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):


Company Name


Price to Trailing BV

BV Q2 2020



Orchid Island Capital






Dynex Capital






American Capital Agency Corp.






Annaly Capital Management






Capstead Mortgage Corporation






ARMOUR Residential REIT






Cherry Hill Mortgage Investment






Two Harbors Investment Corp.






Arlington Asset Investment Corporation






AG Mortgage Investment Trust, Inc.






Invesco Mortgage Capital






Chimera Investment Corporation






Ellington Financial






Western Asset Mortgage Capital Corp.






Anworth Mortgage Asset Corporation






MFA Financial






PennyMac Mortgage Investment Trust






New Residential Investment Corp.






New York Mortgage Trust






iShares Mortgage Real Estate Capped ETF



VanEck Vectors Mortgage REIT Income 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.

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 come up in the comments, so I added a chart for dividend yields:

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.

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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.


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 Residential

We’re starting with New Residential. NRZ offers investors a mortgage REIT along with an origination company. The value of their origination business isn’t captured in the book value. This is one reason NRZ often achieved one of the highest price-to-book ratios in the sector over the last several years. Shares are in the buy range:

Source: The REIT Forum

You’ll notice a low payout ratio. While NRZ has a low dividend yield, the company has also been conservative. We aren’t going to speculate on the timing of future dividend increases in this public article. However, NRZ’s payout ratio is exceptionally low compared to their forward run-rate for core EPS. Core earnings weren’t too bad lately either:

Source: NRZ

So what happened to NRZ? They were carrying a bit too much leverage and decided to unload a large batch of credit-sensitive investments when the market got rough. They don’t plan to make that mistake twice. They have more cash on the balance sheet than ever before:

Source: NRZ

If investors assigned a value to their operating company, they would reach a much higher target for valuation:

Source: NRZ

The operating company has been the bright spot for NRZ so far this year:

Source: NRZ

Originating home loans has been quite profitable. In Q2 2020, the company reported exceptional margins for the gain on sale of their DTC (Direct to Consumer) loans:

Source: NRZ

Shares of NRZ still trade at a substantial discount to book value. That’s quite attractive since the book value ignores most of the value created by the operating company.

Two Harbors

We’re bullish on Two Harbors as well. Shares have been dipping lately and pushing them back into the target range for a buy rating:

Source: The REIT Forum

Core earnings were bad in Q2 2020. That’s fine. Management clearly broadcast their expectations for higher Core EPS starting in Q3 2020:

Source: TWO

So how can the company increase earnings by that level? They overhauled their swap portfolio to fix their “Cost of Funds”:

Source: TWO

There’s a huge difference in core earnings between funding this portfolio at a 2.61% cost of funds and a 0.86% cost of funds. That’s the quickest way to fix weak Core EPS.

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Investors often ask about “Taxable Income.” I leave most of those questions for Scott Kennedy, but Two Harbors provided a nice slide on the topic:

Source: TWO

The REIT wants to highlight that the tax concept is not the same as the economic concept. The rules for “Taxable Income” can confuse most investors and many think the designation of “Return of Capital” or “Taxable Income” is important to their investment. I find the most relevant thing to consider about “Taxable Income” is what it means for dividend policy. Why? Because dividend choices can impact the price-to-book ratio. Over short-term or medium-term periods the change in share price (primarily driven by price-to-book ratio) can easily outweigh the dividends. That’s something many retail investors hate to think about, but it is incredibly useful when evaluating the sector.

A Preferred Share Sale

We normally don’t bring the preferred shares into the series on common shares, but we want to highlight them today. Every once in a while, a sale suddenly occurs. This was a sale in shares of NRZ-C (NRZ.PC):

Source: Street Smart Edge

Remarkably, that chart only covers 4 hours. That was a rapid dip and rally. Here are the price ranges on a daily basis:

You may notice there was some wild volatility at the start of the chart. That’s the truth, volatility since late February was insane. You’ll also see a dip in the first half of July when it looked like the second wave was going to take off in the United States. Today looks much more like a simple sale if you’ll ignore the broad market decline for the moment.

NRZ-B was in on the sale as well. We published a buy alert on NRZ-B and picked up some shares.

Source: Schwab

It’s always nice to catch a quick sale on some preferred shares.

Granite Point Mortgage Trust

We don’t usually include any commercial mortgage REITs in this series. However, we will highlight Granite Point Mortgage Trust (GPMT) for a moment. Shares look very cheap, but investors should be aware that this is also a highly speculative opportunity. GPMT still has high leverage, which prevents them from being able to run an aggressive buyback campaign to shrink the discount to book value.

Shares were hammered today, down 7.4%. While commercial mortgages and high leverage are a bad combination for this year, the vast majority of the portfolio has continued to perform. The REIT already reduced book value by including write-downs for the losses management believes would be reasonable. Given the amount of leverage, this isn’t a “low risk” investment, but the upside is large enough to warrant allocations for investors who can stand the risk.

Thankfully, the portfolio only has 9.1% exposed to retail and 14.8% exposed to hotel:

Source: GPMT

99% of the portfolio is senior first mortgage loans and the weighted average stabilized LTV (loan-to-value) was 63.7%. While we see significant declines in the fair market value of retail and hotel real estate (and expect some for office), the loss on “default” shouldn’t be anywhere near 100%. Further, the owners have rarely seen the property value fall far enough to make defaulting an intelligent choice.

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So why isn’t GPMT getting more love from the market? One major factor is probably the lack of a dividend. Management wants to retain as much cash as possible because it gives them more flexibility. That makes sense. That’s what they should be doing. Consequently, the lack of a dividend doesn’t scare me.

Some investors may be concerned that the company reported a loss on the sale of part of their portfolio. The realized loss was only $9 million and the principal on the transaction was $191 million. That’s a realized loss of 4.7%. Yes, it is a “loss,” but this is a company trading at a staggering discount to book value. Using their Q2 book value of $17.47, today’s closing price of $5.70 represents a price-to-book ratio of 32.6%. That’s a huge discount. Even if book value suffers more in Q3 and suffers again in Q4, it would still be a staggering discount.

It isn’t a low-risk pick, but the upside here is dramatic. If shares were to move all the way back up to book value, it would represent more than a 200% increase in the share price. I don’t expect to see a rally that large, but I’ve hardly ever called for a 200% rally in anything.

Notes on the Sector

The market was down today. So were mortgage REITs. The vast majority of preferred shares dipped as well, but most of the dips were closer to 1% rather than around 3.5%. In some cases, the dips on the preferred shares were (at least temporarily) bigger than the dips on the common shares.


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  • Bullish on NRZ, TWO, GPMT

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,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.