A Quick Look at mREIT Preferreds

As you all know many of the mortgage REIT preferreds fell fast and hard this week—either devasting investors or presenting a huge opportunity. We have seen large bounces the last 2 trading days, but prices remain very low.

Regardless of what these preferred stocks did this week and last this is a fluid situation and could change for the better or worse any day now so pay attention to your buys and sells.

I am suggesting that some investors with risk capital to devote to a more risky play look through these preferreds–the risk reward on many shares is very attractive–as long as one recognizes the risk. Remember all of these preferreds are cumulative dividends.

As most of you know mREITs leverage their mortgage portfolios with relatively short term repurchase agreements–using mortgages as collateral with an agreement to repurchase. If the collateral loses value the company must put up more collateral (per whatever the terms are in the agreement). This is where the counter party to the repurchase agreement demands more collateral–a margin call. If the mREIT can’t meet the margin call they try to negotiate a ‘forbearance agreement’ (an agreement to change the terms of the repurchase agreement for a while).

This week the Royal Bank of Canada has begun selling collateral from some of the mREITs below–apparently deciding not to agree to forbearance.

Let’s go through the line-up of companies and see where they are at as of this minute. The news flow is pretty active on these companies.

The mREIT preferred listing is here.

AG Mortgage Investment (MITT)

Preferred shares now in the $4.xx range. The company has announced they can NOT meet margin calls. Their press release.

AGNC Investment (AGNC)

This company hasn’t made any statements as of yet so it is assumed they met any margins calls made by counter parties. The company declared preferred shares on 3/13.

Preferred shares are in the $16-$19/share range.

Annaly Capital Management (NLY)

Preferred shares are trading in the $15-$18 area. The company has made no announcements so it is assumed they met margin calls if necessary.

Anworth Mortgage Asset Corp (ANH)

Anworth says they have ‘delayed’ declaring common share dividends–no mention of the preferred dividends. Their press release is here.

The preferred shares closed today in the $9-$10/share range.

Arbor Realty Trust (ABR)

No word from commercial and multifamily mREIT ABR. They have announced a $100 million in common buybacks.

Preferreds are trading in the $16-$17 area.

Arlington Asset Investment (AI)

No word out of AI. Preferred shares are trading in the $11-$12/share range.

Armour Residential REIT (ARR)

No word out of ARMOUR. Their monthly paying preferred is trading around $14.

Capstead Mortgage Corp (CMO)

Capstead made a statement on 3/18 but nothing since–statement at that time was positive.

Their preferred stock is trading around $18.

Cherry Hill Mortgage (CHMI)

No further word out of Cherry Hill since a 3/13 announcement of dividends declared.

The companies preferred stock is trading around $11-$12/share.

Chimera Investment (CIM)

No new word from CIM since 3/18 when they made an announcement of stock buybacks and successful ‘rolling’ of their repurchase agreements.

The companies preferred shares are trading in the $10.xx area.

Dynex Capital (DX)

No word from the company since the declaration of dividends on 3/19.

Preferred shares are trading in the $17 area.

Ellington Financial (EFC)

No word out of EFC at this point. Their 1 preferred issue is trading around $9.

Exantus Capital (XAN)

The company did NOT meet margin calls and default notices have been issued by one of their counter parties–Royal Bank of Canada. The company has rescinded previously declared dividends. The notice is here.

The company’s preferred stock is trading at $4.40.

Invesco Mortgage Capital (IVR)

The company did NOT meet margins calls and has suspended the dividend of both common and preferred shares.

The preferred shares are trading in the $7-$8 range.

MFA Financial (MFA)

MFA could NOT meet margins calls and has suspended all common and preferred dividends. The preferred shares are trading at $4.25.

New Residential Investment (NRZ)

No word out of the company. Preferred shares at trading around $9-$10.

New York Mortgage Trust (NYMT)

The company could NOT meet margin calls. All common and preferred stock dividends are suspended.

Preferred shares are trading at in the $4.xx area.

PennyMac Mortgage Trust (PMT)

The company has declared a reduced dividend on the common and plans to pay preferred dividends. The company has had no margin calls.

The preferred shares are trading in the $16 area.

Two Harbors Investment (TWO)

TWO announced the suspension of common and preferred stock dividends. The company met all margin calls.

Today the company announced the sale of all their non-agency mortgages.

Disclosure – I bought 100 share of the Chimera 8% perpetual (CIM-B) @ $8.80 and 100 shares of the Invesco Mortgage Capital 7.75% perpetual (IVR-B) at $4.60 earlier this week. I plan to build a small portfolio (maybe 1000-2000 shares) of mREIT preferreds over the course of the next week.

