Sudden Discount Creates A Huge 12% Yield

Jan. 31, 2022 7:41 PM ETAAIC, AAIC.PB, AAIC.PC, AAIN, ACR, ACR.PC, ACR.PD, AGNC, AGNCM, AGNCN, AGNCO, AGNCP, AIC, MFIC, ARR.PC, BXMT, CHMI, CHMI.PA, CHMI.PB, CIM, CIM.PA, CIM.PB, CIM.PC, CIM.PD, DX, DX.PC, EARN, EFC, EFC.PA, EFC.PB, FBRT, FBRT.PE, FSK, GAIN, GAINM, GBDC, GPMT, GPMT.PA, IVR, IVR.PB, IVR.PC, KBWY, MAIN, MFA, MFA.PB, MFA.PC, MITT, MITT.PA, MITT.PB, MITT.PC, MORT, NEWT, NEWTL, NEWTZ, NLY, NLY.PF, NLY.PG, NLY.PI, RITM, RITM.PA, RITM.PB, RITM.PC, RITM.PD, NYMT, NYMTL, NYMTM, NYMTN, NYMTZ, OCSL, ORC, PFLT, PMT, PMT.PA, PMT.PB, PMT.PC, PSEC, PSECP, RC, RC.PC, RCA, RC.PE, SLRC, TCPC, TSLX, TWO, TWO.PA, TWO.PB, TWO.PC, VGSIX, VGSLX, VGSNX, VNQ, WMC54 Comments

Colorado Wealth Management Fund

Investing Groups

Summary

There are plenty of mediocre opportunities for a high yield. However, one stands out.
This opportunity wasn’t available in the last several months.
Shares plunged in January, dramatically underperforming their peers. However, the REIT is less exposed than many peers to the January challenges.
This idea was discussed in more depth with members of my private investing community, The REIT Forum. Learn More »

People teen girl stress worry with home expense and debt concept — This is how it feels trying to find an interesting image in the database from Getty Images.

coffeekai/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.

Sometimes bargains are more abundant than other times. We caught a bargain in the high-yielding mortgage REIT space. While January has been a harder month for BV in most mortgage REITs, this mortgage REIT had a plunging price instead of book value.

Trades Placed

Purchased 1,207 shares of Ready Capital (RC) at $13.5791 per share (weighted-average price)

Index Cards

Card showing several core investment metrics for analyzing Ready Capital — The REIT Forum

Brief Commentary on RC

To demonstrate the difference in recent performance among mortgage REITs, I put together a $100k chart with many of the mortgage REITs. The mortgage REITs used for comparison in the chart are not selected based on being similar to RC. Instead, they are simply other mortgage REITs to provide a bit of a feel for the sector:

Chart showing the investment required on any prior day to reach 100,000 today — The REIT Forum

For new members, the $100k chart shows how much needed to be invested on any prior day (with dividend reinvestment) to reach $100k today. It gives us a much better feel for trends in valuation because it uses today as the focal point rather than using one arbitrary date in the past.

Seeing the dramatic underperformance of RC along with RC trading at a large discount to Scott's target "buy under" price for RC (buy under $14.65), it makes perfect sense that he bought shares on Monday at $13.39. Shares were up a bit over 1% compared to then, but I can live with that difference.

We are confident RC didn't get demolished on fundamentals during the last month because Scott is running weekly estimates on BV per share. Through 1/21/2022, RC was doing okay. From 9/30/2021 to 1/21/2022, RC has one of the best "estimated changes" in book value per share among the mortgage REITs.

While many of the mortgage REITs saw substantial decreases in book value per share, RC's estimate is relatively flat.

That's not entirely surprising since RC has a history of keeping their change in BV per share pretty small, which is positive for generating returns:

Historical performance for Ready Capital — RC Q3 Earnings Presentation

Account

These trades were placed in our tax-advantaged account. We previously provided a brief guide on utilizing tax-advantaged accounts.

The goal of this trade is to generate a positive total return, but the primary tool is expected to be an increase in share price. We're expecting RC to see a recovery in the price-to-book ratio following a dramatic drop year-to-date.

Execution

Conclusion

There are plenty of shares in the neutral range where discounts to book are large enough to provide some opportunity, but not large enough to provide a highly compelling ratio of risk to reward. RC is one opportunity where the odds are tilted in favor of investors as the REIT should trade at a higher price-to-book ratio. As Q4 earnings roll out, Scott Kennedy will be providing frequent updates on The REIT Forum. I’ll update this series to include charts using Q3 2021 BV and Q4 2021 BV soon since there are several weeks between the first Q4 reports and the last Q4 reports.

