Mortgage REITs trade at premium on income demand
The guest argued that mortgage REITs like Annaly and AGNC are trading at unusual premiums to book value due to intense investor demand for yield.
The argument
The guest noted that while most REITs typically trade at a discount to book value, these specific mortgage REITs are trading above book value with betas above one. He expressed a preference for Annaly due to its strong position in mortgage servicing rights, which act as a negative duration asset that hedges against rising interest rates.
The thesis, stress-tested
✓ What validates it
- ✓Continued premium pricing relative to book value in quarterly reports
- ✓Stable or growing dividend distributions from mortgage servicing cash flows
▸ Risks discussed
- ▸Trading at a premium to book value is historically abnormal and could revert
- ▸High betas above one indicate elevated volatility
Hear it yourself
"But AGNC is the same way. PennyMac Mortgage Trust, all of these REITs, which are mostly income vehicles, are trading at betas above one. We talked about this last week. And they are also, trading above book, which is not normal. Most REITs trade at a slight discount to book value."
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