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

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

0.99

$5.22

$5.15

DX

Dynex Capital

Agency

0.96

$16.69

$15.94

AGNC

American Capital Agency Corp.

Agency

0.88

$15.86

$14.03

NLY

Annaly Capital Management

Agency

0.85

$8.39

$7.10

ARR

ARMOUR Residential REIT

Agency

0.85

$11.11

$9.40

CMO

Capstead Mortgage Corporation

Agency

0.81

$6.79

$5.52

TWO

Two Harbors Investment Corp.

Agency

0.71

$7.24

$5.17

CHMI

Cherry Hill Mortgage Investment

Agency

0.67

$13.41

$9.04

AI

Arlington Asset Investment Corporation

Agency

0.47

$5.63

$2.67

MITT

AG Mortgage Investment Trust, Inc.

Hybrid

0.98

$2.75

$2.70

IVR

Invesco Mortgage Capital

Hybrid

0.87

$3.17

$2.75

EFC

Ellington Financial

Hybrid

0.82

$15.68

$12.83

CIM

Chimera Investment Corporation

Hybrid

0.79

$10.63

$8.44

WMC

Western Asset Mortgage Capital Corp.

Hybrid

0.67

$3.17

$2.12

MFA

MFA Financial

Hybrid

0.63

$4.51

$2.83

ANH

Anworth Mortgage Asset Corporation

Hybrid

0.59

$2.85

$1.67

PMT

PennyMac Mortgage Investment Trust

Multipurpose

0.84

$19.39

$16.25

NRZ

New Residential Investment Corp.

Multipurpose

0.75

$10.77

$8.05

NYMT

New York Mortgage Trust

Multipurpose

0.60

$4.35

$2.60

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 $0.54 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 $0.54 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.

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 come 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.

Capstead Mortgage

Source: The REIT Forum

CMO invests in ARMs (adjustable-rate mortgages). The ARMs generally perform better when the curve is steepening and worse when it is flattening. That makes sense. When the curve is steepening, prepaying a mortgage becomes less attractive. Many of their borrowers have pretty low-interest rates on their floating-rate mortgages, so there is less incentive to refinance. The homeowner might want to lock in their rate for a longer period, but the savings are less substantial when the floating rate is already low.

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One tool for looking at the steepness of the curve is to simply use the 10-2 spread:

Source

That’s a pretty simplistic method, but it still gives readers a very rough idea. The curve has been getting a little bit steeper, though it has been a function of the 2-year rates plunging.

New York Mortgage Trust

Source: The REIT Forum

NYMT takes on some credit risk, which may scare some investors. However, they reduced leverage substantially over the last year, and the credit risk they kept is primarily tied to residential home values. For readers who haven’t heard, home prices remain pretty hot. Or in other words, collateral values keep rising. That’s a great sign for NYMT. This was considered a “best of breed” mortgage REIT by many investors for several years. It often traded above 100% of book value. Today? It trades for around 56 cents on the dollar. That’s a big difference.

Note: We’ve covered NYMT extensively in this series. Here is our latest piece providing more depth on NYMT.

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:

  • Bullish rating on CMO and NYMT

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, ARR-C, TWO-E, TWO-A, NYMTP, NRZ-C, TWO-B, NRZ-B, TWO-C, NRZ, AGNC, NLY, 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: 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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