36 thoughts on “A Quick Look at mREIT Preferreds”

  1. Bloomberg had a manager describe the AAA mortgage liquidation VS margin calls cascading downward over the weekend. Like the RBC margin call disagreements there’s not much we can even guess as to holdings. Some of there mreits have decades of history and surviving 2008 better than what we just witnessed.

    I had many rated pfds go from 26 to 10, though the average higher quality bottomed around 18. In reit space we saw the numbers. Kind of hard to av down when they’ve dropped to 5 or lower in a month.

    I’ve been wondering if the brokers holding the margin accounts may be figuring its better to let it roll w an active manager, then to force sakes all at same time

  2. Tim,
    Thanks for this list. It really comes in handy. Maybe, you can add it to the categories list, so updates are easy to find.
    I own about 100 different preferred including many MReits. Many are down 80-90%.
    However, today I have 4 stocks up over 100% and another one up over 200%.
    Of course, when your $1 shrinks to 15 cents and then rallies to 35 cents, you’re still in a world of hurt.

  3. Hopped on two’s prfs yesterday after seeing they met margins. Used money laying around in an older Ally account so I went for it… And now Ally won’t let me sell. It says I don’t own the securities? Been on hold for hour and a half now. At least, my sell orders are logged, in case, the sell price drops, I can argue it.

  4. Well,my ARR-C finally woke up.
    I guess a new hedge fund is starting a position in ARR and other reits.
    The FED may have pulled it off.
    Maybe, we don’t retest so quickly.
    I am amazed that i am still in the game, bloodied, but still hopeful.
    I will not spend the 2,400 from the fed, cause i will be repaying it in 2021.
    If you didn’t know, A reconciliation needs to be done to see if we qualified for the aid. The $500 for @ kid is free.
    Still down 18% in my Retirement accts.

    1. As painful as it is, I appreciate hearing I am not alone. Once I learned MFA suspended payments I bailed on MFA-C, commenting it might have marked the low–and I was very close. So why have the preferred increased $5 AFTER stopping the dividend? I did not lose as much % on NRZ-A, but I fail to understand who would be buying at 15 with the current market dynamics.
      It pays to be nimble. which I am not, so learning to leg in or out like Tim suggests.

      1. The Fed has unleashed the bazooka’s with money backstops for the credit markets, which should help give some hope for recovery. Also, suspending the cumulative dividends means there is hope that they can remain on life support and pull thru this as things get back to normal. If they had to keep paying the dividend while trying to recover, they’d be cooked -game over.

        I saw your post when you said you’d bailed and I winced cuz I thought you were panic selling at the worst time. I’ve held my nose and held on to NRZ-A/B and MFA-B. Hopefully some of that Fed backstop money is coming their way and they will continue to rise. I’ll then cash out at some point and plan to put mREIT’s on my “DO NOT INVEST IN” list until I get to the point where I have a lot more time on my hands to be able to babysit these things.

        As to who’s buying? Speculators, flippers, and those likely riding the monopoly money coming at us from the gov. Sure, some long term investors are jumping in – but I bet not with the $ in hand that they were doing so just a month ago.

        1. A4I, thanks for the reply. I winced when I sold, but at the moment it seemed prudent. I do not think it was an emotional response, it was a lack of confidence in the name–after some thought, I realized I did not understand the news on MFA and thought they were at high risk of bankruptcy. On the bright side, someone bought my shares and are doing well!

          1. I was with you buddy, no doubt. Had my finger hovering over the “sell” mouse button for hours while watching the bleeding continue. You just never know so you throw the dice and wait. You could just have easily been puffing your chest out as things could have went the other way – and they still might.

  5. Tim and Community,

    I have been lurking here for a number of weeks and am very grateful to have found such an excellent resource. I have been inactive in the markets since subprime (mReits) and planning to start contributing to the board. I chose the monitor handicpd as an education can be helpful but is no substitute for real world experience. The knowledge on this board is spectacular.

    My current belief is we are likely a long way from a bottom where we can safely invest. A professor in the program I went to several decades ago makes what seems to be a reasonable ‘worst case’ projection. https://markets.businessinsider.com/news/stocks/coronavirus-could-spark-greater-depression-dr-doom-nouriel-roubini-warns-2020-3-1029027839

    I use the market > sector > security method to identify and then take positions. My #1 priority is to manage risk. So the first step is to forecast the market.

