I understand the sell off in many mREITs, but these are not all the same and some won't see hits to their BVs, nor will they be cutting dividends. TWO is one such mREIT. It was one of the few that reported higher BVs and its 32 cent dividend looks safe. There's no reason for this to trade at 10% discount to BV.
Per Credit Suisse:
The key to the mortgage real-estate-investment-trust sector right now is book-value preservation.
Given the relative strength of the non-Agency mortgage-backed-securities (MBS) market (recent weakness notwithstanding), hybrid mortgage real-estate investment trusts (REITs) have been able to withstand the volatility of the market better. This protection of book value leaves the hybrid mortgage REITs in a better position to continue to deliver returns and potentially take advantage of the better spread environment on Agency MBS today.
Two Harbors Investment (ticker: TWO) remains our top pick among residential-mortgage REITs.
Interest rates and the Agency MBS market continue to be volatile; this is leading to continued book-value volatility for the mortgage REITs. On average book values are down an additional 2.6% from our May 28 update. While there has been some recent softness in non-Agency prices, the hybrid mortgage REITs continue to fare better than the Agency-focused REITs.
Our book-value estimates referenced above represent a status quo assumption of portfolios from the end of the first quarter. The mortgage REITs could have reduced leverage (most effective) or added hedges to help mitigate the book-value impact during the quarter. Along these lines, Two Harbors disclosed recently that it had gone from over $2 billion long to-be-announced (TBA) position to over $2 billion short TBA position during the second quarter. This action, coupled with its hedges, is why we feel comfortable that Two Harbors has protected book value better than its peers.
Thanks for the info. I just bought a small chunk of TWO for the reason you put forth. I was wondering about MTGE; I think they are a hybrid also and have been hammered so much the div is now about 18%. What do you think?
MTGE is supposed to be a hybrid, but every dollar from the Fed offering when into agency paper -- ATM stuff. Although the premium on ATM stuff is lower, MTGE will take a hit in BV. Whether or not this is priced in is not known to me. I got out of MTGE at $24. It's tempting to get back in at $20, but the volatility may continue. Imagine what happens in six months when the Fed backs off on buying MBS and we see mortgage rates (e.g. 30Y fixed) rise to say 4.5% or 5%? The mgmt at AGNC and MTGE are very good. Right now, I'm not comfortable getting back into MTGE.
I still own hybrid mREITs TWO, IVR and NRZ, as well as some AGNCP. I think I have more than enough exposure to this sector.
Could you please give me a date for the Credit Suisse statement quoted. I assume that it was within the past week or so. Also, if you have a reference of where to find the statement/article, I for one would appreciate it.
There are other problem with TWO and the mREIT sector. People will see lots of cut-backs in dividends and falls in BV over the next few months.
It's very likely that TWO dips into the single digits.
You have no facts to support this kind of statement. The sell off in the market is based on fear -- mostly becasue people do not understand how to value something like this.
House prices have risen over the past year -- that's good for TWO's subprime bonds. They are getting into MSRs -- another good source of income.