Quick And Dirty Discounts To Book Value For September 1st, 2020


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 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

0.98

$5.22

$5.11

(DX)

Dynex Capital

Agency

0.95

$16.69

$15.87

(CMO)

Capstead Mortgage Corporation

Agency

0.92

$6.79

$6.24

(AGNC)

American Capital Agency Corp.

Agency

0.89

$15.86

$14.08

(ARR)

ARMOUR Residential REIT

Agency

0.88

$11.11

$9.79

(NLY)

Annaly Capital Management

Agency

0.88

$8.39

$7.39

(TWO)

Two Harbors Investment Corp.

Agency

0.75

$7.24

$5.46

(CHMI)

Cherry Hill Mortgage Investment

Agency

0.72

$13.41

$9.59

(AI)

Arlington Asset Investment Corporation

Agency

0.49

$5.63

$2.74

(MITT)

AG Mortgage Investment Trust, Inc.

Hybrid

1.03

$2.75

$2.82

(IVR)

Invesco Mortgage Capital

Hybrid

0.92

$3.17

$2.93

(CIM)

Chimera Investment Corporation

Hybrid

0.83

$10.63

$8.83

(EFC)

Ellington Financial

Hybrid

0.79

$15.68

$12.46

(WMC)

Western Asset Mortgage Capital Corp.

Hybrid

0.70

$3.17

$2.22

(ANH)

Anworth Mortgage Asset Corporation

Hybrid

0.60

$2.85

$1.72

(MFA)

MFA Financial

Hybrid

0.59

$4.51

$2.67

(PMT)

PennyMac Mortgage Investment Trust

Multipurpose

0.90

$19.39

$17.51

(NRZ)

New Residential Investment Corp.

Multipurpose

0.71

$10.77

$7.65

(NYMT)

New York Mortgage Trust

Multipurpose

0.60

$4.35

$2.61

(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 $.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:

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.

PMT

PennyMac Mortgage Trust finally dipped its way back into a slightly bullish rating. Not a strong bullish rating, but bullish is still an improvement.

Source: The REIT Forum

As we previously predicted, shares of PMT were simply getting too expensive heading into its second quarter earnings release. The excitement was too much and some widely-circulated estimates for Q2 2020 book value proved to be too high. The company had a great second quarter, but the goals were simply set at absurd levels.

Over the last few weeks, PMT has significantly underperformed the sector following the “disappointment” of its exceptional Q2 2020 earnings. Just expectations that had gotten out of control. Simple as that.

NLY

Let’s touch on NLY again. Annaly is currently one of the top bargains in the sector:

Source: The REIT Forum

Shares trade at an estimated price-to-book ratio of .84 using our updated estimate of BV at $8.75. That’s still a very attractive valuation. Some peers trade at lower price-to-book ratios, but for NLY this is a very large discount.

The mortgage REIT benefits from a few key strengths. Among those strengths are the exceptional scale it has on operating expenses (due to the size), the recent move to internalize with virtually no expense (great deal), and the leverage it has in negotiating terms for accessing debt markets.

ANH

For one last mortgage REIT, we’ll highlight ANH. Anworth is primarily notable because the discount to NAV is so large:

Source: The REIT Forum

ANH often trades at a discount to book value, but the discount is usually much smaller. A discount of about 40% is exceptionally large and signals that management should be focused on reducing the portfolio and buying back shares to drive book value per share higher. This would also be a great time for them to consider internalizing at no expense to the company (see what NLY did and learn) or a time for the independent members of the board to start flexing their muscles. Two Harbors (TWO) went from paying a big fee to the manager to telling the manager to buzz off when the independent members of the board flexed their fiduciary muscles.

You may notice that our targets for the share price still involve a huge discount to book value. We aren’t looking for the shares to climb all the way back to book value, but they could still move higher from here.

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.

You’ll see some upcoming articles that cover more of the basics for investing in the sector. Those articles should help investors who are still getting a grasp on how this sector works.

Ratings:

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Disclosure: I am/we are long NRZ, AGNC, NLY, NYMT, NLY-F, NLY-I, AGNCO, NLY-G, ARR-C. 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: Scott Kennedy leads mortgage REIT research for The REIT Forum. Therefore, you will see an enormous amount of overlap in our opinions and estimates.

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