Mortgage REITs Raise Dividends | Seeking Alpha


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

0.98

$5.22

$5.13

DX

Dynex Capital

Agency

0.94

$16.69

$15.72

ARR

ARMOUR Residential REIT

Agency

0.88

$11.11

$9.83

AGNC

American Capital Agency Corp.

Agency

0.88

$15.86

$14.00

NLY

Annaly Capital Management

Agency

0.87

$8.39

$7.27

CMO

Capstead Mortgage Corporation

Agency

0.85

$6.79

$5.75

TWO

Two Harbors Investment Corp.

Agency

0.73

$7.24

$5.27

CHMI

Cherry Hill Mortgage Investment

Agency

0.70

$13.41

$9.39

AI

Arlington Asset Investment Corporation

Agency

0.51

$5.63

$2.86

MITT

AG Mortgage Investment Trust, Inc.

Hybrid

1.07

$2.75

$2.95

IVR

Invesco Mortgage Capital

Hybrid

0.91

$3.17

$2.88

CIM

Chimera Investment Corporation

Hybrid

0.81

$10.63

$8.66

EFC

Ellington Financial

Hybrid

0.80

$15.68

$12.58

WMC

Western Asset Mortgage Capital Corp.

Hybrid

0.66

$3.17

$2.09

MFA

MFA Financial

Hybrid

0.62

$4.51

$2.80

ANH

Anworth Mortgage Asset Corporation

Hybrid

0.59

$2.85

$1.69

PMT

PennyMac Mortgage Investment Trust

Multipurpose

0.88

$19.39

$17.10

NRZ

New Residential Investment Corp.

Multipurpose

0.77

$10.77

$8.34

NYMT

New York Mortgage Trust

Multipurpose

0.60

$4.35

$2.62

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:

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.

Our Open Positions

This is a table we rarely include our public articles. It shows ALL of our open positions in the common shares of the BDCs and mortgage REITs. This comes from one of the tools we maintain for subscribers to make it easier to track our holdings:

Source: the REIT Forum

There are two stocks in there that aren’t listed in the table at the start of the article. They are Solar Capital (SLRC) and Granite Point Mortgage Trust (GPMT). Since Solar Capital is a BDC, we don’t plan to discuss it much in the mortgage REIT series. We may launch a similar series to cover BDCs, since we already have all the tools necessary. For now, we’re getting back to the mortgage REITs.

Granite Point Mortgage Trust

We rarely talk much about GPMT in the public articles, but it is the #1 most common REIT for questions on The REIT Forum. To solve those questions, we prepared a huge subscriber article on GPMT.

Since there is very little analysis available on GPMT on the public side, I’d like to share a piece of that article:

At the end of Q2 2020, GPMT’s book value was $17.47. That’s not our estimate of book value as of September 25th, 2020, but it is the official number for the end of Q2. Our estimate for book value so far in Q3 2020 is lower than the value from the end of Q2, but not dramatically lower. That’s important because protecting book value is very important for mortgage REITs.

At the end of Q2 book value was slightly up from Q1 2020:

Source: GPMT

The main factor weighing against book value was recording a provision for credit losses in the amount of $14.2 million, or $.26 per share. Without that, earnings would’ve been pretty good.

The Portfolio

We need to touch on the types of loans in GPMT’s portfolio:

Source: GPMT

The primary area for concern would be “Retail” and “Hotel”. Those are broad categories, but they are going to be a major part of the concern. The other sectors are less exposed to falling rapidly enough for a borrower to choose to default. Remember that the weighted average stabilized yield is only 63.7%, so borrowers have a material amount of their own equity at stake.

Second Quarter

Before talking about the third quarter, at all, we need to catch investors up on the second quarter:

Source: GPMT

The company had a small GAAP net loss, which isn’t that bad when you consider that commercial mortgage REITs will send most of their results through GAAP earnings. This is a difference between commercial mortgage REITs and residential mortgage REITs. For residential mortgage REITs, GAAP earnings can be a largely useless metric.

We also see Core Earnings at $.25 per share. That’s positive to consider, but I would start by drawing attention to the fact that GAAP earnings were not slaughtered during a very rough quarter.