As investors digest the earnings, we want to remind them that book value as of 12/31/2021 is not the same as book value as of 1/31/2022. We’ve seen quite a bit of volatility already in Q1 2022.

The other thing worth highlighting is that we’ve had a sharp increase in the volume of preferred share opportunities over the last week. The dip is providing several opportunities in the preferred shares for the more conservative income investor. I’ll look to highlight some of those in an upcoming article. However, I’ll be working on our big monthly portfolio update as well. The time commitment for that article may limit how many public articles we’re able to publish over the next week.

The rest of the charts in this article may be self-explanatory to some investors. However, if you’d like to know more about them, you’re encouraged to see our notes for the series.

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
Residential Agency	Residential Hybrid	Residential Originator and Servicer	Commercial	BDC
AGNC	CIM	PMT	BXMT	MAIN
NLY	EFC	NRZ	GPMT	TSLX
DX	NYMT		WMC	NEWT
CMO	MFA		RC	ARCC
ORC	MITT			GAIN
ARR				GBDC
CHMI				SLRC
TWO				ORCC
IVR				TCPC
AAIC				PFLT
EARN				OCSL
				AINV
				FSK
				PSEC

Let the images begin!

Residential Mortgage REIT Charts

Residential mortgage REIT price to book ratio chart — The REIT Forum

Residential mortgage REIT dividend yield chart — The REIT Forum

The earnings yield is the inverse of the price to earnings ratio. — The REIT Forum

Source: The REIT Forum

Commercial Mortgage REIT Charts

Commercial mortgage REIT price to book ratio chart — The REIT Forum

Commercial mortgage REIT dividend yield chart — The REIT Forum

Commercial mortgage REIT earnings yield chart — The REIT Forum

BDC Charts

BDC price to book ratio chart — The REIT Forum

BDC dividend yield chart — The REIT Forum

BDC earnings yield chart — The REIT Forum

Preferred Share Charts

The REIT Forum	The REIT Forum	The REIT Forum
The REIT Forum	The REIT Forum	The REIT Forum

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	$24.84	FTF	6.96%	6.88%	4.71%	4/15/2024	$4.03	AGNCM	Prospectus
AGNCN	$25.12	FTF	7.01%	7.00%	5.43%	10/15/2022	$1.19	AGNCN	Prospectus
AGNCO	$25.13	FTF	6.50%	6.50%	5.31%	10/15/2024	$4.34	AGNCO	Prospectus
AGNCP	$24.53	FTF	6.28%	6.13%	5.14%	4/15/2025	$5.45	AGNCP	Prospectus
NLY-F	$24.90	FTF	7.06%	6.95%	5.40%	9/30/2022	$1.40	NLY-F	Prospectus
NLY-G	$24.74	FTF	6.64%	6.50%	4.59%	3/31/2023	$2.29	NLY-G	Prospectus
NLY-I	$25.48	FTF	6.70%	6.75%	5.27%	6/30/2024	$3.74	NLY-I	Prospectus
ARR-C	$25.22		6.96%	7.00%	6.96%	1/28/2025	$5.03	ARR-C	Prospectus
DX-C	$25.20	FTF	6.89%	6.90%	5.77%	4/15/2025	$5.40	DX-C	Prospectus
FBRT-E	$25.03		7.54%	7.50%	7.54%	3/1/2022	$0.20	FBRT-E	Prospectus
EFC-A	$25.10	FTF	6.76%	6.75%	5.52%	10/30/2024	$4.62	EFC-A	Prospectus
NRZ-A	$25.02	FTF	7.52%	7.50%	6.14%	8/15/2024	$4.68	NRZ-A	Prospectus
NRZ-B	$24.49	FTF	7.30%	7.13%	6.10%	8/15/2024	$4.97	NRZ-B	Prospectus
NRZ-C	$22.55	FTF	7.09%	6.38%	5.88%	2/15/2025	$7.25	NRZ-C	Prospectus
NRZ-D	$24.92	FTF	7.05%	7.00%	7.89%	11/15/2026	$8.41	NRZ-D	Prospectus
PMT-A	$26.00	FTF	7.92%	8.13%	5.99%	3/15/2024	$3.57	PMT-A	Prospectus
PMT-B	$26.14	FTF	7.75%	8.00%	6.11%	6/15/2024	$3.86	PMT-B	Prospectus
PMT-C	$24.95		6.84%	6.75%	6.84%	8/24/2026	$7.97	PMT-C	Prospectus
AIC	$25.35	Bond	6.73%	6.75%	6.73%	3/1/2022	-$0.01	AIC	Prospectus
AAIN	$24.95	Bond	6.03%	6.00%	6.03%	8/1/2023	$2.29	AAIN	Prospectus
CIM-A	$25.27		7.99%	8.00%	7.99%	3/1/2022	$0.06	CIM-A	Prospectus
CIM-B	$25.34	FTF	7.97%	8.00%	6.09%	3/30/2024	$4.15	CIM-B	Prospectus
CIM-C	$24.91	FTF	7.86%	7.75%	5.13%	9/30/2025	$7.36	CIM-C	Prospectus
CIM-D	$25.00	FTF	8.08%	8.00%	5.75%	03/30/2024	$4.49	CIM-D	Prospectus

