A Rare Opportunity For Yield

Feb. 07, 2022 7:44 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

History demonstrates that these shares go on sale when investors are worried about how quickly interest rates are changing.
Prices have been higher even when interest rates were higher. It’s all about the speed.
Friday’s close saw some opportunities going from good to excellent. These shares don’t go on sale often.
This idea was discussed in more depth with members of my private investing community, The REIT Forum. Learn More »

Grilled beef steak with rosemary, salt and pepper — Three things that are rare in this article: A sale on these shares, the steak in this photo, and a relevant image from Getty Images.

karandaev/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.

Last time I told investors about the opportunity in AGNCO. That opportunity still exists, but there are several other opportunities as well. The most surprising sales came in preferred shares from AGNC Investment Corp. (AGNC) and Annaly Capital Management (NLY). These were highlighted for subscribers over the weekend in Preferred Share Opportunities Abound. We want to share part of that article with you here.

Treasury Rates

The number one question for most investors is if preferred share prices are going to be destroyed by higher Treasury rates. When Treasury rates move dramatically in a day, we often see preferred share yields move as well. However, the correlation is that volatility in Treasury yields pushes the preferred share price lower.

I’m explicitly NOT suggesting that higher Treasury rates mean lower higher yields on preferred shares. That would only be one small part of the picture. If Treasury rates plunge, that also creates temporary pressure on the share price. If Treasury rates plunge, it signals greater fear about the economy, which sends prices lower.

So when you’re seeing Treasury rates rising rapidly and preferred share prices falling, you should put it in historical perspective.

Historical Perspective

Thanks to several preferred shares being called, there are fewer preferred shares with a long enough price history to use for this example. To see how preferred share prices move with yields, it is ideal to have several years of history. Fortunately, MFA-B (MFA.PB) has several years of history. I built the following chart comparing MFA-B’s dividend yield with the 10-year Treasury rate. MFA-B is a fixed-rate share. There isn’t a floating rate component, so higher rates won’t do anything to boost MFA-B’s dividend.

Therefore, if investors are dumping preferred shares because they demand a higher rate of return since Treasury rates are higher, we would expect MFA-B’s yield to rise when Treasury yields rise. On the other hand, in reality, there just isn’t a significant link.

See if you can find the correlation (you’ll need to zoom in by clicking the image to have sufficient image quality):

Comparison of preferred share dividend yield with 10-year Treasury rate — The REIT Forum

Do you see the blue line moving in the same direction as the orange line? No. Due to the panic during the pandemic, I had to cut off the top of the chart. When the pandemic was most intense and Treasury rates were at their lowest, MFA-B was at its cheapest.

I’ve updated the chart to include commentary highlighting several periods (zoom in again):

Notes on a chart comparing dividend yields to the 10-year Treasury rate — The REIT Forum

We can see that during periods where the Treasury yield surges higher, it can have a temporary negative impact on the share price. However, the recovery in the share price doesn’t require rates to fall.

Fixed-to-Floating

Theoretically, shares that are fixed-to-floating should be even less exposed to an increase in rates. Theoretically, if the yield curve was flattening it would signal a smaller difference between the future floating rate and the 10-year Treasury rate. It would be great to have charts for this comparison using those shares, however, most of the fixed-to-floating shares were issued no earlier than 2017. Consequently, we can’t draw a great graph for them since the price history simply does not exist.

Two of The Shares

We are going to drill in on two of the five shares we highlighted in that weekend article. Specifically, we’re going to drill in on NLY-F and NLY-I:

Key investment metrics for Annaly Capital Management preferred share — The REIT Forum

Investment metrics on another preferred share from Annaly Capital Management — The REIT Forum

Here we have two shares with several factors in common:

They closed between $24.20 and $24.63
Have risk ratings of 1
Have a floating spread of about 4.99%.
Are preferred shares from Annaly Capital Management
Declined materially over the last several weeks

It’s worth noting that the decline for these preferred shares was materially larger than it was for several other preferred shares. That's at least a bit ironic since these shares have a lower risk profile. They tend to have pretty low volatility. In fact, shares of NLY-F had only a handful of days below $25.00 in the last 12 months:

Price history for NLY-F — Charles Schwab

Shares bounced back some on Monday, but they still opened this morning at $24.23. That was the cheapest opening price shares have seen in the last 12 months and only $.08 above the cheapest trade. That was still exceptionally cheap. Even after today’s rally, at $24.71 shares are still quite cheap. The only time in the last 10 months investors could get them cheaper was Friday or Monday. Two days out of the last 300.

