3 Mortgage REITs At Lofty Valuations


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

Your feedback has improved this series week after week. Thank you, readers, for all you do.

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

1.00

$4.65

$4.67

(CMO)

Capstead Mortgage Corporation

Agency

0.90

$6.07

$5.46

(AGNC)

American Capital Agency Corp.

Agency

0.88

$14.55

$12.86

(DX)

Dynex Capital

Agency

0.88

$16.07

$14.20

(NLY)

Annaly Capital Management

Agency

0.87

$7.50

$6.52

(ARR)

ARMOUR Residential REIT

Agency

0.84

$11.10

$9.34

(TWO)

Two Harbors Investment Corp.

Agency

0.72

$6.96

$5.04

(CHMI)

Cherry Hill Mortgage Investment

Agency

0.66

$13.73

$9.05

(AI)

Arlington Asset Investment Corporation

Agency

0.56

$5.28

$2.96

(MITT)

AG Mortgage Investment Trust, Inc.

Hybrid

1.19

$2.63

$3.14

(WMC)

Western Asset Mortgage Capital Corp.

Hybrid

0.79

$3.41

$2.69

(EFC)

Ellington Financial

Hybrid

0.78

$15.06

$11.71

(CIM)

Chimera Investment Corporation

Hybrid

0.77

$12.45

$9.56

(IVR)

Invesco Mortgage Capital

Hybrid

0.72

$5.02

$3.61

(ANH)

Anworth Mortgage Asset Corporation

Hybrid

0.62

$2.69

$1.68

(MFA)

MFA Financial

Hybrid

0.57

$4.34

$2.47

(PMT)

PennyMac Mortgage Investment Trust

Multipurpose

1.15

$15.16

$17.36

(NRZ)

New Residential Investment Corp.

Multipurpose

0.69

$10.71

$7.37

(NYMT)

New York Mortgage Trust

Multipurpose

0.67

$3.89

$2.59

(REM)

iShares Mortgage Real Estate Capped ETF

ETF

(MORT)

VanEck Vectors Mortgage REIT Income ETF

ETF

Note: Some mortgage REITs such as AGNC and ORC have reported material gains to book value during Q2 2020. They aren’t the only mortgage REITs which should see book value higher as today than it was on 3/31/2020.

Prices in the table and used for the chart were pulled on 6/15/2020 about 30 minutes before the market closed. Consequently, they won’t be a perfect match for closing prices.

Price-to-Book Value

The next image provides a graphical representation:

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. In some cases, they will be up quarter-to-date; in other cases, they will be down.

As of 05/07/2020, management’s estimate for IVR book value was $2.25 to $3.25. As a reminder, shares of IVR just closed at $4.47. The earnings release indicates that, as of 5/31/2020, the book value was between $2.65 and $3.15.

Why Do These Ratios Matter So Much?

You may notice that we write about these topics quite frequently. Why? Because share prices swing hard, especially when there is panic in the sector. The difference in price movement can be massive.

That level of volatility is NOT usual when we look at a period that spans years, but it is quite normal in the period that began in late February and runs through at least today.

Outlooks – PMT

Let’s jump into the bearish ratings. We can start with PMT. It’s too expensive. Some analysts may believe the book value has roared dramatically higher during the second quarter. I’m not buying it. I don’t see book value ramping that much higher. That doesn’t mean PMT is doing poorly, but I don’t believe in the kind of jump in book value needed to justify their soaring price.

It does appear to have increased. However, we’re expecting the increase to be in single-digit percentages. That means it increased by more than 0.01%, but less than 10.0%. Could we be wrong? Sure, it’s possible. However, if you’re thinking book value is up more than 20%, or perhaps even more than 30%, that’s probably going to turn out wrong.

We liked PMT once. Not now. We’re clearly bearish on PMT now.

When did we like PMT?

We really liked shares on 3/17/2020. We bought shares that day at $8.31. We sold them at $10.31 on 3/31/2020 so we could reallocate the capital. We earned 24.02% with PMT, while the rest of the sector was plunging.

What did we swap the capital into? NRZ. We ended up closing that position for a 75% gain, so we’re not crying about missing out on the rest of PMT’s run.

We’re not completely out of NRZ, we still have some shares purchased on 4/6/2020. However, we did scale down our position dramatically on 6/9/2020 at $8.78.

Unlike IVR and MITT, PMT actually has a reasonable amount of common equity. It just shouldn’t be this expensive.

Outlooks – MITT

Next share up? MITT. We will highlight this opportunity frequently. MITT has been crashing down over the last three weeks, but it is still remarkably expensive. No thank you! We’ve got no interest in seeing a tiny mortgage REIT trade at a huge premium to book value. Thanks, Robinhood Traders!

Source: The REIT Forum

Oh, you didn’t know Robinhood Traders loved MITT?

Source: Robintrack

Outlooks – IVR

There are a few rules every person should know.

  1. Always be yourself.
  2. Unless you can be Batman, then be Batman.
  3. Regularly be bearish on small highly leveraged mortgage REITs trading at large premiums to book value.

Source: The REIT Forum

Much like MITT, IVR is a Robinhood favorite:

Source: Robintrack

Now, you may reasonably believe that there has simply been an increase in the number of accounts holding many different shares of stock. Allow me to demonstrate the difference:

Source: Robintrack

When NLY shows up in less than 20,000 accounts and IVR is in more than 140,000, that’s a sign that this is retail money buying in to “Baghold”.

Let’s make that an official verb.

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, follow me.

Ratings:

  • Bearish on common shares: MITT, IVR, PMT

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Disclosure: I am/we are long NLY-F, NLY-I, AGNCO, NLY-G, NRZ, NLY, AGNC. 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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