Mortgage REITs Declining Volatility Leads to Stable 1Q Book Values; TWO and PMT Remain Top Picks

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1 Credit Suisse Equity Research Americas/United States Mortgage REITs Declining Volatility Leads to Stable 1Q Book Values; TWO and PMT Remain Top Picks March 7, 2017 RESEARCH ANALYSTS Douglas Harter, CFA Research Analyst (212) Sam Choe Research Associate (212) Josh Bolton Research Associate (212)

2 Mortgage REITs 1. TWO, PMT Remain Top Picks Volatility has declined so far in the first quarter providing a favorable environment for the mreits to deliver an attractive economic return. However, with the sector trading at 96% of book value we don t see this as a time to take increased risk with stock selection. TWO and PMT remain our top picks in the sector as both have low sensitivity to rising rates, have multi-faceted earnings streams that should outperform in volatile rate environments, and are trading cheap relative to peers on P/B multiple. 2. Adjusting Estimates Following a review of our models following 4Q earnings and incorporating a change in our assumptions around short-term rates (3 hikes in 2017) we are modestly reducing our 2017 and 2018 core EPS estimates; in addition we are establishing 2019 estimates. Our estimates are the furthest below consensus for Underperform rated CYS and NYMT. 3. Book Value On average we expect book values to be flat to modestly positive through February as the decline in volatility has resulted in a benign environment. As this period has included the full pricing in of a March rate hike we view this performance favorably. Inclusive of the dividend we expect a 3.3% total economic return for the quarter. 4. Access to Capital With the improvement in valuation for the sector we have seen increase in the amount of capital raised by the sector since December. For the residential mreits this has taken place in the form of converts ($410 million) and preferred stock ($415 million). We view this trend as favorable given the cheaper cost of capital relative to the investment opportunities. 5. Target Price Changes We are raising target prices for 5 out of 18 residential mreits in our coverage. We are also establishing Blue/Grey Sky (Upside/Downside) target prices, to better frame the risk/return of this sector. From a total return perspective we see the risk/reward landscape as fairly balanced at the moment. See slide 8 for our Blue Sky/Grey Sky scenarios. 1

3 Earnings Estimates We are updating our 2017 and 2018 earnings estimates post-4q earnings releases and factoring in one incremental rate hike in 2017 vs. our previous estimate. We are also establishing 2019 estimates. 2017E 2018E 2019E CS Old CS Consensus CS Old CS Consensus CS Consensus AGNC $2.40 $2.35 $ $2.25 $2.23 $2.15 $2.25 AI - $2.40 $2.46 $2.20 $2.25 $2.32 $ ANH $0.56 $0.52 $0.56 $0.58 $0.48 $0.58 $ ARR $2.50 $2.45 $ $2.15 $2.12 $ CIM - $2.50 $ $2.50 $2.39 $ CYS $0.75 $0.80 $0.95 $0.60 $0.65 $0.89 $ DX - $0.77 $ $0.66 $0.70 $ EARN $1.80 $1.75 $1.77 $1.70 $1.65 $1.72 $1.60 $1.78 EFC - $1.18 $ $1.40 $1.49 $ IVR $1.65 $1.50 $ $1.60 $1.58 $ MFA $0.72 $0.65 $0.77 $0.72 $0.65 $0.78 $ MITT - $1.75 $ $1.80 $1.77 $ MTGE - $1.80 $ $1.80 $1.74 $1.70 $1.71 NLY $1.15 $1.16 $1.17 $1.00 $1.08 $1.12 $1.00 $1.16 NYMT - $0.50 $ $0.60 $0.62 $ PMT - $1.85 $ $1.95 $1.73 $2.00 $1.67 TWO - $1.00 $ $1.05 $0.99 $ ¹Switched to using economic book value, accounting for the goodwill on the balance sheet. Source: Company data, Credit Suisse estimates, Thompson Reuters 2