Do these opportunities not resonate with investors? As we demonstrated with MFA-B, higher Treasury rates do not result in investors requiring materially higher yields on these shares. Volatility in rates pushes prices down a bit, but after the volatility passes the prices tend to recover. I’m predicting the same thing will happen. Investors who don’t like the upcoming call date and floating date on NLY-F could use NLY-I instead. That gives investors significantly more time before the call protection expires and the floating rate kicks in. Those shares were pretty close to a new 52-week low also:

Price history for NLY-I — Charles Schwab

Who doesn’t like those opportunities? Investors who want more price volatility? The shares tend to be less volatile because they are also lower risk. This isn’t for investors who want to gamble and live on the thrill of potentially losing their portfolio. This is for investors who just want to add another steady income producing position with an eventual floating rate as a hedge against changing interest rates.

I'm less excited about NLY-G:

Third card with key investment metrics for an Annaly preferred share — The REIT Forum

Conclusion

Over the weekend we saw more preferred shares in the target buy range than we’ve seen in a long time. Several shares, including many of the lower risk ones, suddenly went on sale. Since we understand that the decline reflects fear about interest rates rather than an issue with the REIT, we are maintaining most of our price targets and encouraging investors to buy the mortgage REIT preferred share dip.

To be clear, that doesn’t mean every single share in the sector is a bargain. It doesn’t mean investors should run out to grab the common shares and say it’s the same except with more yield (it is not the same). Recognizing that one share has a higher yield than another doesn’t take a genius. A child can do it. An investor who believes they are a genius for doing what a child can do is unlikely to make the best choices. The proper way to handle these opportunities is to remain calm, carefully evaluate which shares are actually on sale, and build positions in those.

This is an exciting opportunity because we finally get to highlight some actionable opportunities in some of the lowest risk shares. It’s so much more fun than just warning investors away from gambling their retirement on a high-risk position in a stock they don’t understand.

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
ORC	MFA		RC	ARCC
ARR	MITT			GAIN
CHMI				GBDC
TWO				SLRC
IVR				ORCC
AAIC				TCPC
EARN				PFLT
				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

Q4 2021 Charts

Several of these companies have not reported Q4 2021 values yet. If they have not reported, or reported very recently, they will not have a bar in the following charts:

Price to book value for residential mortgage REITs using Q4 2021 book value per share — The REIT Forum

Price to book value for commercial mortgage REITs using Q4 2021 book value per share — The REIT Forum

Price to book value for BDCs using Q4 2021 book value per share — The REIT Forum

Yes, I'm aware that none of the commercial mortgage REITs reported earnings and that the entire chart is blank. It made more sense to include the blank chart than to leave a blank section where a chart could've been.

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	$24.73	FTF	7.00%	6.88%	4.76%	4/15/2024	$4.14	AGNCM	Prospectus
AGNCN	$24.74	FTF	7.13%	7.00%	5.55%	10/15/2022	$1.57	AGNCN	Prospectus
AGNCO	$24.25	FTF	6.75%	6.50%	5.54%	10/15/2024	$5.22	AGNCO	Prospectus
AGNCP	$23.75	FTF	6.49%	6.13%	5.34%	4/15/2025	$6.23	AGNCP	Prospectus
NLY-F	$24.71	FTF	7.13%	6.95%	5.47%	9/30/2022	$1.59	NLY-F	Prospectus
NLY-G	$24.36	FTF	6.76%	6.50%	4.69%	3/31/2023	$2.67	NLY-G	Prospectus
NLY-I	$24.98	FTF	6.84%	6.75%	5.40%	6/30/2024	$4.24	NLY-I	Prospectus
ARR-C	$25.20		6.98%	7.00%	6.98%	1/28/2025	$5.05	ARR-C	Prospectus
DX-C	$25.35	FTF	6.85%	6.90%	5.76%	4/15/2025	$5.25	DX-C	Prospectus
FBRT-E	$24.51		7.71%	7.50%	7.71%	3/7/2022	$0.75	FBRT-E	Prospectus
EFC-A	$25.05	FTF	6.79%	6.75%	5.57%	10/30/2024	$4.67	EFC-A	Prospectus
NRZ-A	$24.88	FTF	7.58%	7.50%	6.20%	8/15/2024	$4.82	NRZ-A	Prospectus
NRZ-B	$23.97	FTF	7.47%	7.13%	6.27%	8/15/2024	$5.49	NRZ-B	Prospectus
NRZ-C	$22.18	FTF	7.22%	6.38%	6.01%	2/15/2025	$7.62	NRZ-C	Prospectus
NRZ-D	$24.67	FTF	7.13%	7.00%	8.13%	11/15/2026	$8.66	NRZ-D	Prospectus
PMT-A	$25.58	FTF	8.06%	8.13%	6.12%	3/15/2024	$3.99	PMT-A	Prospectus
PMT-B	$25.55	FTF	7.95%	8.00%	6.29%	6/15/2024	$4.45	PMT-B	Prospectus
PMT-C	$24.27		7.05%	6.75%	7.05%	8/24/2026	$8.65	PMT-C	Prospectus
AIC	$25.21	Bond	6.78%	6.75%	6.78%	3/7/2022	$0.15	AIC	Prospectus
AAIN	$24.82	Bond	6.07%	6.00%	6.07%	8/1/2023	$2.42	AAIN	Prospectus
CIM-A	$25.15		8.05%	8.00%	8.05%	3/7/2022	$0.21	CIM-A	Prospectus
CIM-B	$25.08	FTF	8.07%	8.00%	6.18%	3/30/2024	$4.41	CIM-B	Prospectus
CIM-C	$24.94	FTF	7.86%	7.75%	5.15%	9/30/2025	$7.33	CIM-C	Prospectus
CIM-D	$25.08	FTF	8.07%	8.00%	5.77%	03/30/2024	$4.41	CIM-D	Prospectus

