8% Yields 3-Way Duel

Summary

  • We've got 3 shares up for comparison. Two good choices and one poor choice.
  • You can look at it from different angles, but it still won't look good. Investors are taking more risk for a lower yield.
  • If you're in the wrong share, it would be prudent to upgrade.
  • Looking for a portfolio of ideas like this one? Members of The REIT Forum get exclusive access to our model portfolio. Learn More »
Female fencer fight on big professional stage

It's a duel and the loser is clear!

Aksonov/E+ 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.

Want to see some absurdity in evaluating risks? Compare these three shares:

All three shares carry fixed-rate dividends, but two are much better than the other:

Comparison of the dividend yield, risk level, and price targets for three shares

The REIT Forum

CIM-A offers the highest yield at 8.8% despite the lowest risk rating.

MFA-B has a slightly lower yield, but the share price being lower by $1.27 gives investors quite a bit of additional upside to call value. That’s a pretty even comparison.

Then we get to AAIC-B. AAIC-B has only slightly more upside than MFA-B, but the stripped yield is materially lower at 8.26% compared to 8.72% on MFA-B. Is the extra $.40 upside to call value enough to justify that difference in yield? No. It was a rhetorical question. The answer is no.

Now you might argue that I’m just wrong in evaluating the risk levels. Let’s consider the common shares.

  • CIM trades at a 7% premium to trailing book value.
  • MFA trades at a 28% discount to trailing book value.
  • AAIC trades at a 48% discount to trailing book value.

Investors in the common shares clearly agree with the idea that CIM is offering less risk while AAIC offers the most risk. That additional risk in AAIC is also reflected in AAIC not even having a dividend on the common shares.

Still don’t think there’s a problem in the risk/reward profiles? Don’t blame it on one series of shares not being callable. Any of them could be called on 30 days' notice, so you can toss that idea out.

Maybe you just think AAIC is secretly dramatically less risky? Tell that to investors in AAIC-C (AAIC.PC)! AAIC-C trading $.24 cheaper than AAIC-B. AAIC-C switches over to a floating rate when call protection runs out. Until then, the stripped yield is 9.87% (much better than 8.26%). If short-term rates remain at the current levels, the floating rate would turn into a 10.32% yield on the current stripped price.

So unless you’re thinking AAIC-B is about to be called (which would be stupid, even by lower standards for AAIC), that disparity between AAIC-B and AAIC-C doesn’t make sense. In fact, the only way you can get it to make sense is to assume that short-term rates are going to fall back down to about 0% within the next year or two. That assumption is necessary to believe AAIC-C should trade for less than AAIC-B. Well, sometimes people believe things without ever thinking about them at all. That’s possible also, but I wouldn’t recommend it.

The rest of the preferred shares show a tendency to prefer shares that switch over to a floating rate. That makes sense, since given current rates it would generally mean a material increase in the dividend rate. I still like to mix floating-rate and fixed-rate shares. However, there’s no way I’d be buying AAIC-B when there are vastly better options on the market.

Should you short AAIC-B? No. Good luck with that. Shorting a preferred share is absurdly expensive (cost to borrow, not just the dividend) and the terrible liquidity puts investors at extra risk. Should investors sell their shares and reallocate the capital to a better share? Absolutely. I’ve given you two superior options here. I’m not going to suggest AAIC-C. It’s a better deal, but if investors want a fixed-to-floating share, they should be looking elsewhere.

In short, if investors want a fixed-rate, they can do better than AAIC-B. If they want a fixed-to-floating share, they can do better than AAIC-C. Between the two, AAIC-B is less appealing than AAIC-C.

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

RITM

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

Note: The chart for our public articles uses the book value per share from the latest earnings release. Current estimated book value per share is used in reaching our targets and trading decisions. It is available in our service, but those estimates are not included in the charts below.

