My Biggest High Yielders Are Finally On Sale

Feb. 04, 2022 7:17 PM ETAAIC, AAIC.PB, AAIC.PC, AAIN, ACR, ACR.PC, ACR.PD, AGNC, AGNCM, AGNCN, AGNCO, AGNCP, AIC, MFIC, ARCC, ARR, 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, GAINN-OLD, 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, ORCC, PFF, PFLT, PMT, PMT.PA, PMT.PB, PMT.PC, PSEC, PSECP, RC, RC.PC, RCA, RCC, RC.PE, SLRC, TCPC, TSLX, TWO, TWO.PA, TWO.PB, TWO.PC, VGSIX, VGSLX, VGSNX, VNQ, WMC64 Comments

Colorado Wealth Management Fund

Investing Groups

Summary

We will share one of our picks that recently went on sale. It’s also one of our larger allocations.
The sudden dip has less to do with current interest rates and more to do with the speed at which interest rates changed.
Discounting future cash flows doesn't explain the change in price. Shares had a higher valuation in late 2019 when 10-year rates were similar.
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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.

Looking for solid income opportunities? Several opportunities are developing in the preferred shares. Prices are usually relatively stable and we’re still looking at yields in the 6% to 8% range. Even if shares switched over to floating, they would be carrying yields around 5% today. If short-term rates increase, as implied by the yield curve, it would push those yields up to around 6% also.

Let’s take a look at some of those preferred shares. We’ll start with AGNCO. This is one of my larger allocations, around 3.9%:

Key investment metrics for a preferred share — The REIT Forum

The spread when floating is 4.99%. That’s not bad for a relatively stable share like AGNCO. Shares won’t actually switch into the floating rate until late 2024. Until then, we know the dividend rate. If investors are concerned about higher interest rates, AGNCO’s floating rate feature should appeal to them. Personally, I like to have a combination of fixed-rate shares and fixed-to-floating shares. Fixed-to-floating simply means the share starts out with a fixed rate before switching over to a floating rate.

The fear in the preferred shares stands out. Simply consider the abrupt dip in the share price:

These shares have rarely traded above $26.00 for long or below $24.25. Now you could try to say that the price is lower because investors are discounting future cash flows at a higher rate. You could say that, but do you really want to make that argument?

Consider AGNCO’s share price since it was offered:

Prices for AGNCO since inception — Seeking Alpha

See that spanning late 2019 through early 2020? The ten-year Treasury yield was actually around 1.9% back then:

10-year Treasury rates over the last 5 years — MBSLive

That’s pretty similar to today. So arguing that investors are intelligently applying a larger discount doesn’t make much sense. These shares traded above $25.00 for most of 2021. There’s a material difference in the risk profile when shares move materially above $25.00 because investors are more exposed to call risk. Throughout much of that period, investors were expecting lower floating rates (as indicated by the forward yield curve), but they were willing to pay a premium.

From that point in time, investors had to accept two risks. If shares were not called, the rate would’ve dipped further since the floating rate would’ve been lower. If they were called, the investor would be eating a small capital loss which would have reduced their yield to call. Yet many investors gladly paid a premium.

Today, shares offer a more compelling alternative. If rates go up as expected, the dividend performs better. If shares are called, investors eat a capital gain which enhances their yield to call. That’s a pretty good risk/reward profile.

An Earnings Update

One of the mortgage REITs to report already was DX. Earnings were a bit low, but it represents a prudent decision management made to protect book value. That repositioning protected shareholder’s capital and it was rewarded with a stronger share price performance following the release.

Plenty of other mortgage REITs haven’t reported yet. We’ll be updating the charts soon to begin including a table that shows the discount to Q4 2021 book value. For many of the mortgage REITs (but definitely not all), we’re expecting 4% to 9% hits to book value. There are a few that should be outside that range. However, for many of the mortgage REITs that’s 4% to 9% between the end of Q3 2021 and the end of January 2022. The drop during Q4 2021 will only reflect a moderate portion of that decline. Enough to be material, but not huge.

The results from DX through late January 2021 (disclosed on their earnings call, suggesting BV still close to $18) will probably go down as one of the best performances among agency-focused mortgage REITs for book value between the end of Q3 2021 and late January 2021.

Conclusion

Opportunities in the preferred shares are opening up rapidly. We have more bullish preferred share ratings today than we’ve had in a long time. That makes sense also, since several of the better shares are suddenly dipping to, or close to, 52-week lows. What’s causing the sudden decline? The most likely answer is that it is momentum. When interest rates rise rapidly, it has a bigger impact on preferred shares. If the 10-year Treasury paused at 1.91% then gradually climbed to 2.0% over the next month, we would most likely see the preferred share prices rallying. In this case, the speed of the change in interest rates can be more important than the actual interest rate.

We refer to these opportunities as buying opportunities.

It isn't just AGNCO. There are several great choices available in the sector today. However, we're emphasizing AGNCO so we can highlight the key metrics on one share. A similar case can be made for some other shares. For instance, DX-C (DX.PC) is slightly over $25.00 but quite attractively valued now. It's been extremely rare to see such an abundance of bullish ratings in the preferred shares, but that happens when opportunities arise.

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's 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:

Investment returns for The REIT Forum compared to four major ETFs — The REIT Forum

Source: 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 preferred share AGNCO

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This article was written by

Colorado Wealth Management Fund

58.67K 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.