What's Going On With This Mortgage REIT?

Dec.18.13 | About: Javelin Mortgage (JMI)

The last few sessions have been interesting for Javelin Mortgage Investment Trust (NYSE:JMI). As many followers of the mortgage real estate investment trusts (mREITs) know, the sector has been battered. My top holdings in the space, Annaly Capital (NYSE:NLY) and American Capital (NASDAQ:AGNC), have plummeted in 2013, which has primarily been in response to fears over the Fed Taper, a rising interest rate environment and several transitional quarters as management rebalanced portfolios. During this time, there have been some true issues with quarterly performances. I still continue to own NLY and AGNC. Yet, many of you still reach out on a daily basis looking for alternatives. You like yield, you want potential growth. While I believe NLY and AGNC can return to greatness as they transition to the new environment, I have lately been of the opinion that JMI is superior to NLY and AGNC in the current environment. I actually think it has the potential to be a real strong source of income in a tax favored account such as an IRA or ESA, though the last few days of action have been puzzling to many.

What Has Happened the Last Few Sessions?

This week, the stock has been trading much worse than NLY and AGNC. Today, AGNC and NLY are each up about a percent, while JMI is in the hole about 2%-3%. Earlier, JMI was down about twice as much as AGNC and NLY. Some of this action is jitters related to the huge 33% cut to the dividend made by Anworth Mortgage (NYSE:ANH), slashing the dividend from $0.12 to $0.08. There has been a fear among mREIT investors that this could spell trouble for AGNC, NLY and JMI. Announcements on future distributions are expected soon for each company, though NLY did maintain its preferred dividends so there is a chance the common distribution will be maintained. I believe JMI's dividend is safe, as they have been buying back shares left and right. In fact, I think that is one of the reasons the stock is getting hit hard. The market is not reacting well to the recent agreement between JMI and bulldog investors.

What's All The Fuss About?

We learned that after pushing hard, JMI has agreed with Bulldog Investors, LLC, headed up by Philip Goldstein, along with certain of its affiliates, to repurchase 516,000 JMI shares. The shares of common stock beneficially owned by Bulldog will be repurchased by JMI for $12.7574 per share. This agreement comes after Philip Goldstein and Bulldog Investors had been buying up shares of JMI. Philip Goldstein recently wrote a letter to the Board of Directors of JMI. Bulldog owns well over a million shares of the company, holding a 7.7% stake in the company. In the letter, we learned that Bulldog wanted to nominate its own directors for consideration at the next Board meeting. Goldstein pushed the company to step in and start the buyback right now at an accelerated pace while the stock trades at such a massive discount to book. JMI's repurchase was made pursuant to the company's previously announced share repurchase program which authorized a purchase of up to two million shares of common stock. As a result of the shares already repurchased this quarter and the repurchase from Bulldog, JMI will have spent over $15 million on share repurchases. This is key, as the company has repurchased approximately 9% of the float. Easing the heat on JMI's management, we learned that part of the deal requires Bulldog to withdraw its slate of nominees for election to the Company's Board of Directors at the 2014 Annual Meeting and agreed to vote all of its shares in support of all of JMI's director nominees.

Street Perceives This As A Negative Here is Why it is NOT

The Street has not reacted well. I am somewhat surprised honestly as this is a major advantage for shareholders as there will be less open shares which will require dividend payments. This will free up more funding to be applied to existing shares that will require dividend payments. Why is this a good thing? Large yields are what mREITs are known for. While AGNC, NLY and JMI have all cut, JMI's cut was less than NLY and AGNC's which have been cut in half. With JMI's cut down to $0.15 monthly, I believe JMI can easily afford to sustain this level, unlike AGNC and NLY which will cut. As it stands now, JMI yields 15.3% compared to AGNC's 15.7% and NLY's 13.7%. With more available cash per share, JMI has a stronger chance of maintaining the dividend. I think one reason the shares are falling is that the Street enjoyed Bulldog pushing on management, shaking things up. Nominating their own directors was a power play to get things moving at JMI. With this possibility withdrawn, JMI's management, which has run Armour Residential REIT (NYSE:ARR) into the ground, could go back to business as usual. I do not see this happening while Bulldog is involved. I think they will keep the pressure on even if their stake will be cut in half.

Disclosure: I am long AGNC, JMI, NLY. 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.