4 Short Term Rates Our mreit estimates now assume 3 rate hikes (March, September, December) in 2017, from 2 previously. Our 2018 and 2019 estimates assume 3 and 2 additional hikes. Our estimates for short term rates are relatively in line with Fed Funds futures. Rate Expectations (as of 3/6) 2.50% 2.10% 2.00% 1.50% 1.40% 1.00% 0.50% 0.00% 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 CS Est Fed Funds Futures Fed Dots (Dec Meeting) Source: Locus, Company data, Credit Suisse estimates 3

5 Book Value Update % Change 1Q16 2Q16 3Q16 4Q16E 1Q17E 4Q/3Q 1Q/4Q Y/Y AG Mortgage MITT $17.22 $17.42 $18.49 $17.86 $17.88 (3.4%) 0.1% 3.9% AGNC Investment¹ AGNC $22.09 $20.54 $21.23 $19.50 $19.48 (8.2%) (0.1%) (11.8%) Annaly NLY $11.61 $11.50 $11.83 $11.16 $11.26 (5.7%) 0.9% (3.0%) Anworth ANH $6.00 $6.06 $6.25 $5.95 $5.90 (4.8%) (0.9%) (1.7%) Arlington Asset (ex-dta) AI $14.45 $13.92 $14.63 $13.11 $13.03 (10.4%) (0.6%) (9.8%) Armour ARR $24.48 $25.67 $27.87 $24.39 $24.75 (12.5%) 1.5% 1.1% Chimera CIM $15.52 $15.78 $16.18 $15.87 $16.11 (1.9%) 1.5% 3.8% CYS Investment CYS $9.46 $9.55 $9.79 $8.33 $8.38 (14.9%) 0.7% (11.4%) Dynex DX $7.54 $7.69 $7.76 $7.18 $7.17 (7.5%) (0.1%) (4.9%) Ellington Financial EFC $20.63 $20.31 $19.83 $19.50 $19.63 (1.7%) 0.7% (4.8%) Ellington Residential EARN $15.39 $15.38 $15.70 $15.52 $15.41 (1.1%) (0.7%) 0.1% Invesco Mortgage IVR $16.53 $17.08 $18.08 $17.48 $17.59 (3.3%) 0.6% 6.4% MFA Financial MFA $7.17 $7.41 $7.64 $7.62 $7.66 (0.3%) 0.5% 6.8% MTGE Investment MTGE $19.03 $19.47 $20.55 $19.17 $19.10 (6.7%) (0.4%) 0.4% New York Mortgage NYMT $6.49 $6.38 $6.34 $6.13 $6.03 (3.3%) (1.6%) (7.1%) PennyMac PMT $20.59 $20.09 $20.21 $20.13 $20.13 (0.4%) 0.0% (2.3%) Two Harbors TWO $9.70 $9.83 $10.01 $9.78 $9.87 (2.3%) 0.9% 1.7% Mortgage REITs avg (4.6%) 0.5% (2.1%) ¹Switched to using economic book value, accounting for the goodwill on the balance sheet. Source: Company data, Credit Suisse estimates, Locus 4

6 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 Book Value: Volatility Moderating Following the spike in MBS volatility in November, we have seen Agency assets volatility come down to pre-election levels. Additionally, implied interest rate volatility measured by the price of swaptions has been declining. We think these two factors will contribute to more muted book value swings this quarter. 1Y x 10Y Implied Vol (Swaption prices) FN 30yr 3.0% performance vol (vs Swap Curve) Source: LOCUS 5

7 Book Value Risks The 2 biggest risks to book value in 2017 are 1) continued rise in long rates and 2) Agency MBS spread widening. Sensitivity to 100 bp move in rates 0.0% TWO NYMT EFC MFA EARN MITT AI MTGE DX ARR IVR ANH CIM AGNC NLY CYS -5.0% -1.3% -1.3% -1.6% -3.1% -10.0% -6.4% -8.4% -8.9% -9.2% -9.5% -9.6% -9.8% -10.2% -15.0% -13.4% -14.1% -20.0% -25.0% -17.3% -20.0% Sensitivity to 10 bp Agency Spread Widening NYMT TWO MFA CIM MITT DX MTGE IVR ARR NLY ANH EARN AI CYS AGNC 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.5% -4.0% Source: Bloomberg, Company data, Credit Suisse estimates 6

