Weekly Series: mREIT And BDC Recommendations (And Price Targets) As Of 12/17/2023
Hi subscribers.
We aim to retain the same layout from week to week. The layout is carried over from last week.
This is one of those rare weeks where we have a modification in the layout. We’re testing an alternative layout.
The modification is moving parts where the view is “same as last week”.
It will be right after the last image. Why there? Because it’s pretty easy to find the last image while scrolling. I want it to still be easy to find.
The objective here is to emphasize the sections where something changed.
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Weekly Notes From CWMF
Positions:
No trades placed.
Commentary:
I went over some upcoming potential trades in an article late Thursday / early Friday.
Use the link for the platform you’re using:
Note: It’s the same article. Just hosted on each of our platforms.
I updated the preferred share tab. Two baby bonds were removed (AIC and AAIN), due to the upcoming delisting. That was referenced already in the articles linked above. The company still needs to pay principal and interest, but they lose the advantage of being easy public trading that comes with being listed.
I also adjusted two tickers:
EFC-D replaces AAIC-B
EFC-E replaces AAIC-C.
There’s a question that’s almost sure to come up:
Hey CWMF, why are the shares in such an absurd order?
EFC-E (formerly AAIC-C)
EFC-A
EFC-B
EFC-C
EFC-D (formerly AAIC-B)
That’s counterintuitive! Please make it alphabetical within reach REIT!
There’s actually a reason for the order, and I’ve applied the same logic to the rest of the shares.
For a REIT with multiple preferred shares, they are listed in order of:
“Earliest floating date to last floating date”.
The list makes perfect sense when viewed this way.
EFC-E: Floats 3/30/2024
EFC-A: Floats 10/30/2024
EFC-B: Resets (using 5-year Treasury) 1/30/2027
EFC-C: Resets (using 5-year Treasury) 4/30/2028
EFC-D: Fixed-rate share. No float or reset.
This method does not put the shares in alphabetical order, but I believe it conveys useful information for members. It facilitates quicker comparison and reduces errors when comparing shares. For instance, you would want to compare CIM-B to CIM-D before comparing it to CIM-C. That is simply because they start floating on the same day. Likewise, when you look at AGNCN, AGNCM, AGNCO, and AGNCP, it makes more sense to view the shares in the order the floating dates hit.
I would be open to changing this on subscriber feedback, but thus far the overwhelming response from members has been to continue sorting by floating date.
FBRT vs. SACH
The two finalists in voting were Franklin BSP Realty Trust (FBRT) and Sachem Capital Corp. (SACH). Scott will be looking at each of them and selecting one for coverage based on that research.
Weekly Notes From Scott
Positions: As noted in chat during the week, I sold my entire position in FSK, RCB, and TSLX. I initiated a position in GBDC with most of my FSK proceeds.
BDC Weekly Change: Continuing the recent trend, spreads very slightly tightened. A majority of peers had their quarterly dividend accruals this week. When both events are combined, weekly NAVs were relatively unchanged - very slightly decreased in applicable stocks.
BDC Other Comments: Similar to the prior 9 weeks, muted volatility in high yield/speculative-grade debt this week. Regarding weekly recommendation changes (mainly due to stock price and projected NAV changes), 3 downgrades occurred. This was mainly due to weekly stock price increases outpacing projected NAV changes. CSWC and PFLT moved from OVERVALUED/SELL to NOTABLY OVERVALUED/STRONG SELL. GBDC moved from UNDERVALUED/BUY to APPROPRIATELY VALUED/HOLD. With the continued market rally, valuations within the BDC sector are remaining “pricey” in some names. Just something to consider at this point.
Underlying Portfolio Company Credit Changes Held by BDCs (Weekly): 0 downgrades, 0 upgrades
Underlying Portfolio Company Credit Changes Held by BDCs (Current Quarter-to-Date):
This is a running tally of the credit upgrades and downgrades for companies held by each BDC.
ARCC: 1 Up (Small Investment), (1) Down (Small Investment)
FSK: (1) Down (Medium Joint Venture Investment)
MFIC: (1) Down (Small Investment)
OBDC: (2) Down (Medium Joint Venture Investment, Small Joint Venture Investment)
OCSL: (2) Down (Small Joint Venture Investment, Large Investment)
PSEC: (2) Down (Medium Investment, Large Investment)
SLRC: (1) Down (Very Small Investment)
TCPC: (1) Down (Medium Investment)
Underlying Portfolio Company Credit Changes Held by BDCs (Prior Quarter):
This is a running tally of the credit upgrades and downgrades for companies held by each BDC.
ARCC: 1 Up, (2) Down
CSWC: (2) Down
FSK: 1 Up, (1) Down
MAIN: 1 Up, (2) Down
OCSL: (1) Down
PFLT: 1 Up (JV Portfolio Company), (1) Down (Includes JV Portfolio Company)
PSEC: 3 Up (Includes 1 Restructuring), (3) Down (Including 1 Bankruptcy)
GBDC: (1) Down
SLRC: (1) Down
TCPC: 1 Up
OBDC: 1 Up, (1) Down (JV Portfolio Company)
TPVG: (1) Down (Declared Bankruptcy)
BDC View: Same as last week. (See repeated section
MREIT Weekly Change: For the 2nd straight week, all agency mREIT BVs slightly increased during the week (slightly varying degrees). Agency MBS spreads slightly tightened relative to underlying net (short) hedges. Most hybrid mREITs experienced slightly increasing weekly BVs (especially those with a low amount of net (short) hedges). The originator + servicer mREITs experienced slightly decreasing BVs as the quick, notable drop in rates/yields have continued to negatively impact MSR and MSR-related valuations to some extent. Commercial whole loan mREITs experienced very slightly decreasing BVs.
