Todd Shaver is a leading growth and income specialist; here, the editor of Bull Market Report reviews three recommendations from his model portfolio that operate in the mortgage market.
Leading mortgage real estate investment trust AGNC Investment (AGNC) released its second quarter results, reporting $315 million in revenues, up 36% YoY, compared to $232 million a year ago. The company posted a profit, or funds from operations (FFOs) of $435 million, or $0.83 per share, as against $400 million, or $0.76.
The mortgage REIT’s book value declined during the quarter to $11.43 per share, compared to $13.12 at the end of the previous quarter. This was owing to the weakness in the agency mortgage-backed securities market, and the anticipation of higher short-term rates driven by fears of a recession, all resulting in substantially high interest rate volatilities during the quarter.
The firm ended the quarter with a portfolio of $61 billion, with $44 billion in agency mortgage-backed securities, $16 billion in to-be-announced mortgage positions, which are essentially forward trades for mortgage settlements, and $2 billion worth of credit risk transfer and non-Agency securities.
AGNC is down by over 18% YTD, and 25% from its peak in October; this has pushed the current yield to 11.4%, and the stock trades at just a 10% premium to book value, making it a great opportunity to get in. With robust liquidity, consisting of $10 billion in cash, and $44 billion in debt, it remains well positioned to make the most of these opportunities.
One of the largest mortgage real estate investment trusts, Annaly Capital Management (NLY) released its second quarter results, reporting $480 million in revenues, up 48% YoY, compared to $320 million a year ago. The profits, or funds from operations during the quarter stood at $460 million, or $0.30 per share, against $430 million, or $0.29 per share during the same period last year.
Like most mREITs, Annaly saw its book value drop 13% during the quarter, resulting in a negative economic return of 9.6% as spreads widened, and interest rate volatility continued to roil operations. The company, however, posted a stellar beat on top and bottom lines, and generated earnings that exceeded dividends by 135%.
Despite a challenging environment during the quarter, the clarity on the Federal monetary front, along with the historically attractive spreads should yield higher total returns in the future. After a 14% fall YTD, Annaly shares provide a yield of 12.8%, with excellent dividend coverage, all the while trading at a healthy premium to book.
Rithm Capital (RITM), formerly known as New Residential Investment, also released its second quarter results, posting $1.3 billion in revenues, up almost triple YoY, compared to $450 million a year ago. Profits during the quarter remained strong at $145 million, or $0.31 per share.
The real estate investment trust’s approach to rebalancing its portfolio with the perfect mix of originations, MSRs, companies, and assets, has resulted in a decrease in book value of just 2.2% QoQ. This makes Rithm an outlier among leading mREITs, most of which have posted drastic erosion in book values in face of rising interest rates, an inverting of the yield curve, slowing real estate sales, and a looming recession.
The stock remains down by over 7% YTD, even after a significant bounce from the low in June. Rithm Capital represents a stellar opportunity for future gains with yields nearing 10%, good coverage on the dividend, substantial value and synergy gains in recent quarters, as its various operating companies come under the purview of internalized management. The future looks bright. We have confidence in management and are confident that book value of $12.28 will increase into the mid-teens in the next 1-2 years.
