

MFA-B

Prospectus

MFA-C

$24.00

FTF

6.83%

6.50%

5.75%

3/31/2025

$6.67

MFA-C

Prospectus

AAIC-B

$24.89

7.08%

7.00%

7.08%

5/12/2022

$1.11

AAIC-B

Prospectus

AAIC-C

$25.29

FTF

8.23%

8.25%

5.77%

3/30/2024

$4.78

AAIC-C

Prospectus

MITT-A

$25.56

8.17%

8.25%

8.17%

11/23/2021

-$0.22

MITT-A

Prospectus

MITT-B

$25.02

8.09%

8.00%

8.09%

11/23/2021

$0.31

MITT-B

Prospectus

MITT-C

$25.10

FTF

8.07%

8.00%

6.65%

9/17/2024

$5.87

MITT-C

Prospectus

ACR-C

$25.65

FTF - Floor

8.45%

8.63%

8.45%

7/30/2024

$5.28

ACR-C

Prospectus

ACR-D

$25.66

7.71%

7.88%

7.71%

7/30/2024

$4.75

ACR-D

Prospectus

There are a few things you should know at the start:

  • When a share can be called on short notice, the annualized yield-to-call reaches absurd levels. Investors shouldn’t put too much weight on it. On the other hand, a negative number can be a significant concern. Consequently, we decided to include it in the chart.
  • We sort our spreadsheet for subscribers by risk ratings within each sector. We decided to use the same technique for this series since it communicates more information to readers. You’ll notice a general correlation where lower risk correlates with a higher price and lower yield, though this link isn’t absolute.
  • Worst Cash to Call example: Imagine a preferred share that could be called in a few months and would pay out a total of $.75 in dividends by that time. If an investment in those shares ends in a call, the smallest amount of cash inflows possible would be $25.00 (call value) plus $.75 (total dividends). If the share price was $25.60, then the “Worst Cash to Call” would be $.15. That comes from the following equation: $25.00 + $.75 - $25.60 = $.15. If the share price increased by $.20 in the next hour, the “Worst Cash to Call” would decline to negative $.05.

Strategy

Our goal is to maximize total returns. We achieve those most effectively by including “trading” strategies. We regularly trade positions in the mortgage REIT common shares and BDCs because:

  1. Prices are inefficient.
  2. Long-term, share prices generally revolve around book value.
  3. Short-term, price-to-book ratios can deviate materially.
  4. Book value isn’t the only step in analysis, but it is the cornerstone.

We also allocate to preferred shares and equity REITs. We encourage buy-and-hold investors to consider using more preferred shares and equity REITs.

Performance

We compare our performance against 4 ETFs that investors might use for exposure to our sectors:

MORT, PFF, VNQ, KBWY performance

Source: The REIT Forum

The 4 ETFs we use for comparison are:

Ticker

Exposure

MORT

One of the largest mortgage REIT ETFs

PFF

One of the largest preferred share ETFs

VNQ

Largest equity REIT ETF

KBWY

The high-yield equity REIT ETF. Yes, it has been dreadful.

When investors think it isn’t possible to earn solid returns in preferred shares or mortgage REITs, we politely disagree. The sector has plenty of opportunities, but investors still need to be wary of the risks. We can’t simply reach for yield and hope for the best. When it comes to common shares, we need to be even more vigilant to protect our principal by regularly watching prices and updating estimates for book value and price targets.

Conclusion

Earnings season is underway. We’ll be providing some updates throughout the earnings season to help investors track which developments are positive or negative. To remain realistic, we won’t be able to cover every earnings release on the public side. However, we will strive to include some updates in this series. Using ORC’s early disclosure, earnings were slightly below expectations while book value was a nearly perfect match for Scott’s projections.

Ratings:

  • Bearish on ORC

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This article was written by

Author of The REIT Forum
The #1 REIT Service For Those Targeting Strong Total Returns
You want to be on The REIT Forum because it is the #1 REIT research service on Seeking Alpha measured by returns. Period. See our Tipranks page. How did we get there? We did a better job of managing risk and discovering opportunities. We didn’t jump into trashy high-yield equity REITs with the rest of the crowd. We cover securities for trading and securities for the buy-and-hold investor. We are clear about the difference and that enabled us to perform better since inception and better in 2020.


Securities for the buy-and-hold investor generally carry much lower risk. If we enter a high-risk position, we plan to capitalize on a change in the valuation. We monitor those positions very carefully, rather than hoping everything turns out well over the next several years. That’s why we have so few losses in our investing.


We post our portfolio for you. You also get real-time alerts on every trade we place. Our reasoning for placing a trade is explained in clear English. You can even see the exact trades with the images we include from our stock accounts. We don’t offer you several different “portfolios”, instead, we show you exactly what we own, when we bought it, and how we are doing in that position. We make it simple for investors to follow our strategy.


You’ll find several reports on The REIT Forum that don’t get posted to the public side of Seeking Alpha. Many of our public reports are dramatically reduced versions of subscriber articles. If you enjoy our public articles, you’ll love the content we keep for subscribers.


Disclosure: I/we have a beneficial long position in the shares of AGNCO, CIM-A, ARR-C, FBRT-E, DX-C, NRZ-D, NRZ, SLRC, DX either through stock ownership, options, or other derivatives. 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: Colorado Wealth Management Fund and Scott Kennedy are supporting contributors for The REIT Forum.
Any recommendation posted in this article is not indefinite. We closely monitor all of our positions. We issue Buy and Sell alerts on our recommendations, which are exclusive to our members.

I have an indirect conflict of interest with ABR and STWD. Me, along with the Marketplace Service where I am currently a contributor, will not provide investment advice, reply to questions, or engage in discussions regarding these two mREIT stocks.

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