8 Target Prices We are raising target prices for 5 out of 18 companies, to reflect updated macro assumptions and book value estimates through February. See below for target price changes. Old Current Ticker Rating Target Price Target Price CIM N $17.00 $20.00 EARN N $13.50 $14.50 MFA N $7.50 $8.50 MITT N $16.00 $18.00 TWO O $9.50 $10.00.Source: Credit Suisse estimates 7

9 Blue Sky/Grey Sky Blue Sky Our Blue Sky Scenario assumes a no rate increases this year ( and the ten year falling to 2%), no end to reinvestment of Fed MBS holdings, and a subsequent 10 bps tightening of MBS spreads. Grey Sky Our Grey Sky Scenario assumes a 100 bp increase in interest rates, and 20 bps of spread widening over the next 12 months. Blue Sky Target Blue Sky Grey Sky Target Grey Sky Ticker Rating Current Price Target Price Book Value Est Multiple Price Target Book Value Est Multiple Price Target AGNC N $19.52 $19.50 $ % $22.00 $ % $15.00 AI N $14.13 $14.50 $ % $15.50 $ % $9.00 ANH N $5.43 $5.50 $ % $6.50 $ % $4.50 ARR U $22.34 $22.00 $ % $26.00 $ % $15.00 CIM N $19.23 $20.00 $ % $23.50 $ % $13.00 CYS U $7.88 $7.00 $ % $9.00 $ % $5.00 DX N $6.90 $7.25 $ % $7.50 $ % $5.00 EARN N $14.29 $14.50 $ % $16.00 $ % $11.00 EFC O $15.74 $18.00 $ % $20.00 $ % $16.00 IVR O $15.35 $16.50 $ % $19.50 $ % $12.00 MFA N $8.08 $8.50 $ % $9.00 $ % $6.00 MITT N $17.69 $18.00 $ % $20.00 $ % $13.00 MTGE N $16.35 $17.50 $ % $20.00 $ % $13.00 NLY N $11.00 $11.00 $ % $12.50 $ % $7.00 NYMT U $6.37 $5.75 $ % $7.00 $ % $4.50 PMT O $16.79 $18.00 $ % $21.00 $ % $16.00 TWO O $9.29 $10.00 $ % $11.00 $ % $8.50 Source: Thompson, Company data, Credit Suisse estimates 8

10 94% 93% 91% 90% 89% 89% 88% 87% Price/Book Value We are currently recommending 4 residential mreits (TWO, PMT, EFC, IVR) based on a combination on expected risk-adjusted returns plus valuation. Price to 1Q17E Book Value 125% 117% 100% 101% 100% 98% 98% 75% 83% 82% 79% 68% 50% 25% 0% CIM MFA AI AGNC NYMT MITT NLY DX TWO ARR EARN CYS ANH IVR MTGE PMT EFC Source: Company data, Credit Suisse estimates, Thompson Reuters 9

11 Appendix

12 Funding Costs/LIBOR Repo Rates Repo-LIBOR Spread Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 1 Month Repo 3 Month Repo Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 1 Mo spread 3 Mo spread Source: Locus (Data as of March 6, 2017) 11

13 Incremental Agency MBS ROEs 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 30 year Agency MBS Returns 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 15 year Agency MBS Returns 0.0% Dec-10 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 Jun-15 Mar-16 Dec year 3.5% OAS 30 year 3.5% OAD 0.0% Dec-10 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 Jun-15 Mar-16 Dec year 3.0% OAD 15 year 3.0% OAD Assumes a constant 7x leverage and 0.5 year duration gap Source: Locus (Data as of March 6, 2017),, CS estimates 12

