Via SeekingAlpha.com

This research report was produced by The REIT Forum with assistance from Big Dog Investments.

Due to the dramatically higher than usual volatility in the sector, we’re planning to post this series a little more frequently than normal. That allows us to provide more ratings and ensure readers of our public work still have recent numbers.

The topics we discuss are going to be extremely relevant to the residential mortgage REITs. The table below uses BV as of Q1 2020 (if the company has reported earnings):

Ticker

Company Name

Focus

Price to Trailing BV

BV Q1 2020

Price

(ORC)

Orchid Island Capital

Agency

0.90

$4.65

$4.17

(AGNC)

AGNC Investment Corp.

Agency

0.89

$14.55

$12.91

(NLY)

Annaly Capital Management

Agency

0.84

$7.50

$6.27

(CMO)

Capstead Mortgage Corporation

Agency

0.83

$6.07

$5.04

(DX)

Dynex Capital

Agency

0.80

$16.07

$12.93

(ARR)

ARMOUR Residential REIT

Agency

0.71

$11.10

$7.88

(TWO)

Two Harbors Investment Corp.

Agency

0.66

$6.96

$4.60

(CHMI)

Cherry Hill Mortgage Investment

Agency

0.62

$13.73

$8.54

(AI)

Arlington Asset Investment Corporation

Agency

0.45

$5.28

$2.40

(EFC)

Ellington Financial

Hybrid

0.67

$15.06

$10.11

(CIM)

Chimera Investment Corporation

Hybrid

0.67

$12.45

$8.29

(WMC)

Western Asset Mortgage Capital Corp.

Hybrid

0.60

$3.41

$2.04

(ANH)

Anworth Mortgage Asset Corporation

Hybrid

0.56

$2.69

$1.50

(IVR)

Invesco Mortgage Capital

Hybrid

$2.80

(MFA)

MFA Financial

Hybrid

$1.69

(MITT)

AG Mortgage Investment Trust, Inc.

Hybrid

$2.45

(PMT)

PennyMac Mortgage Investment Trust

Multipurpose

0.72

$15.16

$10.91

(NRZ)

New Residential Investment Corp.

Multipurpose

0.67

$10.71

$7.18

(NYMT)

New York Mortgage Trust

Multipurpose

0.53

3.89

$2.07

(REM)

iShares Mortgage Real Estate Capped ETF

ETF

(MORT)

VanEck Vectors Mortgage REIT Income ETF

ETF

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Price-to-Book Value

The next image provides a graphical representation:

Chart

Source: The REIT Forum

Sector Overview

Discounts to book remain exceptionally large. Consequently, there are plenty of opportunities.

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.

Further, we want to highlight that book values change throughout the quarter. They don’t simply change when the quarter ends. So far, Q2 has been a good quarter for several mortgage REITs.

For instance, AGNC estimated that its tangible net book value per share was up 12% since the start of the quarter. That’s a much larger gain than we expect to see on average so far.

Ratings

We’re going neutral on ORC:

Source: The REIT Forum

Why neutral? ORC’s price-to-book ratio isn’t “high” by traditional measures. At an estimated .81 ratio (using recent estimated BV), shares still trade at a significant discount. However, the sector also trades at a significant discount. For instance, AGNC also trades right around an estimated 20% discount to current book value. NLY also trades around an estimated 20% discount (slightly larger). There have been several months where a 20% discount would warrant a bullish rating, but in this case, ORC only gets a neutral rating.

We’re neutral on Blackstone Mortgage Trust (BXMT):

Source: The REIT Forum

It may still seem rare for investors to see BXMT at a discount to book value. Over the last few years, they regularly traded at very material premiums to book value. A premium can be a very useful tool for a mortgage REIT since it enables them to issue new equity while driving book value per share higher.

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However, BXMT has recovered quite dramatically from their 52-week lows and a price-to-book ratio around .90 is quite high for the sector. The commercial mortgage REITs face several risks from a potential increase in default rates and wider credit spreads to a decline in interest rates creating potential pressure on their net interest income if interest rates remain low. Consequently, we’re going with the neutral outlook on BXMT here.

Conclusion

The sector is filled with opportunities. Some of those opportunities are much more attractive than others. If you aren’t careful, you could wind up with one of the very few mortgage REITs trading at a premium to current book value. If you want to learn more about opportunities in the sector, start by clicking the “follow” button beside my name.

We’ve modified the layout for our mortgage REIT series following feedback from readers. We would love to continue getting that feedback. Let us know what you think of the layout in the comments section.

Ratings:

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Disclosure: I am/we are long AIC,IVR-C,NLY-F,NLY-I,AGNCO,MFO,NYMTM,ANH-C,NYMTN,TWO-B,MFA-C,ANH-A,ANH,CMO,NRZ,CIM. 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.

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