The MORL Is A Story

Mar. 5.13 | About: UBS ETRACS (MORL)

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 ((NYSEARCA: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):

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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.


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

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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:

Stock Ex Div Pay date
NLY 26 Dec 29 Jan
AGNC 24 Dec 28 Jan
STWD 26 Mar 14 Apr
CIM 27 Dec 25 Jan
TWO 27 Dec 18 Jan
MFA 26 Dec 31 Jan
NCT 26 Dec 31 Jan
HTS 18 Dec 19 Jan
IVR 20 Dec 28 Jan
ARR 13 Mar 27 Mar
CYS 19 Dec 28 Dec
NRF 21 Feb 1 Mar
PMT 19 Feb 1 Mar
RWT 13 Mar 29 Mar
CMO 27 Dec 18 Jan
CLNY 27 Dec 15 Jan
ANH 26 Dec 29 Jan
SFI No Div No Div
RSO 27 Dec 28 Jan
DX 27 Dec 31 Jan
FUR 27 Dec 15 Jan
RAS 14 Jan 31 Jan
ARI 26 Mar 12 Apr
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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.


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

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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:

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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.

Disclosure: I am long MORL, TWO, NCT, WMC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.