14 Agency MBS Spreads 1.10% 1.00% 0.90% 0.80% 0.70% 0.60% 0.50% Spread to 10-Year Swaps 1.00% 0.90% 0.80% 0.70% 0.60% Spread to 10-Year Treasuries 0.40% Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Agency 30Y Swap Basis Average 30-Year OAS Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb Year LIBOR OAS 30-Year TSY OAS 0.50% Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Agency 30Y TSY Basis Average ZV Treasury Spread (bps) Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb Year 15 Year Source: Locus (Data as of March 6, 2017) 13

15 Hedging 30-Year 3.5% Hedged Performance Difference Swap Spreads Jan-17 Jan-17 Jan-17 Feb-17 Feb-17 Feb-17 Mar Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 vs. Treasuries vs. Swaps 2 year 5 year Source: Locus 14

16 CMBS CMBS Spreads (bps) CMBS Spreads (bps) Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 CMBS AAA 5yr 2.0 CMBS AA 2.0 CMBS A 2.0 CMBS BBB- 2.0 Source: Locus 15

17 REIT Historical Total Return For 1Q17 we expect total economic return of 3.3% on an equity-weighted basis, as we expect book values to be up in the quarter. 10.0% mreit Total Economic Return by Quarter (not annualized) 8.0% 8.2% 6.0% 4.8% 5.2% 4.0% 2.8% 3.2% 3.3% 2.0% 0.0% -2.0% 1.6% 1.1% 0.2% 0.5% 0.2% -0.4% -0.6% -1.0% 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17E Source: Locus, Company data, Credit Suisse estimates 16

18 Risk- Adjusted Returns Our favorite measure for looking at risk-adjusted returns across the mreit sector is average economic returns divided by the standard deviation of that return. 9 Quarter Risk Adjusted Returns Source: Thompson Reuters, Company data, Credit Suisse estimates 17

19 Valuation The residential mreits are trading at 96% of estimate fourth quarter book value compared to a long-term average of 95%. 1.80x Long Term P/B 1.60x 1.40x 1.20x 1.00x 0.80x 0.60x 0.40x 0.20x 0.00x Source: SNL, Company data, Credit Suisse estimates 18

20 Disclosures

21 Companies Mentioned (Price as of 06-Mar-2017) AG Mortgage Investment Trust (MITT.N, $17.69, NEUTRAL, TP $18.0) AGNC Investment Corp. (AGNC.OQ, $19.52, NEUTRAL, TP $19.5) Annaly Capital Management (NLY.N, $11.0, NEUTRAL, TP $11.0) Anworth Mortgage Asset Corp (ANH.N, $5.43, NEUTRAL, TP $5.5) Arlington Asset Investment Corp (AI.N, $14.13, NEUTRAL, TP $14.5) Armour Residential REIT (ARR.N, $22.34, UNDERPERFORM, TP $22.0) CYS Investments. Inc (CYS.N, $7.88, UNDERPERFORM, TP $7.0) Chimera Investment (CIM.N, $19.23, NEUTRAL, TP $20.0) Dynex Capital (DX.N, $6.9, NEUTRAL, TP $7.25) Ellington Financial LLC (EFC.N, $15.74, OUTPERFORM, TP $18.0) Ellington Residential Mortgage REIT (EARN.N, $14.29, NEUTRAL, TP $14.5) Invesco Mortgage Capital (IVR.N, $15.35, OUTPERFORM, TP $16.5) MFA Financial (MFA.N, $8.08, NEUTRAL, TP $8.5) MTGE Investment Corp (MTGE.OQ, $16.35, NEUTRAL, TP $17.5) New York Mortgage Trust Inc (NYMT.OQ, $6.37, UNDERPERFORM, TP $5.75) PennyMac Mortgage Investment Trust (PMT.N, $16.79, OUTPERFORM, TP $18.0) Two Harbors Investment (TWO.N, $9.29, OUTPERFORM, TP $10.0) Analyst Certification Disclosure Appendix I, Douglas Harter, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for AG Mortgage Investment Trust (MITT.N) MITT.N Closing Price Target Price 07-Apr N 27-May Sep Jan Sep N EU T RA L 3-Year Price and Rating History for AGNC Investment Corp. (AGNC.OQ) AGNC.OQ Closing Price Target Price 28-Apr O 28-Jul Feb Sep Jan May R 12-Jul O 09-Sep Dec N O U T PERFO RM REST RICT ED N EU T RA L 3-Year Price and Rating History for Anworth Mortgage Asset Corp (ANH.N) ANH.N Closing Price Target Price 07-Apr U 18-Apr R 29-Jun N 06-Jan Sep U N D ERPERFO RM REST RI C T ED N EU T RA L 3-Year Price and Rating History for Arlington Asset Investment Corp (AI.N) AI.N Closing Price Target Price 24-Mar R 14-Apr N * 27-May Sep R 04-Sep N 04-Feb Apr Sep Oct Jan Apr R 01-Jul N REST RICT ED N EU T RA L 3-Year Price and Rating History for Armour Residential REIT (ARR.N) ARR.N Closing Price Target Price 07-Apr O 05-May Feb U 09-Sep Jan May Sep O U T PERFO RM U N D ERPERFO RM 3-Year Price and Rating History for CYS Investments. Inc (CYS.N) 3-Year Price and Rating History for Annaly Capital Management (NLY.N) NLY.N Closing Price Target Price 07-Apr N 02-Feb Aug R 07-Aug N 06-Jan Sep Dec N EU T RA L REST RICT ED CYS.N Closing Price Target Price 21-Apr N 02-Feb U 09-Sep Jan Sep Dec Feb N EU T RA L U N D ERPERFO RM