Residential mortgage REIT price to book ratio chart

The REIT Forum

Residential mortgage REIT dividend yield chart

The REIT Forum

Residential mortgage REIT earnings yield chart

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

Preferred share price comparison chart

The REIT Forum

Preferred share stripped yield comparison chart

The REIT Forum

Preferred share floating yield comparison chart

The REIT Forum

preferred share price comparison for higher risk shares

The REIT Forum

preferred share stripped yield comparison for higher risk shares

The REIT Forum

preferred share floating yield comparison for higher risk shares

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

$22.01

FTF

7.89%

6.88%

8.37%

4/15/2024

$6.01

AGNCM

Prospectus

AGNCN

$24.59

FTF

7.18%

7.00%

8.28%

10/15/2022

$0.85

AGNCN

Prospectus

AGNCO

$22.36

FTF

7.34%

6.50%

8.98%

10/15/2024

$6.31

AGNCO

Prospectus

AGNCP

$21.53

FTF

7.18%

6.13%

8.98%

4/15/2025

$7.69

AGNCP

Prospectus

NLY-F

$24.38

FTF

7.24%

6.95%

8.28%

9/30/2022

$1.06

NLY-F

Prospectus

NLY-G

$22.80

FTF

7.24%

6.50%

7.94%

3/31/2023

$3.42

NLY-G

Prospectus

NLY-I

$23.65

FTF

7.25%

6.75%

8.54%

6/30/2024

$4.73

NLY-I

Prospectus

ARR-C

$22.43

7.81%

7.00%

7.81%

1/28/2025

$6.81

ARR-C

Prospectus

DX-C

$23.81

FTF

7.32%

6.90%

8.93%

4/15/2025

$5.93

DX-C

Prospectus

FBRT-E

$21.56

8.80%

7.50%

8.80%

9/16/2022

$3.76

FBRT-E

Prospectus

EFC-A

$21.90

FTF

7.79%

6.75%

9.41%

10/30/2024

$6.98

EFC-A

Prospectus

RITM-A

$23.25

FTF

8.13%

7.50%

9.49%

8/15/2024

$5.52

RITM-A

Prospectus

RITM-B

$21.82

FTF

8.23%

7.13%

9.93%

8/15/2024

$6.76

RITM-B

Prospectus

RITM-C

$20.37

FTF

7.88%

6.38%

9.80%

2/15/2025

$8.63

RITM-C

Prospectus

RITM-D

$22.35

FTF

7.89%

7.00%

10.45%

11/15/2026

$10.11

RITM-D

Prospectus

PMT-A

$24.65

FTF

8.39%

8.13%

9.08%

3/15/2024

$3.91

PMT-A

Prospectus

PMT-B

$24.75

FTF

8.22%

8.00%

9.20%

6/15/2024

$4.26

PMT-B

Prospectus

PMT-C

$20.55

8.36%

6.75%

8.36%

8/24/2026

$11.53

PMT-C

Prospectus

AIC

$24.99

Bond

6.86%

6.75%

6.86%

9/16/2022

$0.44

AIC

Prospectus

AAIN

$23.90

Bond

6.31%

6.00%

6.31%

8/1/2023

$2.60

AAIN

Prospectus

CIM-A

$23.31

8.74%

8.00%

8.74%

9/16/2022

$2.20

CIM-A

Prospectus

CIM-B

$23.02

FTF

8.85%

8.00%

9.69%

3/30/2024

$5.57

CIM-B

Prospectus

CIM-C

$21.23

FTF

9.31%

7.75%

9.25%

9/30/2025

$10.16

CIM-C

Prospectus

CIM-D

$22.20

FTF

9.19%

8.00%

9.58%

03/30/2024

$6.39

CIM-D

Prospectus

Second Batch:

Ticker

Price

BoF

S-Yield

Coupon

FYoP

NCD

WCC

QO Link

P-Link

TWO-A

$23.74

FTF

8.63%

8.13%

9.16%

04/27/2027

$10.91

TWO-A

Prospectus

TWO-B

$22.41

FTF

8.58%

7.63%

9.36%

07/27/2027

$12.12

TWO-B

Prospectus

TWO-C

$21.94

FTF

8.33%

7.25%

9.16%

1/27/2025

$7.60

TWO-C

Prospectus

MFA-B

$21.80

8.76%

7.50%

8.76%

9/16/2022

$3.61

MFA-B

Prospectus

MFA-C

$20.62

FTF

8.02%

6.50%

10.24%

3/31/2025

$8.87

MFA-C

Prospectus

GPMT-A

$22.00

FTF

8.04%

7.00%

10.10%

11/30/2026

$10.65

GPMT-A

Prospectus

CHMI-A

$22.42

9.26%

8.20%

9.26%

9/16/2022

$2.86

CHMI-A

Prospectus

CHMI-B

$22.54

FTF

9.27%

8.25%

9.65%

4/15/2024

$6.00

CHMI-B

Prospectus

IVR-B

$22.03

FTF

8.96%

7.75%

9.41%

12/27/2024

$7.84

IVR-B

Prospectus

IVR-C

$22.09

FTF

8.64%

7.50%

9.51%

9/27/2027

$12.78

IVR-C

Prospectus

NYMTM

$23.30

FTF

8.55%

7.88%

10.19%

1/15/2025

$6.63

NYMTM

Prospectus

NYMTN

$21.66

FTF

9.35%

8.00%

10.11%

10/15/2027

$13.84

NYMTN

Prospectus

NYMTL

$20.55

FTF

8.46%

6.88%

11.18%

10/15/2026

$11.76

NYMTL

Prospectus

NYMTZ

$19.81

8.94%

7.00%

8.94%

1/15/2027

$13.07

NYMTZ

Prospectus

AAIC-B

$21.50

8.26%

7.00%

8.26%

9/16/2022

$3.81

AAIC-B

Prospectus

AAIC-C

$21.00

FTF

10.00%

8.25%

10.45%

3/30/2024

$7.53

AAIC-C

Prospectus

MITT-A

$20.60

10.25%

8.25%

10.25%

9/16/2022

$4.90

MITT-A

Prospectus

MITT-B

$19.99

10.24%

8.00%

10.24%

9/16/2022

$5.49

MITT-B

Prospectus

MITT-C

$20.10

FTF

10.18%

8.00%

12.01%

9/17/2024

$9.39

MITT-C

Prospectus

ACR-C

$22.12

FTF

9.88%

8.63%

10.18%

7/30/2024

$7.20

ACR-C

Prospectus

ACR-D

$21.85

9.12%

7.88%

9.12%

5/21/2026

$10.65

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:

  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:

Chart showing the performance of the best service on Seeking Alpha compared to four ETFs for dividend investors

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: CIM-A and MFA-B
  • Neutral on preferred share: AAIC-C. However, you can do much better. Shorting these shares for a pair trade simply isn't viable due to liquidity and costs to borrow.

It's time to try our service.

Get your 2 week free trial subscription today! | InsiderAdvantageGeorgia Don't make me write longer advertisements. I hate advertising. Read the reviews. See the happy customers. The customers who improved their investing. That's all the advertising any analyst should need. Click the link to get your two-week trial. Unlike Netflix, I'm not jacking up prices, removing content, restricting device usage, or making my paid customers listen to advertisements.

You can even access our service from any country with internet service. It's part of our revolutionary strategy called: "We value our customers". Brilliant!

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, DX-C, RITM-D, AGNCP, MFA-C, NYMTZ, NYMTL, MFA-B, AGNCM, PMT-C, RITM, SLRC, AAIC, MFA, GPMT, 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. We actively trade positions in the sector based on changes in the risk/reward profile. We tend to sell shares in this sector that have seen a big rally unless the book value is roaring higher at the same time to warrant a higher price.
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.

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