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The mortgage REIT sector has seen quite a bit of volatility lately, but Ready Capital (RC) remains one of the biggest bargains among the common shares.

Shares of RC trade at a huge discount to book value. Using our recent estimates, book value for RC should be about $14.30 per share as of early November. At $9.67, that results in a .68 price-to-book ratio. Rallying to trade at book value would be about a 47% increase in the share price. Not bad for a share with a dividend yield of nearly 15%. 

The sector plunged in late October, before putting together a huge rally. That was related to swings in book value. I put together a guide on why book values surged from October 27th to November 3rd.

That surge in book value was reversing a huge plunge from the prior weeks.

We cover the swings in share prices, book value, and targets within our weekly series on mREITs and BDCs.

The highest dividend yield here is ARMOUR Residential REIT (ARR) at nearly 29%. That’s already been declared through the end of the year, but don’t expect it to last much longer. ARR can’t really generate that kind of recurring cash flow without paying out the principal for dividends. Of course, you should be pretty suspicious when you see such a big yield anyway.

We’ve been evaluating each REIT and BDC as they report earnings. For instance, we had a big report covering earnings for Blackstone Mortgage Trust (BXMT), Annaly Capital Management (NLY), Rithm Capital (RITM), and ARR.

I can also say AGNC Investment Corp. (AGNC) carries the highest price-to-book ratio in the sector. Peers like Dynex Capital (DX) are materially more attractive because of a much lower ratio. While I don't like AGNC's common shares, I find AGNCP (AGNCP) more attractive.

Looking over to BDCs, there is also a reasonable discount to book value on SLR Investment Corp. (SLRC). I think that's a respectable bargain, so we have a position in SLRC.

Looking at the preferred shares, I see a great deal of opportunity. 

We’re particularly interested in preferred shares that should begin floating within the next 18 months. If they float sooner, that’s even better. The preferred shares have been a great tool for us to:

1. Collect an attractive yield.
2. Get a big discount to call value (so upside can exist).
3. Swap between similar shares to take advantage of relative values.
4. Buy into shares that should see a big dividend increase when the floating rate arrives.

Investors who are looking for fixed income would want to look at the fixed-rate shares. However, the fixed-to-floating shares can be a good choice for most income investors. In particular, any investors looking to hold shares for a while as part of a retirement income strategy would be much better off examining the mortgage REIT preferred shares over the mortgage REIT common shares.

Strategy

Investments in common shares should be treated as positions for trading. This isn’t a buy-and-hold sector, contrary to what many yield-chasers would claim.

If you’re looking for long-term dividend growers, you would look for companies like Realty Income (O). We determined Realty Income overpaid for Spirit Realty Capital (SRC). However, the selloff that ensued created a much better bargain than if Realty Income had negotiated a much better price. I also prepared an update on Realty Income’s Q3 2023 earnings.

My tables for comparison have regularly been very popular with readers, so I’m going to include them below.

These tables are a very important part of the article because they enable investors to quickly visualize information across the sector. 

Stock Table

We will close out the rest of the article with the tables and charts we provide for readers to help them track the sector for both common shares and preferred shares.

We’re including a quick table for the common shares that will be shown in our tables:

 If you’re looking for a stock that I haven’t mentioned yet, you’ll still find it in the charts below. The charts contain comparisons based on price-to-book value, dividend yields, and earnings yield. You won’t find these tables anywhere else.

For mortgage REITs, please look at the charts for AGNC, NLY, DX, ORC, ARR, CHMI, TWO, IVR, EARN, CIM, EFC, NYMT, MFA, MITT, AAIC, PMT, RITM, BXMT, GPMT, WMC, and RC.

For BDCs, please look at the charts for MAIN, CSWC, ARCC, TSLX, TPVG, OCSL, GAIN, GBDC, SLRC, OBDC, PFLT, TCPC, FSK, PSEC, and MFIC. 

This series is the easiest place to find charts providing up-to-date comparisons across the sector. 

Warning

Book values changed dramatically during Q3 2023. Relying on mortgage REIT trailing book value would be very unwise, especially for agency mortgage REITs.  The values for BDCs didn’t change much.

No seriously, book value went up in flames. 

I’ve updated the charts to use Q3 2023 book values. These are much closer to current book values. Companies that have not reported values for Q3 2023 will be blank. We don’t want to put Q2 2023 and Q3 2023 BVs in the same charts due to the significant changes.

Residential Mortgage REIT Charts

Note: The chart for our public articles uses the book value per share from the quarter indicated in the chart. We use the current estimated (proprietary estimates) book value per share to determine our targets and trading decisions. It is available in our service, but those estimates are not included in the charts below. PMT and NYMT are not showing an earnings yield metric as neither REIT provides a quarterly “Core EPS” metric. Presently, a few other REITs also have no consensus estimate. 

Second Note: Due to the way historical amortized cost and hedging is factored into the earnings metrics, it is possible for two mortgage REITs with similar portfolios to post materially different metrics for earnings. I would be very cautious about putting much emphasis on the consensus analyst estimate (which is used to determine the earnings yield). In particular, throughout late 2022 the earnings metric became less comparable for many REITs.

(Click on image to enlarge)

Commercial Mortgage REIT Charts

BDC Charts

Preferred Share and Baby Bond Charts

I changed the coloring a bit. We needed to adjust to include that the first fixed-to-floating shares have transitioned over to floating rates. When a share is already floating, the stripped yield may be different from the “Floating Yield on Price” due to changes in interest rates. For instance, NLY-F already has a floating rate. However, the rate is only reset once per 3 months. The stripped yield is calculated using the upcoming projected dividend payment and the “Floating Yield on Price” is based on where the dividend would be if the rate reset today. In my opinion, for these shares the “Floating Yield on Price” is clearly the more important metric.

Note: Shares that are classified as “Other” are not necessarily the same. Within The REIT Forum, we provide further distinction. For the purpose of these charts, I lumped all of them together as “Other”. Now there are only two left, PMT-A and PMT-B. Those both have the same issue. Management claims the shares will be fixed-rate, even though the prospectus says they should be fixed-to-floating. I blasted PMT on the decision as soon as it was announced. I still believe PMT is wrong. If PMT reverses its decision (or has the decision reversed for them), the shares will switch to fixed-to-floating. Until then, I have them listed as "other".

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