Second Batch:

Ticker	Price	BoF	S-Yield	Coupon	FYoP	NCD	WCC	QO Link	P-Link
TWO-A	$25.33	FTF	8.07%	8.13%	5.96%	04/27/2027	$10.33	TWO-A	Prospectus
TWO-B	$24.42	FTF	7.85%	7.63%	5.86%	07/27/2027	$11.06	TWO-B	Prospectus
TWO-C	$23.64	FTF	7.71%	7.25%	5.69%	1/27/2025	$6.80	TWO-C	Prospectus
CHMI-A	$25.38		8.15%	8.20%	8.15%	8/17/2022	$0.74	CHMI-A	Prospectus
CHMI-B	$25.19	FTF	8.26%	8.25%	5.98%	4/15/2024	$4.37	CHMI-B	Prospectus
IVR-B	$24.65	FTF	7.98%	7.75%	5.68%	12/27/2024	$6.18	IVR-B	Prospectus
IVR-C	$23.99	FTF	7.93%	7.50%	5.95%	9/27/2027	$11.81	IVR-C	Prospectus
NYMTM	$25.10	FTF	7.91%	7.88%	6.80%	1/15/2025	$5.81	NYMTM	Prospectus
NYMTN	$24.99	FTF	8.07%	8.00%	6.09%	10/15/2027	$11.51	NYMTN	Prospectus
NYMTL	$23.92	FTF	7.24%	6.88%	6.81%	10/15/2026	$9.24	NYMTL	Prospectus
NYMTZ	$24.03		7.34%	7.00%	7.34%	1/15/2027	$9.72	NYMTZ	Prospectus
MFA-B	$24.98		7.61%	7.50%	7.61%	3/7/2022	$0.37	MFA-B	Prospectus
MFA-C	$22.70	FTF	7.26%	6.50%	6.35%	3/31/2025	$7.59	MFA-C	Prospectus
AAIC-B	$24.61		7.18%	7.00%	7.18%	5/12/2022	$0.93	AAIC-B	Prospectus
AAIC-C	$24.94	FTF	8.36%	8.25%	6.09%	3/30/2024	$4.58	AAIC-C	Prospectus
MITT-A	$24.94		8.40%	8.25%	8.40%	3/7/2022	$0.47	MITT-A	Prospectus
MITT-B	$24.36		8.34%	8.00%	8.34%	3/7/2022	$1.04	MITT-B	Prospectus
MITT-C	$24.50	FTF	8.29%	8.00%	7.06%	9/17/2024	$5.97	MITT-C	Prospectus
ACR-C	$24.85	FTF - Floor	8.76%	8.63%	8.76%	7/30/2024	$5.54	ACR-C	Prospectus
ACR-D	$24.45		8.12%	7.88%	8.12%	5/21/2026	$9.03	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 4 ETFs that investors might use for exposure to our sectors:

Line chart comparing returns for the best REIT stock research service on Seeking Alpha with four major ETFs. — The REIT Forum

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.

Ratings:

Bullish on preferred shares NLY-I and NLY-F.
Neutral on NLY-G. Expecting NLY-G to deliver inferior returns compared to NLY-I and NLY-F due to the eventual weaker floating rate.

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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, AGNCP, 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.