22 3-Year Price and Rating History for Chimera Investment (CIM.N) 3-Year Price and Rating History for Invesco Mortgage Capital (IVR.N) CIM.N Closing Price Target Price 23-Jul N 11-May Aug R 07-Aug N 09-Sep Jan Feb Sep Dec Year Price and Rating History for Dynex Capital (DX.N) DX.N Closing Price Target Price 07-Apr N 27-May Feb Sep Jan Sep N EU T RA L REST RICT ED IVR.N Closing Price Target Price 14-Apr O 29-Jul Feb Sep Jan Sep Year Price and Rating History for MFA Financial (MFA.N) MFA.N Closing Price Target Price 07-Apr N 27-May Feb Sep Jan Sep O U T PERFO RM N EU T RA L N EU T RA L 3-Year Price and Rating History for Ellington Financial LLC (EFC.N) EFC.N Closing Price Target Price 07-May O 02-Sep R 21-Oct O 02-Feb Sep Jan Nov O U T PERFO RM REST RICT ED 3-Year Price and Rating History for Ellington Residential Mortgage REIT (EARN.N) EARN.N Closing Price Target Price 31-Mar R 29-Jun N 09-Sep Jan Sep REST RICT ED N EU T RA L 3-Year Price and Rating History for MTGE Investment Corp (MTGE.OQ) MTGE.OQ Closing Price Target Price 07-Apr O 29-Apr Sep Jan N 09-Sep O U T PERFO RM N EU T RA L 3-Year Price and Rating History for New York Mortgage Trust Inc (NYMT.OQ) NYMT.OQ Closing Price Target Price 07-Apr N 20-Nov R 21-Nov N 02-Feb U 09-Sep Jan Sep N EU T RA L REST RI C T ED U N D ERPERFO RM

