Quick And Dirty Discounts To Book For 6/29/2020

Quick And Dirty Discounts To Book For 6/29/2020

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 Q1 2020 (if the company has reported earnings):

TickerCompany NameFocusPrice to Trailing BVBV Q1 2020Price
ORCOrchid Island CapitalAgency1.01$4.65$4.71
CMOCapstead Mortgage CorporationAgency0.92$6.07$5.58
AGNCAmerican Capital Agency Corp.Agency0.89$14.55$12.94
DXDynex CapitalAgency0.88$16.07$14.08
NLYAnnaly Capital ManagementAgency0.87$7.50$6.52
ARRARMOUR Residential REITAgency0.85$11.10$9.48
TWOTwo Harbors Investment Corp.Agency0.74$6.96$5.13
CHMICherry Hill Mortgage InvestmentAgency0.66$13.73$9.02
AIArlington Asset Investment CorporationAgency0.55$5.28$2.92
MITTAG Mortgage Investment Trust, Inc.Hybrid1.23$2.63$3.23
WMCWestern Asset Mortgage Capital Corp.Hybrid0.82$3.41$2.78
CIMChimera Investment CorporationHybrid0.78$12.45$9.68
EFCEllington FinancialHybrid0.77$15.06$11.67
IVRInvesco Mortgage CapitalHybrid0.72$5.02$3.61
ANHAnworth Mortgage Asset CorporationHybrid0.63$2.69$1.69
MFAMFA FinancialHybrid0.57$4.34$2.47
PMTPennyMac Mortgage Investment TrustMultipurpose1.15$15.16$17.46
NRZNew Residential Investment Corp.Multipurpose0.68$10.71$7.31
NYMTNew York Mortgage TrustMultipurpose0.68$3.89$2.65
REMiShares Mortgage Real Estate Capped ETFETF
MORTVanEck Vectors Mortgage REIT Income ETFETF

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 that should see book value higher as of today than it was on 3/31/2020.

Prices in the table and used for the chart were pulled on 6/29/2020 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:

Chart

(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.

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

We’re going to focus in on one of the ratings here. We haven’t talked about ARR in quite a while. This is a great time to bring it up again. Our view on ARR and recent metrics are shown below:

14527192 15934603753998165

(Source: The REIT Forum)

Previously, we covered ARR back on May 23rd, 2020:

14527192 159346037601691

(Source: Seeking Alpha)

We went bullish at the time and argued that the dividend level was fine. At the time, ARR’s monthly dividend rate was $.09 per share. Since then, management raised the monthly dividend rate to $.10 per share. It should be no surprise the share price rallied as well, delivering a 10.47% return so far.

We got a very rough value for “since publication”. We published on 5/23/2020 (Saturday) and the last closing price was $8.01. We prepared the piece Friday afternoon, when shares were $7.97.

When the market opened the next time, shares opened at $8.49. They weren’t at $8.67 until 5/27/2020 (Wednesday). If we use the $8.01 closing price for the rating, shares delivered over 15% in total returns (1 dividend and a 14% rally in the price).

At this point, we estimate ARR’s price-to-current book value ratio is about 0.86. That isn’t high enough to get bearish, but it is higher than that of some of the peers. We generally prefer ARR’s peers unless ARR trades at a discounted price-to-book ratio.

Traders who took the opportunity to buy into ARR may want to look at capturing their gains and reallocating into one of their peers. There are better options available.

Let’s recap how we were able to call out the buy rating and the neutral rating:

When the price to book is .72, that’s a Buy.

When it is .86 (like now), that’s Neutral.

Each of those valuations used recent estimates for book value.

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.

We’re harvesting some gains and loading up our cash position in preparation for the next buying opportunities.

Ratings:

  • Neutral on common shares: ARR

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.

Source: Seeking Alpha

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