Following reader feedback, we’ve enhanced the layout for this series. Your continued feedback is greatly appreciated, so please leave a comment with suggestions.

This article will be heavy on charts because we like to communicate with images, rather than words, whenever possible. Likewise, we will use several tables to more efficiently structure the data. Enjoy!

Mortgage REITs and Preferred Shares

We’ve consistently incorporated a significant allocation to preferred shares in our portfolio. We could simply hold the positions for income, but we take advantage of trading opportunities as well. Our goal is to maximize total returns and this technique has worked wonderfully.

We also trade positions in mortgage REIT common shares. We find this sector is particularly attractive because it can be so inefficient. Long term, share prices revolve around book value. In the short term, the price-to-book ratios can deviate materially. Simply by understanding that, you can put yourself in a better position.

Our other major source of allocations is equity REITs. While an investor might occasionally choose to trade an equity REIT position, the sector is a great fit for buy-and-hold investors.

We compare our performance against four ETFs that investors might use for exposure to our sectors:

Source: The REIT Forum – Chart runs through 11/19/2020

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.

Mortgage REITs

Today’s Lesson

New York Mortgage Trust was cheap. We know, we told you. You can see it in this card from 5/20/2020:

We sent public articles several times highlighting that NYMT was too cheap over the last eight months. That card comes from: Mortgage REIT Rally Rocks On. It’s a great article to check out. You’ll see several other strong buy cards included as well. It’s like a blast from the past that will make you wonder why you didn’t buy shares.

Well, it happened. The rally rocked on even harder.

You also can see that most of the rally was over the last month.

As a fun little side note, I didn’t even include the dividends. That’s just the price change. Dividends would push it past 100%.

Now we have to write much more boring articles like:

“Hey, you should’ve listened to us and bought some NYMT.”

Thankfully, that’s not a real article title.

However, we did get a few other nice article titles. Like this trade alert:

Or this other trade alert:

We should disclose that we don’t care for trading retroactively. I’m sure you know many retroactive traders. They may announce a trade a month later after the price moved, separate positions into several portfolios, or call something a “speculative strong buy” so it’s a strong buy if it goes up but it was only a speculative idea if the price goes down. Our solution to that is called “Trade Confirmations.” Here’s how it works. When you post a trade, you post these:

Source: Schwab

Source: Fidelity

Pretty cool, huh? You can’t misconstrue a trade confirmation.

Now for some dull news. We are stuck with a much more “boring” outlook now:

How pedestrian! A boring neutral outlook. What fun is that? OK, ignore the thousands of dollars in profits we’ve been locking in. Clearly, those are still pretty fun.

How?

The top question is probably investors asking how we could possibly have predicted that NYMT would rally dramatically. Well, the answer is in the cards. The shares traded at a massive discount to book value. Since NYMT wasn’t a garbage REIT (one where overhead devours the returns that could’ve gone to shareholders), it was reasonable to believe that NYMT would probably trade much closer to book value. Further, we knew that at the time the discount on NYMT was dramatically larger than the discount on most of their peers.

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Consequently, they would have substantially more upside than many of those peers. Further, we knew NYMT had dramatically reduced leverage and reduced the risk within their portfolio. How could we know that? Because management literally said so on the earnings calls, on the press releases, and in the presentations. It wasn’t a secret.

We expanded on that information by having regular updates on how the portfolio should be doing throughout the quarter. The company doesn’t provide those, but a great analyst in mortgage REITs can still work through the positions to find the values. Scott Kennedy nailed the calls. The sector was cheap enough that almost anyone could make money, but many weren’t going to pick the best opportunities. That’s the point of research.

Do we still have other options? Of course. We’re far more cautious on the sector now, compared to when we had buy ratings on about 90% of the REITs we covered. Well, most of those shares are up 40% to 400% (not a typo) so what else can we do? If we were equally bullish now, that would just be silly.

You don’t downgrade a REIT when it’s set to rally a hundred percent or more.

Source: Seeking Alpha

Quick question for readers. Looking at the image above, would you guess that NRZ had closed at $4.26 on April 2nd, 2020? If you would guess that, you’d be right. It closed even lower on April 3, 2020. It was under $3.50 that day.

That kind of hurt. We had paid over $5 only a week earlier:

Source: Fidelity

Down 40% in a week on a new position could make someone doubt themselves.

What are you gonna do?

Double down.

Source: Schwab

Make sure to send the alert also:

NRZ is at $9.75 today.

We will close out the rest of the article with the charts we provide for readers to help them track the sector for both common shares and preferred shares.

Let the images begin!

Price-to-Book Value – Using Q3 2020 Book Value

All the mortgage REITs within our batch have reported their Q3 2020 earnings, so we have trailing book values for all of them.

Chart

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 during Q3 2020 and to a lesser degree during Q4 2020.