23 3-Year Price and Rating History for PennyMac Mortgage Investment Trust (PMT.N) PMT.N Closing Price Target Price 07-May O 06-May Sep Jan Feb Jun O U T PERFO RM 3-Year Price and Rating History for Two Harbors Investment (TWO.N) TWO.N Closing Price Target Price 07-May O 27-May Sep Jan Jan R 13-Jan O O U T PERFO RM REST RICT ED The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock s t otal return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between - 5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors. 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Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Valuation Methodology and Risks: (12 months) for AG Mortgage Investment Trust (MITT.N) Method: Our $18.00 target price is based on a 1% primium to fourth quarter book value. Our Neutral rating is based on MITT's lack of operational business, and our view that there exists better risk/reward in some of its peers. The primary risks to our $18.00 target price and Neutral rating for MITT are interest rate risk on the agency MBS portfolio and worse than expected deterioration in credit quality on the credit investments. The Agency book is subject to interest rate risk, both on the long- and shortend of the rate curve. A flattening of the yield curve will lead to a reduction in returns available on incremental investments. An increase in long-term interest rates will result in a reduction to book value. Any macro-induced volatility would negatively impact the credit book. Valuation Methodology and Risks: (12 months) for AGNC Investment Corp. (AGNC.OQ) Method: Our $19.50 target price for American Capital Agency is based on a 1.0x price to 4Q tangible book value. Our Neutral rating is based on management's track record of outperforming peers, along with its current discount to BV. The biggest risk to our $19.50 target price and Neutral rating for American Capital Agency comes from interest rate risk. AGNC is exposed to interest rate risk on both the long and the short end of the interest rate curve. Valuation Methodology and Risks: (12 months) for Annaly Capital Management (NLY.N) Method: Our $11.00 target price for Annaly is based on an 0.99x price to 4Q book value Our NEUTRAL rating is based on the limited upside of our target price from current levels. The primary risk to our $11.00 target price and NEUTRAL rating for Annaly Capital Managment is interest rate risk given the funding strategy. If the Federal Reserve raises rates sooner than expected Annaly's earnings and valuation will be negatively impacted. Other risks are negative marks to book value from widening Agency spreads or rising mortgage rates and reliance on external capital for growth. Valuation Methodology and Risks: (12 months) for Anworth Mortgage Asset Corp (ANH.N) Method: Our $5.50 target price for Anworth Mortgage is equal to an 8% discount to 4Q16 reported book value. Our NEUTRAL rating is based on the fact that ANH has not added any operating business lines like some of its peers, as well as the limited upside to our target price from current levels. The primary risk to our $5.50 target price and NEUTRAL rating for Anworth Mortgage is interest rate risk. Anworth faces a risk to its book value if interest rates rise, which would result in lower mortgage prices and a decline in investment portfolio value. In addition, ANH faces a reduced net interest spread from increased premium amortization if mortgage rates fall significantly. As a REIT, Anworth also relies on external capital to grow its investment portfolio and earnings. Valuation Methodology and Risks: (12 months) for Arlington Asset Investment Corp (AI.N) Method: Our $14.50 target price is based on 1.1x 4Q16 book value. Our NEUTRAL rating is based on the limited upside to our target price compared with our Outperform-rated names.

