Its been a hell of a few weeks for mREITs. From the Friday freakout just over one month ago to the recent week’s 5%+ price declines investors are digesting multiple new risks to the mREIT’s businesses. In response to all this valuations for the sector have come down to a level that represents a very positive risk reward setup.
First, lets outline the new perceived risks. Nobody has outlined it better than AGNC. In a recent investor presentation they stated:
Basically, all these new risks are very very small probabilities, i.e. tail risks. Many of these mREITs have come out publicly and commented on these risks, basically saying that they fears are overblown. Also, several of the mREITs have announced some big buybacks recently. Overall, the environment remains very positive for mREITs as I outlined in my post on Q2 mREIT earnings. At that time, valuation, P/B, for the mREITs I follow was 1.05. Lets look at the valuation now. Below is my new valuation table.
They key here is the Q3 2011 estimated book values. The Q3 estimated book values were pulled from various sources. What most investors are missing is that agency mREIT book values are going up in Q3, not down, driven by lower rates. Also, Q3 dividends remained strong with only a couple of reductions, nothing out of the ordinary. Valuation for these mREITs is now at a P/B value of 0.88 and the dividend level is up close to 19% for the sector. This is at the lower end of historical valuations. In particular Agency mREIT valuation is quite compelling. Stock prices have come down significantly. This combination presents a nice long setup. Yes, there are new potential risks on the horizon but the risks are small and prices have adjusted accordingly.
I’m playing this setup with options, selling slight out of the money puts and would be willing to go long the solid agency mREITs, NLY and AGNC in particular, if these levels continue. Also, I’m not taking full positions in the event prices continue to go lower. For more risk averse investors, wait until Q3 earnings are reported in a few weeks and listen to the CEO comments on the current environment. You probably won’t get the same level of prices but good value should persist for a while.
6 Comments
dave o · October 6, 2011 at 1:25 pm
if there is a govt refinancing program, it will be implemented by the agencys and apply only to agency debt. Less refinancing risk with the non agency mortgages.
libertatemamo · October 6, 2011 at 7:58 pm
Hey Dave, thanks for the comment. Maybe but unlikely that there will be a massive refinancing program from the agencies. There was a very key statement from the FHFA on Sept 9th, See here. It basically says that there considering changed only to the HARP program and only for high LTV loans. Basically there is not much risk of a massive refi effort here. The FHFA realizes that they need private capital and need much more of it if they want to hit their long term goal of getting the gov’t less involved in the mortgage market.
On the non-agency side, non agency RMBS is getting hit this quarter. Non agency book values are going down in Q3, not up like the agency REITs. This is mainly due to Europe, foreclosures, and lower house prices. This will turn but not right now.
I think there is more opportunity for capital gains in non agency in the next 1-2 years but for a less than 1 year trade I’d take the agency mREITs. I’m long both in different setups.
Paul
Tony · November 7, 2011 at 5:05 pm
Hi Paul.
Here is a presentation from MFA,
http://wsw.com/webcast/jmp15/mfa/
J Carroll · December 24, 2011 at 11:05 am
Hi, Paul and all who read this blog. It has been a while since activity, but I would like to take the opportunity to wish all a Merry Christmas. Paul, I sincerely hope your mother’s medical condition has stabilized; I have personal experience and empathy for such issues. Finally, Happy New Year; hope 2012 is a wonderful and prosperous year for all.
libertatemamo · December 25, 2011 at 12:33 pm
Thanks J. Merry Xmas and Happy new year to you and your family as well. Things have stabilized with my mother which is great. Now its about managing her illness. Definitely a learning process with lots of ups and downs.
As for the blog, I’ve been thinking about getting back into it. Family stuff has quieted down, RV projects have subsided. Just need to get motivated again.
Paul
mREIT valuation & interest rate risk « Investing For A Living · September 5, 2012 at 9:56 am
[…] The best metrics for mREIT valuation are price to book value (P/B) and dividend yield. I last posted on mREIT valuation in Oct of last year. In that post, the group of large cap mREITs that I follow […]
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