Mortgage REITs in Disfavor: Granite Point vs Sachem Capital

Granite Point Mortgage Trust and Sachem Capital are both mortgage REITs with public preferreds trading at discounts to their $25 per share liquidation value. Sachem Capital has a higher yield of 11%, making it a more attractive option for investors looking for higher returns.

Granite Point Mortgage Trust (NYSE: GPMT) and Sachem Capital (NYSE: SACH) are both mortgage Real Estate Investment Trusts (mREITs) that have been trading at discounts to their $25 per share liquidation values. This discount has created an opportunity for investors seeking discounted fixed-income securities. Sachem Capital, in particular, has a higher yield of 11%, making it an attractive option for those looking for higher returns.

Both mREITs distribute the same quarterly cash dividend of $0.05 per share, but they trade at vastly different yields. Sachem Capital's annualized distribution of $0.20 per share results in a 19% dividend yield, while Granite Point Mortgage Trust's annualized distribution of $0.20 per share results in a 6.7% dividend yield. This significant yield disparity is notable, especially given the fact that Sachem Capital's preferred stock, the 7.75% Series A Preferreds (NYSE: SACH.PR.A), offers an 11.17% current yield, compared to Granite Point Mortgage Trust's 7.00% Series A Fixed-to-Floating Rate Preferreds (NYSE: GPMT.PR.A) with an 8.6% current yield.

The primary reason for the disparity in yields is the discount to book value. Granite Point Mortgage Trust's discount to book value per share is 62%, or 38 cents on the dollar, with a net asset value (NAV) per share of $7.99 as of the end of the second quarter. In contrast, Sachem Capital's book value per share is $2.54, with common shares trading at a 59% discount, or 41 cents on the dollar.

Another factor contributing to the yield disparity is the credit quality and portfolio composition of the mREITs. Sachem Capital focuses on originating secured short-term loans, typically between 12 to 36 months, for real estate investors involved in residential development projects. Granite Point Mortgage Trust owns a blended portfolio of credit collateralized by a range of commercial real estate, with 43.9% of its portfolio from office properties and 32.9% from multifamily properties as of the end of its second quarter.

The credit loss allowance (CECL) as a percentage of the loan portfolio has been declining for Granite Point Mortgage Trust, dropping 70 basis points sequentially to 8.1% at the end of the second quarter. Sachem Capital's CECL was 4.62% of its loans held for investment, with the mREIT seeing its real estate owned (REO) essentially flat versus the start of the year as of the end of its second quarter.

Both mREITs are currently facing headwinds with negative earnings per share (EPS) and cash from operations. Sachem Capital recorded positive cash from operations of roughly $500,000 during the second quarter, while Granite Point Mortgage Trust reported negative cash of $710,000. Sachem Capital's substantial liquidity position provides a hedge against potential risks.

The outlook for both mREITs is influenced by the Federal Reserve's (Fed) rate cuts. Sachem Capital's portfolio has a weighted average term to maturity of 6 months, providing a backdrop for the mREIT to optimize its broad exposure against a constant stream of repayments. Granite Point Mortgage Trust's preferreds are floating at Three-Month SOFR plus 5.83% per year, set to float from November of next year. The outlook of rate cuts would mean their implied yield would be lower than it currently stands.

In conclusion, while Sachem Capital's preferreds offer a higher yield and a greater total return potential on a recovery of credit conditions, investors should be cautious due to the risks associated with the mREIT's double-digit dividend yield. Granite Point Mortgage Trust's preferreds, while offering a lower yield, provide a more stable investment option with a lower risk profile.

References
Granite Point Or Sachem Capital: I Went With Sachem's 11% Yielding A Preferreds^[1] https://seekingalpha.com/article/4825057-granite-point-or-sachem-capital-i-went-with-sach-11-percent-yielding-a-preferreds