Second Batch:

Ticker	Price	BoF	S-Yield	Coupon	FYoP	NCD	WCC	QO Link	P-Link
TWO-A	$26.07	FTF	7.83%	8.13%	5.76%	04/27/2027	$9.59	TWO-A	Prospectus
TWO-B	$24.72	FTF	7.74%	7.63%	5.76%	07/27/2027	$10.76	TWO-B	Prospectus
TWO-C	$24.47	FTF	7.44%	7.25%	5.47%	1/27/2025	$5.97	TWO-C	Prospectus
CHMI-A	$25.53		8.09%	8.20%	8.09%	8/17/2022	$0.59	CHMI-A	Prospectus
CHMI-B	$25.25	FTF	8.23%	8.25%	5.93%	4/15/2024	$4.31	CHMI-B	Prospectus
IVR-B	$24.32	FTF	8.07%	7.75%	5.73%	12/27/2024	$6.51	IVR-B	Prospectus
IVR-C	$24.09	FTF	7.88%	7.50%	5.89%	9/27/2027	$11.71	IVR-C	Prospectus
NYMTM	$25.07	FTF	7.91%	7.88%	6.77%	1/15/2025	$5.84	NYMTM	Prospectus
NYMTN	$25.02	FTF	8.05%	8.00%	6.05%	10/15/2027	$11.48	NYMTN	Prospectus
NYMTL	$24.11	FTF	7.17%	6.88%	6.73%	10/15/2026	$9.05	NYMTL	Prospectus
NYMTZ	$24.59		7.16%	7.00%	7.16%	1/15/2027	$9.16	NYMTZ	Prospectus
MFA-B	$25.06		7.58%	7.50%	7.58%	3/1/2022	$0.26	MFA-B	Prospectus
MFA-C	$23.02	FTF	7.14%	6.50%	6.22%	3/31/2025	$7.27	MFA-C	Prospectus
AAIC-B	$24.71		7.14%	7.00%	7.14%	5/12/2022	$0.83	AAIC-B	Prospectus
AAIC-C	$24.80	FTF	8.40%	8.25%	6.09%	3/30/2024	$4.72	AAIC-C	Prospectus
MITT-A	$25.01		8.37%	8.25%	8.37%	3/1/2022	$0.37	MITT-A	Prospectus
MITT-B	$24.30		8.35%	8.00%	8.35%	3/1/2022	$1.07	MITT-B	Prospectus
MITT-C	$24.42	FTF	8.31%	8.00%	7.05%	9/17/2024	$6.05	MITT-C	Prospectus
ACR-C	$25.10	FTF - Floor	8.65%	8.63%	8.65%	7/30/2024	$5.29	ACR-C	Prospectus
ACR-D	$25.28		7.84%	7.88%	7.84%	5/21/2026	$8.20	ACR-D	Prospectus

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:

Prices are inefficient.
Long-term, share prices generally revolve around book value.
Short-term, price-to-book ratios can deviate materially.
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 four ETFs that investors might use for exposure to our sectors:

Chart showing cumulative returns for the REIT Forum compared to four major ETFs. — The REIT Forum

The four 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.

Ratings:

Bullish on RC

Take advantage of our Valentine's Day sale to try out the full service.

This article was written by

Colorado Wealth Management Fund

58.75K Followers

Leader of The REIT Forum

Most of our subscriber articles never go to the public side.

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, DX-C, NRZ-D, NRZ, SLRC, AAIC, PMT, FSK, RC 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. Our ratings and outlooks will often overlap.
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. Neither I, nor any contributor for The REIT Forum, will provide investment advice, reply to questions, or engage in discussions regarding these two mREIT stocks.