The weighted average stabilized LTV of 63.7% is reasonable and the yield at origination on their loans of LIBOR + 4.22% is within the reasonable range for a commercial mortgage REIT. Why are we highlighting things that aren’t unusual? Because the low price on GPMT reflects a market that believes the company is in a bad position.

A Quick Note on Adjusted Core Earnings

I ran an earlier draft of this article past Scott Kennedy and asked for his feedback on what was missing. He had two things to highlight, one of which is “Adjusted Core Earnings”. Scott said:

“I would consider adding in “adjusted core earnings” for GPMT. Simply put, back out those realized losses so the metric is more comparable to sector peers. Going forward, I’ll continue to provide both core earnings and adjusted core earnings. This especially holds true as all future realized losses will be reversed out of taxable income so GPMT’s core earnings should more closely match the other mREITs. GPMT’s adjusted core earnings was $0.37 per common share for Q2 2020. Was an increase since their net spread improved (lower asset yields were “trumped” by lowering borrowing costs).”

So how can investors get there? We’ll do some quick math and round the numbers. Start with core earnings of $13.8 million. Add back $6.9 million for realized losses. These realized losses reduced GAAP net income and were not added back in reaching Core EPS. That gets investors to just under $20.7 million in core earnings. Divide by 55.16 million shares outstanding and you get $.37 in core earnings per share (slightly more, this is rounded down a fraction of a penny).

Are Borrowers Making Payments?

Since GPMT trades at a staggering discount to book value (larger than a 50% discount), we need to consider the quality of the loans. So far, they are doing surprisingly well:

Source: GPMT

Over 99% made their payments in accordance with the loan agreements. That’s not bad. Sure, investors would prefer 100%, but should we really complain about less than 1%?

Of course, each loan is different and GPMT is working with borrowers who are impacted by the pandemic.

Does that guarantee that 99% of loans will go as planned? Certainly not. However, they don’t need to be that high for the investment to work out. Remember that shares are trading at a substantial discount to book value.

Moving on to the financing portion of the slide, we can see that GPMT has made substantial headway on improving their position. They have been achieving better flexibility by working with their lenders. They aren’t facing other near-term maturities, which would be hard to tackle. They’ve also reduced the leverage on repurchase facilities used to fund 100% of their hotel loans and almost all of the retail loans. That’s positive since hotel and retail are the two most dangerous sectors currently.

The rest of the article is on The REIT Forum. We’re bullish on GPMT though. If we didn’t see a substantial upside, we wouldn’t have purchased shares twice in the last 40 days. We’re up about 13% and about 27% on those two purchases.

In the interest of transparency, we screenshot our order execution:

Here is the first purchase:

Source: Schwab

Here is the second purchase, doubling our position in GPMT:

Source: Fidelity

We also issue trade alerts in real-time:

Source: The REIT Forum

New York Mortgage Trust

NYMT has one of the largest discounts among the residential mortgage REITs:

Source: The REIT Forum

Despite having internal management, NYMT trades at a very large discount to book value. That dramatic discount represents a nice opportunity. We don’t expect mortgage REITs to be trading above book value right now. We expect the vast majority to be trading at some level of discount. However, a price to book value (or price to NAV) of .57 is remarkably low.

NYMT recently increased the dividend by 50%, which demonstrates more confidence from management. We can appreciate their being careful. Future dividend increases could help the market to recover their faith in the company.

A large portion of the decline in NYMT’s book value represents unrealized losses on mark-to-market for credit-sensitive securities:

Source: NYMT

NYMT gives investors plenty of potential for returns and shares are already discounted to the point of pricing in huge losses. Remember, the shares trade at a large discount to book value. The book value was calculated by including the unrealized mark-to-market loss on the assets. So we’ve got a substantial discount in the book value, and then another discount moving from book value to the share price.

Other Dividend Raises

A couple more dividend increases to highlight include a 50% increase for NRZ and a 150% increase for IVR. Regarding IVR’s increase, the prior dividend was only $.02 (down from $.50), so raising to $.05 is technically a 150% increase.

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 ratings on NYMT and 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,ARR-C,TWO-E,TWO-A,NYMTP,NRZ-C,TWO-B,NRZ-B,CIM-C,NRZ,AGNC,NLY,NYMT,GPMT,SLRC. 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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