24 The biggest risks to our $14.50 target price and NEUTRAL rating are interest rate risk on the Agency MBS and credit deterioration on the private label portfolio. Furthermore, its ability to unlock value from the deferred tax asset (DTA) would negatively impact the earnings potential of the company as well as the economic book value. Valuation Methodology and Risks: (12 months) for Armour Residential REIT (ARR.N) Method: Our $22 target price for Armour is a 10% discount to 4Q16 reported book value. Our UNDERPERFORM rating is based on a history of underperformance of ARR vs. peers, as well as limited upside to our target price from current levels. The biggest risk to our $22 target price for Armour is interest rate risk, both on the long-and-short end of the curve. A flattening of the yield curve will lead to a reduction in returns available on incremental investments. An increase in the long-term interest rates will result in a reduction to book value. A factor that could cause a change in our Underperform rating is sustained dividend coverage over subsequent periods. Valuation Methodology and Risks: (12 months) for CYS Investments. Inc (CYS.N) Method: Our $7 target price for CYS is based on a 15% discount to fourth quarter book value. Our UNDERPERFORM rating is due to CYS's high volatility of economic returns. The biggest risk to our $7 target price for CYS Investments is interest rate risk. CYS has interest rate risk on both the long and the short-end of the interest rate curve. Upside risks to our UNDERPERFORM rating are sustained economic returns above the dividend level, and increased share buybacks programs. Valuation Methodology and Risks: (12 months) for Chimera Investment (CIM.N) Method: Our $20 target price for Chimera Investment Corporation is calculated using an 25% premium to the fourth quarter economic book value. Our NEUTRAL rating is due to the limited upside to our target price from current levels. The primary risk to Chimera's ahievement of our $20 target price and NEUTRAL rating is an increase in the credit losses of the non-agency mortgage-backed securities in the company's portfolio. 60% of Chimera's investment portfolio are in subordinated securities, which are more levered to the credit performance than senior bonds. Valuation Methodology and Risks: (12 months) for Dynex Capital (DX.N) Method: Our $7.25 target price for Dynex Capital is based on 0.98x 4Q book value. Our NEUTRAL rating reflects DX's limited upside of our target price from current levels, as well as its failure to diversify into more operating business lines The principal risk to our $7.25 target price and NEUTRAL rating for Dynex Capital is interest rate risk. The investment portfolio is mostly funded with short-term repos and partially hedged with fixed-rate interest rate swaps. This leaves the net interest spread negatively exposed to rising short-term interest rates. Dynex also faces risks associated with the long-end of the interest rate curve and credit risk related to its non-agency assets. Valuation Methodology and Risks: (12 months) for Ellington Financial LLC (EFC.N) Method: Our target price of $18 for Ellington Financial LLC represents a 8% discount to 4Q16 book value. Our OUTPERFORM rating is based on the upside of our target price from current trading levels, and EFC's track record of less volatile economic returns throughout the cycle. As a mostly non-agency hybrid mortgage REIT, EFC's largest risk to our $18 target price and OUTPERFORM rating is credit risk. A downturn in the economy and a resulting decline in home prices and job growth would negatively impact this company. The company is also subject to interest rate risk as it has an Agency portfolio as well. Continued rising rates would negatively impact this company as the cost of funds would increase and book values would decline. Valuation Methodology and Risks: (12 months) for Ellington Residential Mortgage REIT (EARN.N) Method: We have established a $14.50 target price and NEUTRAL rating for EARN based on a 7% discount to fourth quarter book value. As a mostly-agency hybrid mortgage REIT, the biggest risk to our $14.50 target price and NEUTRAL rating on EARN is interest rate risk and, therefore, its book value. As interest rates rise, the value of its assets could decline, reducing earnings and dividend yields. Valuation Methodology and Risks: (12 months) for Invesco Mortgage Capital (IVR.N) Method: Our $16.50 target price for Invesco Mortgage is based on a 5% discount to fourth quarter book value Our OUTPERFORM rating is based on IVR's balanced portfolio consisting of residential and commercial real estate credit. The biggest potential risk to our $16.50 target price and OUTPERFORM rating for Invesco Mortgage is the continued deterioration in the credit quality of the underlying mortgages in the non-agency residential mortgage securities portfolio. The Agency MBS portfolio is subject to short-term interest rate risks which could cause returns, and dividends, to be lower than expected. Invesco Mortgage is also subject to the risk from the appearance of conflict of interests for the allocation of investment opportunities with its external manager. Valuation Methodology and Risks: (12 months) for MFA Financial (MFA.N) Method: Our $8.50 target price for MFA Financial is based on a 10% premium to 4Q book value. Our NEUTRAL rating is based on limited limited upside of our price target from current levels, as well as MFA under earning the dividend on a core basis. The biggest