DOW JONES & COMPANY, INC. 12:19 PM ET 4/2/2020
Symbol Last Price Change
MITT 2.09 -0.21 (-9.13%)
MFA 1.08 -0.2 (-15.62%)
NYMT 1.197 -0.093 (-7.21%)
IVR 2.68 -0.13 (-4.63%)
QUOTES AS OF 01:20:17 PM ET 04/02/2020
Four publicly traded vehicles that invest in residential mortgages are now “in limbo,” says Keefe, Bruyette & Woods.
One challenge for would-be investors now is figuring out how much value would be left in the worst-case scenario — if the vehicles liquidate.
U.S. mortgage real-estate investment trusts had a rough March, falling 57% on aggregate. Because mortgage REITs use leverage to boost their yields, severe market volatility took an especially large toll on that sector as some of those firms were forced to unwind trades and sell securities. That forced selling further depressed the price of the mortgages they use as collateral.
Eventually, four mortgage REITs announced that they could not meet margin calls, and had to, in effect, default on their side of short-term funding trades: AG Mortgage Investment Trust(MITT) , MFA Financial(MFA) , New York Mortgage Trust(NYMT) , and Invesco Mortgage Capital(IVR) .
Those four firms said they were asking their lenders for leniency in those funding trades. Bankruptcy filings are not likely, KBW says, primarily because a court won’t provide much help for the lenders or borrowers in this scenario. The claims in question — the repurchase or “repo” agreements that mortgage REITs use to add leverage — aren’t automatically paused like other claims in case of a bankruptcy, according to the firm.
But some of the trades’ contracts include provisions that could push a REIT into liquidation, according to KBW. So the analysts looked at what value could be left in those REITs if the worst-case scenario came to pass and they were forced to liquidate:
— AG Mortgage Investment Trust(MITT) : Notably, AG Mortgage has filed a legal challenge to lender RBC’s decision to seize its collateral, and appears to be the only mortgage REIT to file such a challenge so far, according to KBW. At the same time, the analysts say they are “most cautious” about whether any value will be left over in AG Mortgage’s common stock or preferred stock “unless there were meaningful portfolio composition changes that took place” since the end of 2019.
— MFA Financial(MFA) : KBW is most optimistic about the value of MFA’s $230 million of convertible bonds maturing on June 15, 2024. The convert — which has a 6.25% coupon — is trading at 60 cents on the dollar. That leaves better potential return than the common shares, since shareholders “aren’t getting paid along the way to shoulder the uncertainty surrounding lender forbearance agreements.” The analysts are also bullish on MFA’s baby bond (MFO), and slightly less bullish on its preferred stock.
— New York Mortgage Trust(NYMT) : The company’s common shares would be left without value if the company’s current assets are sold with a 30% discount or “haircut,” KBW says, assuming the REIT’s leverage is the same as it was at the end of last year. The analysts think the company’s unsecured debt and preferred stock could have a better outcome, however.
— Invesco Mortgage Capital(IVR) : Invesco hasn’t reported valuation estimates or other details around its asset sales, KBW says. The analysts do think that REIT’s assets will get written down by only 7% for every 10% that other REITs’ assets get written down, since three-quarters of its portfolio was made up of agency mortgage-backed securities, which the Federal Reserve is now buying.
Invesco and MFA Financial(MFA) declined to comment on the KBW report. AG Mortgage and New York Mortgage(NYMT) did not immediately respond to requests for comment.
All four mortgage REITs have sold assets to raise cash. But it isn’t yet clear how much of the declines in their book values were the result of selling assets at a loss, rather than selling higher-valued assets and marking down the value of the rest of their books. (Marked-down asset prices can recover, but low sale prices are permanent.)
For now, at least, KBW thinks that most of the REITs’ lenders will agree to hold off on seizing their collateral for an agreed-upon period.
“We think it’s rational that most lenders would likely be patient and flexible given the current circumstances,” the firm writes. “We note significant overlap in mortgage REIT repo lenders concentrated at global money-center banks.”
The longer that lenders agree to hold off on collecting, the more chance prices of the REITs’ mortgage-backed securities will recover — and with them the value of the REITs’ shares.
In any event, investors will get a better view of what securities the REITs still own — and how much those securities are worth — when detailed portfolio holdings are reported.