    Using this chart (https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart) we can see the historical $SPX P/E ratio. Let’s say we use a market P/E of 10 as an initial forecast. We can only use last year’s earnings because current data is unavailable. So the simple math is:

    22.5 10
    —— —– -> 22.5x = 34000 -> 34000/22.5 = 1511 $SPX price target.
    3400 X

    Now let’s do the same simple math again looking at the subprime crisis when the $SPX fell from 1600 to 660. Is this situation worse – big time!

    1600 3400
    ——- ——- -> 3400 (660) = 1600x -> 1402.5 $SPX price target
    660 x

    Using technical Fibonacci tools and following the analysts at stockcharts.com, the next level I am watching is 2050 on the $SPX as a fairly safe place to establish new positions.

    I’m having difficulty taking any long term positions until the markets stabilize at what seems unavoidably, will be much lower levels. In many ways, I am a novice to high yield income portfolio strategies. In a correlated security world, can anything hold current levels if / when markets continue to drop?

    1. Handicpd,
      I appreciate your post and while I have tons of respect for technical analysis and how that applies to normal market ebbs and flows, I just don’t think much of this applies to where we are today. Many keep referring to ’87, dot com bubble, the great recession, the temper tantrum period, December 2018, etc.

      While all of these times shook the markets and the world, at no time were people en-masse afraid to leave their houses for fear of dying. At no time that I’m aware of have a dozen states literally closed up shop and issued businesses closed and people to stay home. At no time in those periods did we print a 3mm unemployment number that unfolded over just a couple of weeks, etc.

      However, some things never change as have been exhibited throughout all or most of these crisis time periods: fear, greed, and government monopoly money will flourish and we are doing not a whole lot except ‘rinse and repeat’…. setting ourselves up for the next crisis to come. JMO.

      1. Affinity, I am not doing any in depth tech analysis just basic algebra looking at two things; comparing historical price earnings ratios and what if the market drop is proportional to subprime. I agree with your assessment that this is a unique market and the hit to the economy is unprecedented.

        The reason I am sharing the math is during subprime I acted as a speculator and loaded up on mreits at about $7 per share, Arbor and Newcastle were principle positions. I had a lot of stress during the next wave down – lost maybe 50% of my position but held on and did eventually sell around par. I think we are nearing the end of the virus panic. I think we could very likely see new lows as the economic damage becomes known. I have already heard rumors of the European banks suspending dividends.

        My question was how do you invest to earn a dividend when capital losses can rapidly swamp interest payments? Seems to me the only prudent thing is to trade or stick to cash until markets settle down? I see a post above where you confirm this perspective.

        “As to who’s buying? Speculators, flippers, and those likely riding the monopoly money coming at us from the gov. Sure, some long term investors are jumping in – but I bet not with the $ in hand that they were doing so just a month ago.”

        In your opinion when can long term investors safely enter the market?

        1. I think your question is one that many of us are asking, no matter if you toil away on the common side, the fixed side, or a combo of the two. It’s simply too early to tell, IMO. As regular as rain, many are saying “we need to retest the lows”. WHY??? That makes me furious and totally smells of market manipulation. The big money guys make these waves and profit off of the little guy who doesn’t have access to their tools and information. But at any rate, why do we seemingly always have to retest the lows before making a lasting move higher? It’s just plain stupid to me, but back to the point. If this is the hand they deal, then I have to play it. So while I nibbled on the way down and have sold some on the way up, it’s prudent for me to wait for the retest, and then get more aggressive with my buys. This is what I did in December of 2018. I waited and then bought like crazy and killed it. It’s inevitable, we’re going to go back down from here for a number of obvious reasons be it more bad news and lockdowns, earnings season reports which are coming up, stimulus falling short, continued uncertainty about the election, yadda yadda.

          I think long-term investors should have already been nibbling. If not and you ‘missed it’ in your mind, nibble now. Nibble on the down days. Wait for this retest of the lows moment.

          Or say to hell with it and buy quality, IG rated securities for the income alone. It just depends on what kind of investor you are. I own commons for the growth, ETD and preferreds for the ‘self made annuity’ I created, and other items for their perks.

          If I’m buying for the income, it doesn’t really matter if my ‘paper losses or paper gains’ are up or down unless I need that money in the near term. My income stream should remain steady as that’s what I need to live on and buy food with. The paper stuff is just the wave we all ride.

  6. What drives the decrease in value of the mortgages held for collateral? Increase in estimated default rates or refinance rates?