Repeated Note: There are two mortgage REITs we need to highlight here:

  • AG Mortgage Investment Trust – We are using the Q3 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.

Unfortunately, we have to repeat those bullet points every time we publish because it regularly comes up if we don’t mention it.

Book values will have changed some already during Q4 2020. We aren’t including that in our public articles (except for index cards). Scott Kennedy provides frequent updates on estimated book value, ratings, and price targets through The REIT Forum.

Dividend Yields

Dividend yield often comes up in the comments, but picking based on dividend yield is dumb and regularly results in terrible performance. Don’t do it.

Chart

Source: The REIT Forum

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

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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.

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
  • BoF = Bond or FTF (Fixed-to-Floating)
  • S-Yield = Stripped Yield
  • Coupon = Initial Fixed-Rate Coupon
  • FYoP = Floating Yield on Price
  • 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
AGNCM $23.66 FTF 7.36% 6.88% 4.88% 4/15/2024 $7.36 AGNCM
AGNCN $24.35 FTF 7.28% 7.00% 5.56% 10/15/2022 $4.15 AGNCN
AGNCO $23.55 FTF 6.99% 6.50% 5.61% 10/15/2024 $7.95 AGNCO
AGNCP $22.90 FTF 6.77% 6.13% 5.44% 4/15/2025 $8.99 AGNCP
NLY-D $24.99 7.51% 7.50% 7.51% 12/23/2020 ($0.03) NLY-D
NLY-F $24.09 FTF 7.22% 6.95% 5.43% 9/30/2022 $3.95 NLY-F
NLY-G $22.70 FTF 7.16% 6.50% 4.85% 3/31/2023 $5.95 NLY-G
NLY-I $24.25 FTF 6.96% 6.75% 5.39% 6/30/2024 $6.66 NLY-I
MFO $25.28 Bond 8.00% 8.00% 8.00% 12/6/2020 $0.01 MFO
ARR-C $24.30 7.23% 7.00% 7.23% 1/28/2025 $8.00 ARR-C
DX-B $25.26 7.65% 7.63% 7.65% 12/27/2020 $0.11 DX-B
DX-C $23.77 FTF 7.35% 6.90% 6.06% 4/15/2025 $8.99 DX-C
CMO-E $24.39 7.80% 7.50% 7.80% 12/27/2020 $0.98 CMO-E
EFC-A $22.00 FTF 7.75% 6.75% 6.23% 10/30/2024 $9.75 EFC-A
NRZ-A $23.17 FTF 8.19% 7.50% 6.58% 8/15/2024 $8.87 NRZ-A
NRZ-B $22.55 FTF 7.99% 7.13% 6.58% 8/15/2024 $9.14 NRZ-B
NRZ-C $20.09 FTF 8.02% 6.38% 6.54% 2/15/2025 $11.70 NRZ-C
PMT-A $24.84 FTF 8.18% 8.13% 6.11% 3/15/2024 $6.76 PMT-A
PMT-B $24.64 FTF 8.12% 8.00% 6.32% 6/15/2024 $7.36 PMT-B
AIC $24.00 Bond 7.04% 6.75% 7.04% 12/27/2020 $1.05 AIC
AIW $24.71 Bond 6.77% 6.63% 6.77% 12/27/2020 $0.53 AIW
ANH-A $25.31 8.65% 8.63% 8.65% 12/27/2020 $0.10 ANH-A
ANH-C $23.91 8.09% 7.63% 8.09% 12/27/2020 $1.46 ANH-C
CIM-A $24.56 8.29% 8.00% 8.29% 10/30/2021 $2.51 CIM-A
CIM-B $23.22 FTF 8.78% 8.00% 6.61% 3/30/2024 $8.68 CIM-B
CIM-C $22.80 FTF 8.66% 7.75% 5.55% 9/30/2025 $11.80 CIM-C
CIM-D $22.90 FTF 8.90% 8.00% 6.24% 3/30/2024 $9.00 CIM-D
TWO-A $24.50 FTF 8.40% 8.13% 6.09% 4/27/2027 $13.72 TWO-A
TWO-B $23.38 FTF 8.26% 7.63% 6.05% 7/27/2027 $14.50 TWO-B
TWO-C $21.65 FTF 8.48% 7.25% 6.13% 1/27/2025 $11.07 TWO-C
TWO-D $24.40 8.05% 7.75% 8.05% 12/27/2020 $0.97 TWO-D
TWO-E $23.82 7.98% 7.50% 7.98% 12/27/2020 $1.53 TWO-E
CHMI-A $25.11 8.29% 8.20% 8.29% 8/17/2022 $3.58 CHMI-A
CHMI-B $23.95 FTF 8.75% 8.25% 6.22% 4/15/2024 $8.19 CHMI-B
IVR-A $24.74 7.94% 7.75% 7.94% 12/27/2020 $0.61 IVR-A
IVR-B $23.49 FTF 8.25% 7.75% 5.76% 12/27/2024 $9.27 IVR-B
IVR-C $23.40 FTF 8.01% 7.50% 5.90% 9/27/2027 $14.27 IVR-C
NYMTM $22.50 FTF 8.89% 7.88% 7.52% 1/15/2025 $10.87 NYMTM
NYMTN $22.90 FTF 8.87% 8.00% 6.57% 10/15/2027 $16.09 NYMTN
NYMTO $22.58 8.86% 7.88% 8.86% 12/27/2020 $2.80 NYMTO
NYMTP $22.58 8.71% 7.75% 8.71% 12/27/2020 $2.80 NYMTP
AAIC-B $20.15 8.86% 7.00% 8.86% 5/12/2022 $7.61 AAIC-B
AAIC-C $21.70 FTF 9.71% 8.25% 6.94% 3/30/2024 $10.44 AAIC-C
MFA-B $23.85 7.86% 7.50% 7.86% 12/27/2020 $1.13 MFA-B
MFA-C $21.89 FTF 7.42% 6.50% 6.37% 3/31/2025 $10.01 MFA-C
MITT-A $19.93 10.37% 8.25% 10.37% 12/27/2020 $5.10 MITT-A
MITT-B $19.80 10.12% 8.00% 10.12% 12/27/2020 $5.23 MITT-B
MITT-C $19.75 FTF 10.15% 8.00% 8.51% 9/17/2024 $12.73 MITT-C
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There are a few things you should know at the start:

  • When a share can be called on short notice, the annualized yield-to-call reaches absurd levels. Investors shouldn’t put too much weight on it. On the other hand, a negative number can be a significant concern. Consequently, we decided to include it in the chart.
  • We sort our spreadsheet for subscribers by risk ratings within each sector. We decided to use the same technique for this series since it communicates more information to readers. You’ll notice a general correlation where lower risk correlates with a higher price and lower yield, though this link isn’t absolute.

For each metric we have two charts. Why use two charts? Because it’s much more convenient for readers who want to enlarge the charts. We simply can’t fit 40-plus shares into a single chart and still have it show up well on a mobile device.

Share Prices

We will start with the prices:

Chart

Source: The REIT Forum

Chart

Source: The REIT Forum

That chart gives you a pretty quick feel for which shares are trading at a discount to call value. Each of these preferred shares has a call value of $25.00, but that doesn’t mean a share will be called. The company decides if they want to issue a call or not.

Dividend Yield

Let’s move onto the stripped yield. This is the way dividend yields should be handled for preferred shares:

Chart

Source: The REIT Forum

Chart

Source: The REIT Forum

Stripped yields are vastly more useful than “current” yields for preferred shares. The stripped yield uses the stripped price. That’s different from using the current price because it means we already adjusted for dividend accrual. This makes the process easier for investors.

We can talk about shares using “regular prices.” Those are the prices an investor would actually use when entering an order.

However, we will provide the stripped yield to adjust for the dividend accrual. In the spreadsheets we host for subscribers, we include the actual ex-dividend date, or the projected ex-dividend date if the actual date isn’t yet known. If you’re planning to buy a share, it’s always wise to check if the shares just went ex-dividend so you can adjust your targets accordingly.

Floating Rate Dividend Yields

Since many of these shares switch over to floating rates, we also want to consider what the yield would be if the floating rate was in effect and shares were still at the current price. To demonstrate that, we use the “Floating Yield On Price.” If the share remains at a fixed-rate indefinitely, then the value doesn’t change:

Chart

Source: The REIT Forum

Chart

Source: The REIT Forum

One point we need to emphasize here is that we are dealing with yields. A yield must involve the share price. We aren’t simply showing the new “rate” if the share began floating, we are adjusting the new rate for the stripped price.

Conclusion

You don’t have to follow us. You don’t have to care about our research. If you’re happy with a high dividend yield and a dwindling account value, there are plenty of authors who can cater to you. On the other hand, if you’re focused on generating total returns and want to use REITs to do it, you may love our research. Hit the “Follow” button beside my name to start seeing more of our research.

Make sure to leave a comment and let us know what you think of the layout.

Ratings:

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Disclosure: I am/we are long NLY-I,AGNCO,TWO-E,NRZ-C,NYMTM,CIM-A,AGNCP,NYMTP,NRZ,AGNC,NLY,SLRC,NYMT,GPMT,PMT. 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: NLY-I,AGNCO,TWO-E,NRZ-C,NYMTM,CIM-A,AGNCP,NYMTP,NRZ,AGNC,NLY,SLRC,NYMT,GPMT,PMT



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