potential risk to the achievement of our $8.50 target price and NEUTRAL rating for MFA Financial is interest rate risk on the Agency MBS (mortgage backed securities) portfolio. An increase in long-term rates could cause a decline in value for MFA's Agency MBS portfolio which would reduce book value. The Agency MBS portfolio is also subject to short-term interest rate risks which could cause returns, and dividends, to be lower than expected. The biggest risk to the non-agency MBS portfolio is the continued deterioration in the credit quality of the underlying mortgages. Valuation Methodology and Risks: (12 months) for MTGE Investment Corp (MTGE.OQ) Method: Our $17.50 target price for American Capital Mortgage Investment Corp represents a 9% discount to fourth quarter book value. Our NEUTRAL rating reflects management's long-term positive track record. The primary risks to our $17.50 target price and NEUTRAL rating for MTGE are interest rate risk on the agency MBS portfolio and worse than expected deterioration in credit quality on the Non-Agency portfolio. The Agency book is subject to interest rate risk, both on the long- and short-end of the rate curve. A flattening of the yield curve will lead to a reduction in returns available on incremental investments. An increase in long-term interest rates will result in a reduction to book value. Valuation Methodology and Risks: (12 months) for New York Mortgage Trust Inc (NYMT.OQ) Method: Our $5.75 price target represents a 6% discount to fourth quarter book value. Our UNDERPERFORM rating is based on the limited earning power of the portfolio at current leverage and expense levels. The biggest risk to our $5.75 target price is a deterioration in credit as a majority of the assets are credit sensitive. Changes in interest rates could negatively impact book values. More consistent dividend coverage and a stable printed book value could cause us to reevaluate our UNDERPERFORM rating. Valuation Methodology and Risks: (12 months) for PennyMac Mortgage Investment Trust (PMT.N) Method: Our $18 target price for PennyMac Mortgage Investment Trust is based on a 10.6% discount to 4Q16 book value. With earnings stabilizing above the current dividend, our OUTPERFORM rating is based on the attractive risk/reward potential given the steep discount to current book value and limited book value risk from interest rate movement. The biggest potential risk to our $18 target price and OUTPERFORM rating for PennyMac Mortgage Investment Trust is the timing of capital deployment. If it takes PennyMac longer than expected to deploy capital near-term earnings and dividends will be lower than expected. PMT should generate non-cash earnings through the accretion of the purchase discount. This discount accretion is a taxable event and requires a dividend payment. The potential cash flow timing mismatch could limit PMT's ability to reinvest into the business or cause liquidity constraints. Also, slower-than-expected growth and profitability in the correspondent lending business presents a downside risk to our earnings estimates. Valuation Methodology and Risks: (12 months) for Two Harbors Investment (TWO.N) Method: Our $10 target price for Two Harbors is based on an 2% premium to current book value. Our OUTPERFORM rating is based on TWO's build out of operational businesses that will help TWO diversify its earnings power. The primary risks to our $10 target price and OUTPERFORM rating for Two Harbors are interest rate risk on the Agency MBS portfolio and worse than expected deterioration in the credit quality of the non-agency portfolio. The Agency MBS portfolio is subject to various forms of interest rate risk. The portfolio is funded with short-term repos and hedged with interest rate swaps. This leaves the net interest spread negatively exposed to rising short-term rates. Agency MBS are also exposed to interest rate risk on the long-term rates. A move higher in interest rates would negatively impact the book value of the portoflio. Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (TWO.N, ARR.N, CIM.N, MFA.N, NYMT.OQ, IVR.N, ANH.N, PMT.N, MITT.N, NLY.N, EARN.N, MTGE.OQ, DX.N, AI.N, AGNC.OQ, CYS.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (TWO.N, CIM.N, NLY.N, AI.N, AGNC.OQ) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (CIM.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (TWO.N, CIM.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (TWO.N, CIM.N, NLY.N, AI.N, AGNC.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (TWO.N, ARR.N, CIM.N, MFA.N, NYMT.OQ, IVR.N, ANH.N, PMT.N, MITT.N, NLY.N, EARN.N, MTGE.OQ, DX.N, AI.N, AGNC.OQ, CYS.N) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (CIM.N) within the past 12 months

25 Credit Suisse has a material conflict of interest with the subject company (CIM.N). Credit Suisse is acting as exclusive financial advisor to Annaly Capital Management, Inc. (NLY) on its announcement with Fixed Income Discount Advisory Company ( FIDAC ), a wholly-owned subsidiary of Annaly, to internalize the management of Chimera Investment Corporation (CIM). Credit Suisse has a material conflict of interest with the subject company (NLY.N). Credit Suisse is acting as exclusive financial advisor to Annaly Capital Management, Inc. (NLY) on its announcement with Fixed Income Discount Advisory Company ( FIDAC ), a wholly-owned subsidiary of Annaly, to internalize the management of Chimera Investment Corporation (CIM). 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