    1. rush for cash (all), negative convexity (15/30y Agency RMBS), fear of coming defaults (everything but agency bonds). Negative convexity is poison in a volatile market. Forced selling only leads to more forced selling at lower prices until the hole that is dug is so deep, that no one can climb up…In Denmark we have a similar set-up with 30y callable mortgage bonds, and every 5 years or so it all explodes, and then we can start all over again. With CB manipulation, ZIRP/NIRP etc., both spreads and rates had reached totally ridiculous levels. At some point there had to come a correction. In US spreads were not particular tight and rates not “that low”, so it surpriced me a little that it could blow in such a spectacular way. Obviously I had underestimated the amount of leverage in the system. We send our thanks to CB’s for manipulating interest rates and encouraging more and more risk-taking in the last 11 years.

  7. Excellent and timely post. Thank you Tim.

    Perhaps make this into a shared Spreadsheet which you can periodically update ?

  8. Own CIM preferred and have been taking it on the chin. I am holding on due to insiders buying both common and preferred. I hope its the right decision. Had a small investment in NYMT for over 7 years-just sold out once they cut all dividends.

  9. PennyMac Mortgage Investment Trust (PMT) wasn’t on the list, but it took a huge hit. I had been very happy with PMT-A for several years, but golly what a shock to see it drop from $26 to $6, back to $16 now. Having “2 positions” in it, I need to decide to ride it out, or dump at a significant loss, or split the difference and self half. Ouch.

    1. Thanks Dave in Texas–yes you are correct–you are the first one to mention that–I will get them on the mREIT listing.

  10. Looks like the market is figuring out who’s most at risk. CMO, AGNC & NLY have almost exclusively Residential agency risk. DX almost only agency risk, but some of it is CMBS. Rest of them have a mix of everything with little to no transparency.
    If we take a look at AGNC, they have a leverage of 9-10, and an estimated spread risk of 4 – meaning if spreads widen by 100bp (mortgages vs. their swap hedges) they lose 4 pct. for every turn of leverage on a mark-to-market basis. 250 bp. of widening would send their BV to zero. In their accounts they can use amortised costs etc. – but repo lenders and swap counterparts don’t care about that. On the other hand they don’t want to sell their collateral in a market with no bids. My guess is that all mReits with CMO as the sole exception would have died had FED not stepped in last week. Can only speculate, but I do believe the worst is over for AGNC, NLY & probably DX. They will however all have to de-risk going forward (a tap on their shoulder from repo lenders). The drop in rates will increase prepayments (at some point) and lower their income going forward. On the other hand, spreads are now at a level where they will earn a lot in the future.

    IMO CMO is a different story they only invest in Agency arms, that have no negative convexity and a spread risk of 1 ? – 2 ? max. On march 18th they estimated BV to be around 7,7. How much has it fallen further ? Maybe to 7 as a rough estimate. Going forward they will benefit the most from lower funding rates i think (Can’t read from their presentations exactly how much of their exposure they hedge). Just state that they have a net duration of 14 mths. Personally I would much rather own the commons of CMO than prefs. from any other mReits. – Not a rekommandation 🙂

    1. MITT is suing RBS to block the sale of their collateral after they couldn’t meet the margin calls, saying the assets shouldn’t be valued at fire sale prices. Now the counterparty can assess the properties at any value they choose and mark-to-market. The ruling could affect all REITs.

      1. No need to Tar and Feather RBS (Royal bank of Scotland). Its was RBC, Royal Bank of Canada, that did this.

        I wish MITT well in its suit. For a bank to sell collateral so quickly, into such a market, is not right.

    2. CIM GAAP leverage is 5.5 per financials with 3.4:1 being recourse. Maybe that’s why insiders are buying?? Maybe someone could comment on this. Trying to understand.

  11. Tim, great over view of the “current” situation. One suggestion for a change is AGNC has made a announcement of dividend payments on March 13th for all the preferred and no other announcements since.

  12. Good analysis! This week they’re reacting to every news blurb about the stimulus package. May be a case of Buy the rumor Sell the news. With the wild price swings choosing an entry point may be more important than choosing the right REIT. Or choose an REIT then track all of their issues until there is an outlying price. Crazy things happen when the market is wild.

    It’s hard to spot trends through all the noise but it seems the floating rates have less impact now with Preferreds priced based on current yield. Fixed rate issues seem to be priced more favorably and those with low floating rates seem overpriced.

    NLY and AGNC are among the safest and largest, if they fail then the whole sector is probably finished. CIM more risky, looks like the best bet of the single digit lot. ARR and NRZ are hard to read because of a lack of relevant information available. TWO went up after suspending dividends, possibly because the news about selling non-agency holdings reduces bankruptcy risk MITT probably worthless unless you’re day trading..

    1. NRZ- while potentially much has changed, look at the last cc from nrz which took place just prior to the decline.
      Tim many thanks for the summery. Still many tough choices we have to make. sc

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