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mREIT investors have been dealt a new instrument to maximize returns and its name is MORL.

MORL Holdings

UBS's ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) is a 2x leveraged tracking of the Market Vectors Global Mortgage REITs Index or MORT. MORT's holdings follow (they can be found here):

(click to enlarge)

MORL's holdings are reset monthly to track the index. It incurs an annual tracking fee of .4%. Because of its monthly compounding, there is a risk significant negative monthly performances may not be offset by subsequent positive monthly performances of equal magnitude. It is also tied to UBS and its creditworthiness in the event of early redemption. It is set to automatically redeem if it drops to 5$ (current price is around $28.80) or drops 60% from its last monthly valuation date.

Dividends

With its 2x leverage, the yield on MORL is supposed to be a whopping 25%! Its distributions to date (info from UBS site here):

(click to enlarge)

I've been watching MORL for how its dividend payments correlate to the ex-dividend date and payout date of the underlying holdings. It seems MORL pays the dividend to its shareholders after one of its stocks goes ex-dividend, not after the payout date where the normal shareholders of those stocks would see the dividend in their accounts. This is what happened in January as the majority of the stocks had not reached their payout date when MORL went ex-dividend and many had not reached their payout date by the time MORL had already paid its dividend. The small payout in February confirms that MORL had already paid out those dividends. Below is a dividend chart that shows the last dividend or any upcoming dividends:

StockEx DivPay date
NLY26 Dec29 Jan
AGNC24 Dec28 Jan
STWD26 Mar14 Apr
CIM27 Dec25 Jan
TWO27 Dec18 Jan
MFA26 Dec31 Jan
NCT26 Dec31 Jan
HTS18 Dec19 Jan
IVR20 Dec28 Jan
ARR13 Mar27 Mar
CYS19 Dec28 Dec
NRF21 Feb1 Mar
PMT19 Feb1 Mar
RWT13 Mar29 Mar
CMO27 Dec18 Jan
CLNY27 Dec15 Jan
ANH26 Dec29 Jan
SFINo DivNo Div
RSO27 Dec28 Jan
DX27 Dec31 Jan
FUR27 Dec15 Jan
RAS14 Jan31 Jan
ARI26 Mar12 Apr

If this is correct, the next dividend that will be similar in size to the January dividend will be paid in April as the majority of the underlying holdings should announce ex-dividend dates for late March based on their dividend history.

Performance

MORL began trading on October 16th during the beginning of a downturn in mREITs due to prepayment increases and lowering spread fears from QE3. After riding out the worst in mid November, it has been recovering nicely and reaching new highs.

MORL is in the red compared to its top six holdings: NLY, AGNC, STWD, CIM, TWO, MFA

(click to enlarge)

The weighted average of the price to book for the index is 1.07, so you are paying 7% above book for MORL right now, not considering the 2x leverage.

Spreads for Mortgage REITs

mREITs' profit is closely tied to the spreads between the borrowing rate and the interest received from the mortgages they own. An interesting chart is the 10-2 year treasury spread and how it relates to MORL's stock price:

(click to enlarge)

Could MORL's performance really be as simple as following the 10-2 year spread? Possibly, although the 30 year mortgage rate is the benchmark for most of the mREITs' interest and the 2 year treasury is not a good indication for the borrowing costs to the mREITs. However, the 10-2 year spread is an indication of the overall yield curve and at least so far, has a strong correlation to MORL's share price.

Why Not Some Juicy Hybrids?

Unfortunately, MORL's index does not include some of the better performing hybrid mREITs like MITT, MTGE, AMTG, or WMC. I'm assuming it's because they are relatively new and unseasoned in the mREIT world, despite their impressive performance. Hopefully in the future the index will drop some of the poor performing low yielding stocks (HTS, CYS, ARI, ANH) and replace them with some of these better performing hybrids.

Final Thoughts

I am bullish on MORL because of the increasing spreads the treasury yields are experiencing of late despite QE3, the housing market rebound kicking off, and the lowering prepayment speeds. If QE3 ends, the spread should get even better, however book value may take a hit and overall market panic may irrationally hit mREITs for a while, despite it being fundamentally good news for them. It isn't until the Fed raises the short-term borrowing rates that we should see the spreads take a significant hit, which Bernanke has made clear is a long way off. Individual stocks in the index may have difficulties. With 23 mREITs in the index, that risk is spread out. NLY and AGNC have a much larger stake in the index than the rest of the stocks and their price movements and dividends have a greater effect on the return. The individual stocks already hedge themselves with swaps and swaptions, further reducing risk. The risk to reduce is substantial considering you are in a 2x leveraged index of stocks that are already leveraged up to 8x. I believe with some close monitoring of the spreads on treasuries and the mREIT world in general, MORL will continue to be a high yielding money maker for its shareholders.

Source: The MORL Is A Story