The topics we discuss are going to be extremely relevant to the residential mortgage REITs. The table below uses BV as of Q2 2020 (if the company has reported earnings):

Ticker

Company Name

Focus

Price to Trailing BV

BV Q2 2020

Price

ORC

Orchid Island Capital

Agency

0.97

$5.22

$5.05

DX

Dynex Capital

Agency

0.91

$16.69

$15.20

AGNC

AGNC Investment Corp.

Agency

0.88

$15.86

$13.92

ARR

ARMOUR Residential REIT

Agency

0.85

$11.11

$9.47

NLY

Annaly Capital Management

Agency

0.85

$8.39

$7.12

CMO

Capstead Mortgage Corporation

Agency

0.85

$6.79

$5.74

TWO

Two Harbors Investment Corp.

Agency

0.72

$7.24

$5.20

CHMI

Cherry Hill Mortgage Investment

Agency

0.67

$13.41

$9.05

AI

Arlington Asset Investment Corporation

Agency

0.51

$5.63

$2.85

MITT

AG Mortgage Investment Trust, Inc.

Hybrid

1.02

$2.75

$2.80

IVR

Invesco Mortgage Capital

Hybrid

0.87

$3.17

$2.75

EFC

Ellington Financial

Hybrid

0.79

$15.68

$12.42

CIM

Chimera Investment Corporation

Hybrid

0.78

$10.63

$8.31

WMC

Western Asset Mortgage Capital Corp.

Hybrid

0.65

$3.17

$2.07

MFA

MFA Financial

Hybrid

0.60

$4.51

$2.70

ANH

Anworth Mortgage Asset Corporation

Hybrid

0.59

$2.85

$1.67

PMT

PennyMac Mortgage Investment Trust

Multipurpose

0.83

$19.39

$16.15

NRZ

New Residential Investment Corp.

Multipurpose

0.73

$10.77

$7.89

NYMT

New York Mortgage Trust

Multipurpose

0.60

$4.35

$2.59

REM

iShares Mortgage Real Estate Capped ETF

ETF

MORT

VanEck Vectors Mortgage REIT Income ETF

ETF

Note: There are three mortgage REITs we need to highlight here:

  • Two Harbors – We are using Q2 2020 book value adjusted to add back the $.54 per share as a result of terminating the management agreement for cause. If this decision was made prior to the end of Q2 2020, it would’ve raised BV accordingly. This is equivalent to GAAP book value excluding the $.54 charge recorded during Q2 2020.
  • AG Mortgage Investment Trust – We are using the Q2 2020 book value reported by management, which does not deduct the value of accrued dividends for preferred shares. If the preferred dividends were paid, it would reduce common book value under these calculations. This method is accepted under GAAP.
  • MFA Financial reports “GAAP book value” and “economic book value.” We’ve chosen to use the GAAP book value to remain consistent.
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Price-to-Book Value

The next image provides a graphical representation:

Price to book ratios for mortgage REITs

Source: The REIT Forum

Remember that these are price-to-trailing-book ratios. They are not using estimates of current book value. Book values have changed even during Q3 2020. The only update we’ve included is adding $.54 to the value for Two Harbors based on their announcement that the management agreement would be terminated for cause.

Dividend Yields

You absolutely should not value mortgage REITs based on dividend yield. Consider it as part of the process, but don’t ever try to simply “buy yield.” Dividend yields often comes up in the comments, so I added a chart for dividend yields:

Chart

Source: The REIT Forum

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

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.

Chart

Source: The REIT Forum

Consensus estimates aren’t always the best and 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.

New York Mortgage Trust

Let’s talk about NYMT. Below is the index card:

Source: The REIT Forum

This is a very cheap REIT. Price to estimated NAV running less than .60. That leaves a ton of upside. You wouldn’t expect to find good REITs at these prices, but you can.

Source: imgflip.com

Why does the market dislike it? Perhaps in part because they deleveraged so effectively. That’s funny because deleveraging was exactly what they needed to do. Their book value declined in Q1 2020, but they also had a pretty nice bounce back in Q2 2020.

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Source: NYMT

You may notice that they still have a significant unrealized loss on their portfolio. Perhaps because they’ve chosen to hold onto some single-family loans.

So what does NYMT invest in? Well, the main allocation is to single-family credit, but they don’t have extensive leverage. That’s great. Lower leverage means less risk of things going horribly wrong. Source: NYMT

So they took on residential credit. Can someone figure out if home prices are going up or down? We better do a Google search:

Source: Google

It would appear home prices are going up. When the value of the collateral jumps higher, that’s good for the loan. Even during Q2 2020, NYMT was reducing their leverage:

Source: NYMT

That non-MTM securitization (non-mark-to-market) looks like a great source of financing. That means if the value of the loans falls amid a general panic, NYMT tells the other parties “not our problem, you can wait it out with us.” That’s way better than margin calls from an anxious bank. Do you think NYMT will do any more securitizations? Let’s check:

Source: NYMT

Hey, look at that, another $242.9 million in securitizations. That’s great!

How’s their NIM (Net Interest Margin)? It’s fine, thanks for asking:

Source: NYMT

So leverage is trending down? How much is it really trending down? Can we demonstrate that?

Source: NYMT

That’s pretty clear. Leverage is down substantially. Why does that matter? When leverage is lower, it is harder for the mortgage REIT to implode. That’s great because when you buy at less than 60% of book value, you don’t need a huge leveraged gain. You simply want to see the stock pay a bit in dividends and rally back to trade much closer to book value.

NYMT’s Plan

Finally, we’ll take a glance at the plan NYMT has for Q3 2020:

Source: NYMT

That looks like a fine strategy. They ran low on leverage and had a huge cash balance. They remained flexible and looked for simple ways to create value. If they decided to repurchase some of their stock (either common or preferred), that would be a great way to generate value for shareholders as well. When you’ve got $544 million in cash, compared to a total investment portfolio of $3 billion, you have some flexibility.

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Did We Buy Any?

We sure did. We bought shares of NYMT on two occasions:

Source: The REIT Forum

That’s pretty clear, isn’t it? We do so strive to be clear:

Source: Schwab

Source: Fidelity

Conclusion

Want to learn how to trade mortgage REITs? Click the follow button. Want to learn how to ignore mark-to-market losses while claiming a dwindling stream of dividends? You’ve got countless options for other authors.

Ratings:

Disclosure

As a reminder, Scott Kennedy also is an author for the REIT Forum. You may see his commentary featured in our articles and may notice an extremely high amount of overlap in our ratings, so subscribers reading this article should see Scott’s latest REIT Forum sector update for more detail.

Our method works. We know because we buy the same shares we recommend. We track our results on a real portfolio and we compare our returns with the major ETFs for our sector:

Those four ETFs are:

  • MORT – Major mortgage REIT ETF
  • PFF – The largest preferred share ETF
  • VNQ – The largest equity REIT ETF
  • KBWY – The high-yield equity REIT ETF

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Disclosure: I am/we are long NLY-F,NLY-I,AGNCO,NLY-G,ARR-C,TWO-E,TWO-A,NYMTP,NRZ-C,TWO-B,NRZ-B,CIM-C,NRZ,AGNC,NLY,NYMT,GPMT. 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: As a reminder, Scott Kennedy also is an author for the REIT Forum. You may see his commentary featured in our articles and may notice an extremely high amount of overlap in our ratings, so subscribers reading this article should see Scott’s latest REIT Forum sector update for more detail.



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