Seeking Alpha
Debt, REITs, macro, ETF investing
Profile| Send Message|
( followers)  

Summary

  • The composition and weightings of the components of comprise ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN had changed since March 21 when I had submitted my article.
  • The dividend projection using the new composition and weightings results in a higher projection for the monthly dividend that MORL will soon declare for the month of April.
  • On a monthly compounded basis, the new effective annualized yield is 22%.

After the publication of my article, MORL Dividend Projected To Rise Sharply In April in which I included a table and methodology "for those who wish to try this at home," an astute reader sent me a message pointing out that the composition and weightings of the components of comprise ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) had changed since March 21 when I had submitted my article to Seeking Alpha.

There are now only 24 components rather than the 25 previously. iStar Financial Inc. (NYSE:STAR), which has still not reinstated its dividend is out. Winthrop Realty Trust (NYSE:FUR), previously the smallest by weight is also out. Blackstone Mortgage Trust Inc (NYSE:BXMT) has been added. The weights for some of the largest components have changed as well. The weighting for Annaly Capital Management Inc (NYSE:NLY) is now 17.33%, up from 13.03%. American Capital Agency Corp (NASDAQ:AGNC) is now 12.46%, up from 10.39%. NorthStar Realty Finance Corp (NRF), which increased its dividend to $0.25 from $0.21, now has a weight of 8.11%, up from 6.26%.

I am not sure which date UBS (NYSE:UBS) uses when they calculate the distribution. However, I recalculated the dividend projection using the new composition and weightings and came up with a projection for the monthly dividend that MORL will soon declare for the month of April 2014 of $.9951. This is very similar to what the astute reader who sent me the message calculated using the methodology from my article.

As I explained in this article, 30% Yielding MORL, MORT And The mREITs: A Real World Application And Test Of Modern Portfolio Theory, MORL pays widely varying dividends each month since most of the mREITs in the basket pay dividends quarterly on various schedules. During any three-month period, usually all of the components would have paid their dividends. The January, April, October and July "big month" MORL dividends are much larger than the "small month" dividends paid in the other months. This is because about 80% of the portfolios pay quarterly. They typically have ex-dates in the last month of the quarter and payment dates in the first month of the next quarter. The ex-dates of the 24 mREITs are shown in the table below. I have included every mREIT that goes ex-dividend in March 2014 in the April dividend projection calculation.

As the table below indicates, of the 24 mREITs that comprise the portfolios of MORL, 21 of them go ex-dividend in March 2014. Most of those will have pay dates in April 2014. PennyMac Mortgage Investment Trust (NYSE:PMT) went ex-dividend on January 8, 2014 with a pay date of January 28, 2014. Most likely it will go ex-dividend and pay in April. I have not included PMT in the calculation, however, some may think that MORL bases its payment on the pay date rather than the ex-date. If that were the case, then if PMT has a pay date in April 2014, it should be included.

Likewise, RAIT Financial Trust (NYSE:RAS) and Dynex Capital Inc (NYSE:DX) both will go ex-dividend on April 2, 2014 with pay dates of April 30, 2014. I have not included those in the April dividend calculation, even though they have declared dividends that will be paid in April 2014. I have included NorthStar Realty Finance Corp. (NYSE:NRF), Redwood Trust Inc (NYSE:RWT), Newcastle Investment Corp. (NYSE:NCT) and New Residential Investment Corp. (NRZ), which have both ex-and pay dates in March 2014. The very low $.0171 March 2014 MORL dividend supports the argument that MORL dividends are based on ex-dates, not pay dates. Armour Residential REIT (NYSE:ARR) pays monthly, and it has announced its dividends for the next 12 months, so it is certain that the ARR dividend of $0.05 will be included in every month.

For those who wish to try this at home, the actual math involved is to start with the weight of each component. For example, this is now 17.33% for (NLY). Then use the 8,300,000 million shares outstanding for MORL and the net asset value of MORL of $21.49 as of March 26, 2014. Using that and the market price of NLY of $10.93 indicates a value of MORL's position in NLY of $61.79 million, taking into account the 2X leverage. Applying the NLY price implies a share count for the NLY position of 5.65 million. Multiplying the share count by the $0.30 dividend gives a dollar amount of $1,696,000. Adding the dividend amount for each of the components that have March ex-dates and subtracting out expenses based on a .80% expense ratio that includes interest expense results in a dividend of $0.9951 based on 8.3 million shares outstanding.

The new projected $0.9951 MORL dividend in April is a 23.2% increase over the January 2014 dividend of $0.8072. This may be surprising to some. The reason for the increase is that 5 of the 21 components that go ex-date in March have increased their dividends and none have cut them. Those increasing their dividends include the number 3 and 4 most important components: NRF, which increased its payout from $0.21 to $0.25, and Starwood Property Trust Inc (STWD), which increased its payout from $0.46 to $0.48.

One complicating factor with MORL is the expense ratio. Various retail brokerage firms like Schwab, Fidelity and Scottrade indicate that both the net and gross expense ratio for MORL is 0.35%. Since MORL is an Exchange Traded Note rather than a fund, it does not make the disclosures about fees that funds do. UBS does indicate that there is a 0.40% tracking fee and that there is an interest expense on the half of the assets that are borrowed based on the LIBOR rate. From that I estimate a .80% net expenses ratio. The effect on the dividend is not very large if the lower expense ratio of .35% is used. Instead of a $0.9951 April dividend for MORL, the lower expense ratio of .35% results in a $1.0034 April dividend for MORL.

