2023-12-18 18:45:50 ET
Summary
- Ready Capital and New York Mortgage Trust both reduced their dividends, surprising investors.
- Fixed-to-floating preferred shares are experiencing large rallies as investors anticipate dividend increases.
- Treasury yields have fallen, leading to higher values for REITs, other stocks, and just about everything.
Brief article today. Many things to address, but not much time.
Why? Because I waited too long to start writing, of course.
RC Dividend Reduced
Ready Capital ( RC ) reduced the dividend. The cut from $.36 to $.30 was a bit surprising. It didn’t match management’s prior commentary about setting their dividend relative to book value and overlooking the temporary negative impact on earnings from their acquisition. I still think shares are undervalued, but I was surprised by this reduction. My bad. We don’t get surprised often in this sector. Previously, management indicated that the short-term earnings hit shouldn’t be an issue for the dividend. Now, they see it as a reason to reduce the dividend. Poor communication.
Note: I haven’t sold my position in RC.
NYMT Dividend Slashed
New York Mortgage Trust ( NYMT ) dropped from $.30 to $.20. We saw this as a more likely candidate for a dividend reduction but didn’t expect it to go below $.25 per share. So the cut wasn’t surprising, but the magnitude of the cut was a bit surprising.
Fixed-to-Floating is Rocking
We’ve seen quite a few preferred share rallies lately. The fixed-to-floating preferred shares have seen some especially large rallies. Seems investors are starting to look at those floating dates and the big divided increase expected.
As interest rates fall, the fixed-rate shares also are becoming more attractive.
Rates Going Down
The trend in Treasury yields took a major turn.
In October, investors were preparing for the Federal Reserve to continue shoving rates higher. The 10-year Treasury hit a cap of around 5%. Today, it's under 4%.
Many REITs ripped higher with the plunging Treasury rates. That was great for our portfolio value. We were up about 11.6% in November and we’re up about 4.2% month-to-date. That combination has us at nearly 20% year-to-date.
Remember all those investors who said we absolutely should not even consider buying REITs until after the Federal Reserve said they were done raising rates?
Well, the Federal Reserve still isn’t sure. Chairman Jerome Powell is pivoting (in his language), but that doesn’t mean everyone is on board.
Should I still be in cash? Would I be feeling better if I had collected about 4% for the year?
It was a long and hard trip getting here, but we made it.
There’s still a chance that rates go up again, but the level of inflation really drops off if we exclude the lagged shelter data. In most areas, rent isn’t rising materially. In some places, it's falling. Since shelter data is lagged, it was able to prop up inflation.
Wild Forecast
I think there’s a decent chance that we see inflation return around 2026 / 2027. I’m not using some stupid crystal ball. The volume of apartment deliveries is going to plunge, so there’s going to be screaming about “the housing shortage.” We also have this macroeconomic condition where a bunch of people are retiring. That means fewer workers, but more consumers. Logically, that means supply and demand would get a bit imbalanced.
The one factor that could offset the wave of retirements is artificial intelligence. If it can rapidly make workers more effective, we could see significant gains in productivity.
The caveat there is that the movement against artificial intelligence will be powerful. The way AI can improve productivity is disruptive. It needs to eliminate jobs. That’s good for society. Like it or not, when something can be automated that's less work that has to be done. The reason people are fighting it is because they are scared (quite reasonably) that their jobs may become obsolete.
Did you see the final season of Game of Thrones?
Do you honestly believe that script was superior to what AI can write?
I don’t. Not for a second.
They had a huge budget. They could, in theory, afford writers and producers who were not idiots. Yet they ended up with an absolutely awful season to close out the most popular show on television.
Can we just have George Martin hand off the series to Brandon Sanderson to finish? He actually gets things done and still writes better than an AI. Sorry, George Martin doesn’t write better than AI because that requires writing. Here are some numbers:
- December 2022: 1,100 to 1,200 pages
- November 2023: 1,100 pages
To be clear, that's cumulative pages George Martin wrote toward the same book. The December 2022 pages are counted within the November 2023 pages. That is 0 to negative 100 pages for nearly a year.
AI is the only thing that can improve productivity enough to offset the reduction in the labor force.
Prepare for Q4 2023 Earnings
When the earnings come out for Q4 2023, some investors will be confused. If you use GAAP figures, you’ll see revenue plunging in some cases. That’s just adjustments related to the expected rate of prepayments. When mortgage REITs came out with their Q3 earnings, they assumed hardly any mortgages would prepay unless the owner was forced to move. With rates falling, some homeowners could actually end up in a scenario where refinancing is not utterly stupid.
It’s been about two years since that was the case.
When the mortgage REITs adjust expectations to say there will be more prepayments, they retroactively increase the amortization charges. That reduces revenue.
Confused?
Sorry, I’ll make it easy.
When rates go down, revenue drops. Part of the decline is lower rates. Part is retroactive adjustments.
The other side of the coin was pushing revenue higher when rates went up.
If you ignore the GAAP figures and focus on adjusted figures, the amortization adjustments will often be stripped out. However, if you’re focusing on the adjusted figures, you still need to be aware that some REITs will see quite a few hedges running out in 2024. Consequently, even if interest rates are falling, the cost of funds will increase for many REITs.
This can be a particularly big issue for agency mortgage REITs like AGNC Investment Corp. ( AGNC ) and Annaly Capital Management ( NLY ).
Good enough. I’m done. Have a good night and enjoy the charts.
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:
Type of REIT or BDC | ||||
Residential Agency | Residential Hybrid | Residential Originator and Servicer | Commercial | BDC |
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.
Notes on Chart Sorting
Within each type of security, the sorting is usually based on risk ratings. However, it's quite common to have a few shares that are tied. When the shares are tied for risk rating, the sorting becomes arbitrary. There may occasionally be errors where a share’s position is not updated quickly following a change in the risk rating. That can happen because the charts come from a separate system. When I update the system we use for members, it doesn’t change the order in the charts.
When I say “within each type of security,” I’m referencing categories such as “agency mortgage REITs.” The “hybrid mortgage REITs” are all listed after the “agency mortgage REITs.” However, that does not mean RC (lowest hybrid) has a higher risk rating than the highest agency mortgage REIT. Each batch is presented by themselves.
PMT and RITM are tied for risk rating.
Finally, there’s an outlier. We don’t cover EARN. However, it was frequently requested for this series. Consequently, I added it to the charts. The important part here is that EARN was never assigned a risk rating. Since it has no assigned risk rating, it got lumped in at the top. However, I do not believe EARN would actually get a higher risk rating than IVR.
This could probably be written better. If someone feels inclined to take it upon themselves to write a section that is objectively better at communicating these points, I would be interested in using it. I’m grateful to have the best readers in SA. I attribute this to self-selection bias. I include enough things to offend the dumb people that I’m left with the best readers.
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's 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 are factored into the earnings metrics, it's 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.
The REIT Forum | The REIT Forum | The REIT Forum |
Commercial Mortgage REIT Charts
The REIT Forum | The REIT Forum | The REIT Forum |
BDC Charts
The REIT Forum | The REIT Forum | The REIT Forum |
For further details see:
High Dividend Yields And Quick Notes