Here's A Few Mortgage REITs To Avoid

This post was originally published on this site

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

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):

Price-to-Book Value

The next image provides a graphical representation:

Source: The REIT Forum

Sector Overview

Discounts to book remain exceptionally large. Consequently, there are plenty of opportunities.

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.

Further we want to highlight that book values change throughout the quarter. They don’t simply change when the quarter ends. So far, Q2 has been a good quarter for several mortgage REITs.

For instance, AGNC estimated that its tangible net book value per share was up 12% since the start of the quarter. That’s a much larger gain than we expect to see on average so far.

Ratings

We’re bearish on IVR:

Source: The REIT Forum

Based on recent estimates, price to NAV would nearly 1.0. That would be exceptionally high for the sector. Most of the mortgage REITs trade at huge discounts.

We’re bearish on MITT:

Source: The REIT Forum

Think that estimate on projected NAV seems way too low? I don’t. A press release by MITT stated:“The Company’s book value per share as of April 30, 2020 is estimated to be in the range of $1.80 to $1.90.”

We’re neutral on WMC:

Source: The REIT Forum

Price to NAV looks pretty low, but there are plenty of other options to get a low price to NAV. Why pick WMC when you could pick CIM or NRZ at similar ratios? You have to ask questions such as: “Is CIM a better REIT than WMC?” Yes, the answer is simply yes. CIM has internal management, a great platform for securitizations (which reduces risk to the mortgage REIT), and a solid history. How about WMC? WMC has two of the same letters in their ticker (C and M). That’s not really enough to compete.

Of course, we are bullish on several of the other REITs in the sector. In several cases there are quality mortgage REITs trading at huge discounts to their net asset value. We expect several of those REITs to rally. However, too many analysts only spend their time on the bullish ratings. We like to find the good opportunities, but we also want to warn investors away from the bad ones. We’ll cover some good opportunities over the next week.

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, start by clicking the “follow” button beside my name.

Ratings:

• Bearish on IVR and MITT
• Neutral on WMC

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Disclosure: I am/we are long AIC,IVR-C,NLY-F,NLY-I,ANH-A,AGNCO,MFO,NYMTM,ANH-C,NYMTN,TWO-B,MFA-C,ANH,CMO,NRZ,CIM. 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.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.