March could not end soon enough for publicly traded U.S. mortgage REITs.
Twenty companies started the month with market capitalization in excess of $1 billion; only eight ended it above that threshold as share price declines ranged from 23.6% at KKR Real Estate Finance Trust to 78.8% at Invesco Mortgage Capital Inc. amid broad-based worries that margin calls by repurchase agreement counterparties had, as AG Mortgage Investment Trust Inc. warned in a recent lawsuit against Royal Bank of Canada, brought mortgage REITs "to the brink of collapse." The sector had been, as Sachem Capital Corp. Chairman, President, CEO and CFO John Villano said during a March 31 conference call, "taken out to the woodshed."
But despite the intense, virtually unrelenting selling pressure, a handful of companies in the sector expressed guarded optimism as April begins.
AGNC Investment Corp. CEO and Chief Investment Officer Gary Kain said in a release that the volatility and lack of liquidity he witnessed in the agency mortgage-backed securities market reached levels he had not experienced through his 30-year career in the industry. Actions by the Federal Reserve that include substantial agency MBS acquisitions brought with them significantly improved valuations and stability for the broader mortgage market, he added.
The effects of the Fed's response and the actions taken by AGNC to strengthen its liquidity position have led Kain to believe that "the worst is behind us for our agency MBS portfolio." The company noted that its access to agency MBS repurchase agreement funding had not been interrupted and, unlike some of its peers, it had been able to timely meet all margin calls received. AGNC estimated March 31 that its tangible book value per common share had tumbled by between 25% and 30% on a year-to-date basis to between $12.35 and $13.25 through March 27.
Starwood Property Trust Inc. Chairman and CEO Barry Sternlicht reported in a March 27 letter to shareholders that his company had approximately $800 million in cash along with "additional sources of incremental liquidity." He expressed confidence that the company would emerge stronger from the crisis while confirming that a previously declared common stock dividend would be paid as originally scheduled.
"Crises can present unusual opportunities and while we are being prudent and judicious in this uncertain climate," Sternlicht wrote, "we look forward to deploying our significant financial resources and global footprint to take advantage of market dislocations as they continue to arise."
Still, there were plenty of negative headlines to go around.
Chimera Investment Corp. issued an estimated book value per share as of March 27. The midpoint of the stated range between $12.25 and $12.75 would mark a 22.6% drop from the company's reported result as of Dec. 31, 2019.
New Residential Investment Corp. disclosed that its estimated book value per share had fallen by between 25% and 30% on a year-to-date basis through March 27. Chairman, President and CEO Michael Nierenberg had estimated during a March 13 call that New Residential's book value had fallen by only 2% or 3% at that point, but he indicated that since then "market dislocations have put significant downward pressure on asset values."
Citing a desire to preserve liquidity, New Residential lowered its common stock dividend to 5 cents per share from what had been a rate of 50 cents per share for the previous 11 quarters. Among various other REITs that took similar action, Redwood Trust Inc. pushed back by more than two months the timing of its scheduled dividend payment, MFA Financial Inc. revoked a previously declared common stock dividend and Two Harbors Investment Corp. suspended its first-quarter dividend.
Sachem Capital, like most mortgage REITs, is also focused on capital preservation. The company, which specializes in originating and managing a portfolio of short-term loans for real estate investors, has tightened its underwriting requirements, capping loan-to-value ratios on new commitments at 50% as compared with 70% previously.
"Now is not the time to do anything crazy," Villano said. "We think the surviving entities here will do unbelievably well. And with that in our mind, it's play small and preserve your bullets. This is going to be a long battle and the man with the cash is going to win."