Charles Lewis Sizemore, CFA

About the Author Charles Lewis Sizemore, CFA

Charles Lewis Sizemore, CFA is the founder and principal of Sizemore Capital Management LLC, a registered investment advisor. Charles has been a repeat guest on CNBC, Bloomberg TV and Fox Business News, and has been quoted in Barron’s Magazine, The Wall Street Journal and The Washington Post. He is a contributor to Forbes Moneybuilder, and has been featured in numerous publications and well-reputed financial websites, including MarketWatch, SmarterAnalyst,, InvestorPlace, GuruFocus, MSN Money, and Seeking Alpha. He is also the co-author, along with Douglas C. Robinson, of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy (iUniverse, 2008). Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. He also maintains the Chartered Financial Analyst (CFA) designation in good standing.

Valuation Update On Mortgage REITs And BDCs

In October, I wrote that mortgage REIT dividends had stabilized and that many were trading below book value. As we enter 2015 much the same way we entered 2014 – with fears of rising rates and an overheated stock market – I wanted to revisit the table I prepared in my October comprehensive portfolio review.

REIT Ticker Weight Book Value Market Price Discount/
Annaly Capital NLY 17.52% $12.87 $10.91 0.85 10.60%
American Capital Agency AGNC 12.92% $22.08 $25.57 1.16 11.80%
Starwood Property Trust STWD 8.41% $17.31 $23.20 1.34 8.20%
Northstar Realty Finance NRF 6.84% $10.06 $17.70 1.76 9.10%
Tow Harbors Investment Corp TWO 5.85% $11.25 $10.12 0.90 10.20%
Colony Financial CLNY 4.99% $22.36 $24.38 1.09 6.00%
Chimera Investment Corp CIM 4.79% $3.50 $3.28 0.94 10.70%
MFA Financial MFA 4.27% $8.08 $8.06 1.00 9.70%
New Residential Investment Corp NRZ 3.84% $11.14 $12.72 1.14 10.60%
Invesco Mortgage Capital IVR 3.50% $19.22 $15.57 0.81 12.60%

Mortgage REITs are not quite the value they were this time last year or even as recently as October. Taking a simple average of the mortgage REITs in the table – which represent the top ten portfolio holdings of the Market Vectors Mortgage REIT Income ETF (NYSEARCA:MORT) – we see the sector trading at book value and yielding 10.0%.

Still, even trading at book value, mortgage REITs are far from expensive. MREITs generally trade at a significant premium to book value (see chart). Many of these mREITs have short trading histories, but Annaly Capital(NYSE:NLY), the granddaddy of the sector and the largest by market cap, has spent virtually the entire period from 2000 to 2013 well above book value.

Dividend cuts are a distinct possibility. But worrying about those today is a case of closing the barn door after the horse has already bolted. Annaly cut its dividend in June and September of 2013 but kept it steady last year.American Capital Agency (NASDAQ:AGNC) cut its dividend aggressively in October of last year. Two Harbors Investment Corp (NYSE:TWO) modestly cut its dividend last year. Bucking the trend, Starwood Property Trust(NYSE:STWD) actually raised its dividend in 2014.

Could further dividend cuts be on the way in 2015? Sure. It’s a real possibility, particularly if the Fed follows through with raising short-term rates. But with yields averaging 10.0%, we have quite a bit of wiggle room.

I expect to see mortgage REITs deliver something along the lines of 20% total returns (capital gains + dividends) this year. Let’s say I’m overly optimistic and the returns end up being closer to 10%. That’s still better than what I expect the U.S. market to deliver given current valuations. U.S. stocks trade at 27 times cyclically-adjusted earnings, making them 63.9% higher than their long-term average and implying annual returns over the next eight years of just 0.3%. Given the choice between overpriced U.S. stocks and modestly undervalued mREITs, I’ll choose mREITs.

The same logic applies to business development companies (“BDCs”). Let’s look at the largest holdings of the UBS ETRACS Wells Fargo Business Development Company ETN (NYSEARCA:BDCS).

BDC Ticker Weight Book Value Market Price Discount/Premium Yield
American Capital Ltd ACAS 10.1% $20.54 $14.65 0.7 0.0%
Prospect Capital Corp PSEC 9.9% $10.45 $8.36 0.8 9.5%
Ares Capital Corp ARCC 9.8% $15.72 $15.72 1.0 9.6%
Apollo Investment Corp AINV 8.3% $8.69 $7.48 0.9 10.6%
Main Street Capital Corp MAIN 5.4% $20.75 $29.05 1.4 7.0%
Fifth Street Finance Corp FSC 5.4% $10.06 $8.05 0.8 13.7%
Hercules Technology Growth Capital Inc HTGC 3.6% $9.92 $14.89 1.5 8.3%
TPG Specialty Lending Inc TSLX 3.6% $15.16 $16.68 1.1 9.3%
Solar Capital Ltd SLRC 3.3% $22.74 $18.19 0.8 8.8%
Pennant Park Investment Corp PNNT 3.1% $12.12 $9.60 0.8 11.5%
Golub Capital BDC Inc GBDC 3.1% $16.11 $17.73 1.1 7.2%

Taking a simple average, the top BDC holdings sport a dividend yield of 8.7.% and trade slightly below book value. But as was the case with mortgage REITs, BDCs often trade at a significant premium to book value.

BDC valuations fell off a cliff during the 2008 meltdown before recovering into 2010. But the overall trend in price/book valuation has been down. As a group, this is the cheapest the BDC sector has been since the crisis.

Can cheap sectors get cheaper? Of course. But given the alternatives in a broadly overpriced market, I’ll gladly take the 8.7% dividends on offer from BDCs

According to, which measures analysts’ and bloggers’ success rate based on how their calls perform, blogger Charles Sizemore has a total average return of 7.3% and a 67% success rate. Charles Sizemore is Ranked #405 out of 4096 Bloggers

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