Get ready for charts, images, and tables because they are better than words. The ratings and outlooks of highlight here come after Scott Kennedy’s weekly updates in the REIT Forum. Your continued feedback is greatly appreciated, so please leave a comment with suggestions.
It’s that time of year again. The time when opportunity knocks. Today’s opportunity is called Granite Point Mortgage Trust (GPMT). GPMT is one of the commercial mortgage REITs and it trades at a substantial discount to current estimated book value. The company provided a preview of their Q1 2022 earnings, so there is even less mystery about the upcoming results. Shares trade at about 60% of current estimated book value. That’s low. While GPMT should probably be trading below book value, they shouldn’t be that cheap.
We’ve gone fishing in GPMT before and the results have been pretty good:
The first two trades ended up pretty mediocre, but the entire sector was having a rough time. However, the subsequent trades turned out much better. I don’t expect anything comparable to the results of our 9/25/2020 investments in GPMT, but we’ve got a good chance to catch some upside. If investors think such a large discount to book means shares are not investable, they only need to look at our purchases from September 2020. The discount at that point was massive yet shares thoroughly recovered.
GPMT vs. BXMT
Well, GPMT isn’t as good as Blackstone Mortgage Trust (BXMT). Pound for pound (book value), BXMT is a better REIT. However, dollar for dollar (share price), GPMT is offering more returns. If you were going to buy one of the REITs at book value, you’d rather have BXMT. However, you do not get that choice. You could buy BXMT at about 10% over book value or GPMT about 40% below it.
In other words, you could invest $ 1,000 in BXMT and get about $ 910 of book value. Or you could invest $ 1,000 in GPMT and get about $ 1,667 of book value. That’s a big difference and it tilts the risk / reward profile significantly. You do not have the option to invest $ 1,000 and get $ 1,667 of BXMT’s book value. That choice does not exist.
When GPMT provided their preliminary figures for Q1 2022, Scott Kennedy wrote:
Hi subscribers, GPMT threw a bit of a curveball after the market close and provided “preliminary earnings results” for Q1 2022 (along with announced refinancings). Slight outperformance on GPMT’s BV as of 3/31/2022 (less severe BV decline by 1.5% -2%) while GPMT’s core earnings estimate is $ 0.04 – $ 0.06 per common share. More importantly, GPMT’s adjusted core earnings estimate of $ 0.23 – $ 0.25 per common share is basically an exact match to my previous projection of $ 0.245 per share. As such, without a full “dive” into earnings, no notable surprises on the disclosed information today. These specific refinancings are a slight positive catalyst / factor. That said, they were already anticipated at some point during 2022. I’ll fully analyze GPMT’s results upon their “official” reporting date on 5/10/2022. From today’s disclosed data, no change in percentage recommendation ranges or risk rating. Hope this helps with subscribers’ assessments / strategies.
That looks good for a REIT trading at only 60% of book value.
GPMT also provides a big dividend yield at 10.3%. While we can’t forecast years into the future, because that’s not how mortgage REITs work, we can say it looks pretty good currently. Even if we see a brief dip in earnings with movements in interest rates, it shouldn’t derail the REIT.
The GAAP numbers look a bit less appealing due to charges for early extinguishment of debt as GPMT looks to improve their funding.
You can see the loss on extinguishment of debt for Q4 2021 in the slide from that quarter:
That isn’t a loss on someone failing to repay them. It’s the way accounting handles their prepayment of their own debts.
In GPMT’s Q1 2022 preview management said:
So those charges will still be there, but it won’t go on forever.
Why is GPMT repaying those debts early if they have to recognize a loss on doing it? I’ll let management explain:
The refinancings released a substantial amount of capital on favorable terms, which we intend to use to make new loan investments, further repay higher cost corporate debt, and for other corporate purposes, as we continue to actively manage our balance sheet. This significant step is part of the ongoing actions we have been taking to improve the efficiency of our balance sheet. We expect these activities to improve our run-rate profitability by lowering our funding costs and generating additional income from new loan investments; and they should help reduce the impact of higher short-term interest rates on our earnings and better position us to benefit from rising rates in the second half of the year. Supported by the strong performance of our investment portfolio and positive credit migration, we believe Granite Point is well-positioned to create value for our stockholders.
That quote comes from the preliminary Q1 2022 announcement.
The market has seen a little bit of difficulty and pretended it was a mountain. The result is a favorable risk / reward profile. As usual, we look for opportunities where the deck is stacked in our favor. I picked up my most recent position at $ 9.71 per share late last week. As luck would have it, GPMT closed at $ 9.71 again today so that same price is still available.
The rest of the charts in this article may be self-explanatory to some investors. However, if you’d like to know more about them you’re encouraged to see our notes for the series.
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:
Let the images begin!
Residential Mortgage REIT Charts
Note: We are modeling some significant changes to BV since 12/31/2021 and some management teams have already publicly indicated a material change in BV per share. The chart for our public articles uses the book value per share from the latest earnings release. Current estimated book value per share is used in reaching our targets and trading decisions. It is available in our service, but those estimates are not included in the charts below.
Source: The REIT Forum
Commercial Mortgage REIT Charts
Preferred Share Charts
Preferred Share Data
Beyond the charts, we’re also providing our readers with access to several other metrics for the preferred shares.
After testing out a series on preferred shares, we decided to try merging it into the series on common shares. After all, we are still talking about positions in mortgage REITs. We do not have any desire to cover preferred shares without cumulative dividends, so any preferred shares you see in our column will have cumulative dividends. You can verify that by using Quantum Online. We’ve included the links in the table below.
To better organize the table, we needed to abbreviate column names as follows:
- Price = Recent Share Price – Shown in Charts
- BoF = Bond or FTF (Fixed-to-Floating)
- S-Yield = Stripped Yield – Shown in Charts
- Coupon = Initial Fixed-Rate Coupon
- FYoP = Floating Yield on Price – Shown in Charts
- NCD = Next Call Date (the soonest shares could be called)
- Note: For all FTF issues, the floating rate would start on NCD.
- WCC = Worst Cash to Call (lowest net cash return possible from a call)
- QO Link = Link to Quantum Online Page
Our goal is to maximize total returns. We achieve those most effectively by including “trading” strategies. We regularly trade positions in the mortgage REIT common shares and BDCs because:
- Prices are inefficient.
- Long-term, share prices generally revolve around book value.
- Short-term, price-to-book ratios can deviate materially.
- Book value is not the only step in analysis, but it is the cornerstone.
We also allocate to preferred shares and equity REITs. We encourage buy-and-hold investors to consider using more preferred shares and equity REITs.
We compare our performance against 4 ETFs that investors might use for exposure to our sectors:
The 4 ETFs we use for comparison are:
One of the largest mortgage REIT ETFs
One of the largest preferred share ETFs
Largest equity REIT ETF
The high-yield equity REIT ETF. Yes, it has been dreadful.
When investors think it is not possible to earn solid returns in preferred shares or mortgage REITs, we politely disagree. The sector has plenty of opportunities, but investors still need to be wary of the risks. We can’t simply reach for yield and hope for the best. When it comes to common shares, we need to be even more vigilant to protect our principal by regularly watching prices and updating estimates for book value and price targets.