MREIT Other comments: Regarding weekly recommendation changes (mainly due to stock price and projected BV changes), 5 downgrades occurred. RC moved from NOTABLY UNDERVALUED/STRONG BUY to UNDERVALUED/BUY. BXMT, MFA, and RITM moved from UNDERVALUED/BUY to APPROPRIATELY VALUED/HOLD. NLY moved from APPROPRIATELY VALUED/HOLD to slightly OVERVALUED/SELL. This was mainly due to weekly stock price increases outpacing projected BV changes.
Regarding weekly agency mREIT BV movements, most agency MBS coupons experienced notable price increases (including a majority of specified pools; mainly HARP and LLB loans). Most (short) derivative instrument valuations modestly - notably decreased. Simply put, the vast majority of spread relationships I/we track (over 100 combinations) slightly tightened. Agency MBS spreads have now moved a good bit below the recent October 2023 highs (a positive catalyst/trend). As pointed out for weeks now, I correctly anticipated the severity of widening during late Q3 2023 - early Q4 2023 would be a relatively short-term event. I (or really anyone) just could not “pinpoint”, to the exact week, when the November 2023 reversal would begin to occur. This reversal continued into the 3rd week of December.
RC’s quarterly dividend decreased from $0.36 to $0.30 per common share which was disappointing. Along with this dividend reduction, management stated the company was continuing to experience a short-term earnings “swoon”; mainly in relation to the BRMK merger. Management continues to believe longer-term earnings will rebound. However, management provided the same exact reasoning (only a short-term earnings "swoon") on not notably cutting the dividend prior to the Q4 2023 dividend declaration. As such, there seems to be a change in management’s tone/expectations which is a bit disheartening. In addition, even if/when RC “outearns” the company’s new $0.30 per common share dividend in the future, management implied there would not be a future dividend raise in lieu of protecting book value and preserving capital. In light of these changes in tone/sentiment, RC received a (5%) recommendation range downgrade to account for the severity of the dividend cut and dimmer prospects of a raise down-the-road (earnings model also moved a bit lower). This decreased RC’s recommendation ranges by approximately ($0.75) per common share. This also resulted in a risk/performance rating downgrade from 3.5 to 4. RC still has a nice "cushion" on valuation but, yes, it narrowed some as a result of this downgrade (I always remain unbiased).
NYMT’s quarterly dividend decreased from $0.30 to $0.20 per common share which was also disappointing. I projected a dividend per share range of $0.25 - $0.30 per common share for Q4 2023. When calculated, NYMT has now reduced the company’s dividend per share rate by (50%) within only 3 quarters. Simply put, this is a negative catalyst/factor. NYMT has been an underperforming sub-sector peer for a while now which only solidifies prior downgrades to make this mREIT the most discounted sub-sector peer (and 2nd most discounted out of the 20 covered peers). This 2nd, notable dividend cut within just 3 quarters is making me a bit "antsy" regarding NYMT’s joint venture (“JV”) equity positions. NYMT is in the process of monetizing a good deal of these investments which likely is not turning out to be going well. These positions are low on the credit hierarchy (not 1st lien positions; subordinated). Even with NYMT’s recent shift into more agency RMBS recently, I would point out the company did not have existing interest rate payer swaps in place so net spreads remain an issue. As such, NYMT received a (2.5%) recommendation range downgrade to account for the severity of the dividend cut. This decreased NYMT’s recommendation ranges by approximately ($0.30) per common share. This also resulted in a risk/performance rating downgrade from 4.5 to 5.
The long-awaited AAIC merger vote was held on 12/12/2023. As correctly anticipated, the EFC/AAIC merger was approved. I/We are keeping AAIC in the subscriber spreadsheets (with an unchanged BV) through year-end. Simply put, just simpler this way. AAIC will be removed on or around 1/1/2024 and be replaced with a new mREIT covered common stock at such time. On this note, the final round of the new mREIT common stock coverage vote to replace AAIC closed on Saturday (within the chat feature of the REIT Forum). The 4 finalists were FBRT, LADR, SACH, and BRSP. By a wide margin, FBRT and SACH received the most votes (see my recent chat note regarding final vote tallies). I will perform a “deep dive” analysis on both companies to choose which mREIT represents the best value-oriented investing opportunity (along with considering assigning a risk/performance rating). My final decision, regarding either choosing FBRT or SACH to be added to our mREIT full coverage list, will be in approximately 1 week. *I will provide some reasoning, within a chat note, regarding my choice when the time comes.*
CWMF Interjects: It will be in chat for Seeking Alpha and in an article on our website. This provides a convenient option for members who don’t like using chat.
MREIT View: Same as last week. (See repeated section)
Public Disclosures
Our positions related to the sector:
CWMF is long: RITM-D, GPMT-A, DX-C, EFC-A, RITM-C, EFC-B, PMT-C, PMT-B, CIM-B, AGNCP, CIM-D, RITM-B, RITM, SLRC, GPMT, RC
Scott Kennedy is long: RITM, RC, SLRC, GPMT, ARCC, GBDC, RITM-D, MITT-B, MITT-C, GAINL, ECCC, ECCW.
Note: The paid version shows the sizing of each position (further down in the article).
Weekly Recommendations
NOTE: This article is usually published Sunday evening or Monday morning. Sometimes it takes a bit longer.
The updates below were live in the spreadsheets by Sunday night, so the delay is just in preparing and posting this article.
The section below is reserved for paid members of our site.