The updated composition of the index also effects Market Vectors Mortgage REIT ETF (MORT), which is in the same basket of 24 mREITs but without the 2X leverage. MORT is much simpler, the shares of each position are public information and the published expense ratio is 0.41%. The same exercise results in a new projected dividend of $0.61 for MORT. This compares to the $0.58 last quarter. Another fund that holds mREITs, iShares Mortgage Real Estate Capped ETF (REM), last declared a quarterly dividend of $0.48 with an ex-date of December 23, 2013 and payable December 30, 2013. The previous quarterly dividend for REM was $0.42. The September payment was a decline of 20.2% from June. REM's dividend may not be that useful in projecting dividends for MORL and MORT since REM can have significant trading gains.

At some point in the future, there should be some beneficial impact from the reinvestment of higher yielding mortgage securities entering the mREITs' portfolios. Newly issued mortgage-backed securities usually settle about two months after the purchase date. Each month an mREIT generally receives principal payments on its mortgages of about 3/4 of a percent of the outstanding balance. As I indicated in my article: Federal Reserve Actually Propping up Interest Rates: What this means for mREITs, higher long-term rates while short-term rates remain low actually increases the spread income of agency mREITs.

If the projection of $0.9951 for the April 2014 MORL dividend is accurate, this is a 20.1% simple annualized yield with MORL priced at $21.40. On a monthly compounded basis, the effective annualized yield is 22%.

If someone thought that over the next five years interest rates would remain relatively stable and thus MORL would continue to yield 22% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $270,640 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $22,033 initial annual rate to $59,630 annually.

Holdings of MORL and MORT as of March 28, 2014:

ex-div

pay

div

chngdiv

value

shares

dividend $mil

NLY

Annaly Capital Management Inc

$10.93

17.33%

28-Mar

30-Apr

0.30

61.79

5.65

1.696

Top of Form

AGNC

American Capital Agency Corp

$21.25

12.46%

27-Mar

28-Apr

0.65

44.43

2.09

1.359

NRF

NorthStar Realty Finance Corp

$15.86

8.11%

6-Mar

14-Mar

0.25

0.04

28.92

1.82

0.456

STWD

Starwood Property Trust Inc

$23.33

6.09%

27-Mar

15-Apr

0.48

0.02

21.71

0.93

0.447

TWO

Two Harbors Investment Corp

$10.20

5.92%

27-Mar

21-Apr

0.26

21.11

2.07

0.538

CIM

Chimera Investment Corp

$3.03

4.46%

27-Mar

24-Apr

0.09

15.90

5.25

0.472

CLNY

Colony Financial Inc

$21.81

4.18%

27-Mar

15-Apr

0.35

14.90

0.68

0.239

MFA

MFA Financial Inc

$7.66

4.11%

26-Mar

30-Apr

0.2

14.65

1.91

0.383

NCT

Newcastle Investment Corp

$4.66

3.86%

21-Mar

25-Mar

0.1

13.76

2.95

0.295

IVR

Invesco Mortgage Capital Inc

$16.30

3.65%

27-Mar

28-Apr

0.5

13.01

0.80

0.399

NRZ

New Residential Investment Corp

$6.37

3.62%

27-Mar

31-Mar

0.175

12.91

2.03

0.355

PMT

PennyMac Mortgage Investment Trust

$23.70

3.35%

8-Jan

28-Jan

0.59

0.02

11.95

0.50

0.297

ARR

ARMOUR Residential REIT Inc

$4.13

3.00%

13-Mar

28-Mar

0.05

10.70

2.59

0.130

HTS

Hatteras Financial Corp

$18.65

2.85%

26-Mar

25-Apr

0.5

10.16

0.54

0.272

CYS

CYS Investments Inc

$8.24

2.70%

21-Mar

17-Apr

0.32

9.63

1.17

0.374

CMO

Capstead Mortgage Corp

$12.60

2.39%

27-Mar

17-Apr

0.34

0.03

8.52

0.68

0.230

BXMT

Blackstone Mortgage Trust Inc

$28.79

2.11%

27-Mar

15-Apr

0.48

0.03

7.52

0.26

0.125

RWT

Redwood Trust Inc

$20.34

2.06%

12-Mar

31-Mar

0.28

7.35

0.36

0.101

MTGE

American Capital Mortgage Investment Corp

$18.72

1.68%

27-Mar

28-Apr

0.65

5.99

0.32

0.208

RAS

RAIT Financial Trust

$8.35

1.37%

2-Apr

30-Apr

0.17

0.01

4.88

0.59

0.099

RSO

Resource Capital Corp

$5.54

1.34%

27-Mar

28-Apr

0.2

4.78

0.86

0.172

ANH

Anworth Mortgage Asset Corp

$4.96

1.29%

27-Mar

29-Apr

0.14

0.06

4.60

0.93

0.130

ARI

Apollo Commercial Real Estate Finance Inc

$16.53

1.09%

27-Mar

14-Apr

0.4

3.89

0.24

0.094

DX

Dynex Capital Inc

$8.82

0.98%

2-Apr

30-Apr

0.25

-0.02

3.49

0.40

0.099

Bottom of Form

Source: MORL Composition Changes Indicate Higher April Dividend And Yield Of 22%