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

Summary

  • The MORL June monthly dividend was much higher that my projection.
  • The discrepancy was due to the third-largest component by weight, NRF.
  • The June dividend brings the effective annualized yield to a monthly compounded basis, to 22.2%.

UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) declared a dividend of $0.0691 with an ex-date of June 10, 2014 and a pay date of June 20, 2014. This was $0.0536 above the $0.0155 that I had projected in my article: MORL Projected June Dividend Brings Yield To 21.7% published on May 26. 2014. An explanation of what caused the difference is in order.

The methodology that I employed was described in detail in my article: MORL Dividend Projected To Rise Sharply In April, and is based on calculating the amount of the dividends that will be paid by each of the components that comprise the portfolio of an ETN. The weights, dividends, ex-dates and pay dates for each of the MORL and Market Vectors Mortgage REIT Income ETF (NYSEARCA:MORT) components are shown in the table below. MORT is based on the same index as MORL, and thus has the same components.

The underestimation for the MORL dividend was initially perplexing, since I used the same methodology to project the June dividend for UBS ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (NYSEARCA:CEFL) in my article: Projected June Dividend For CEFL Will Bring Yield To 18.1%, also published on May 26, 2014. My projection of $0.3381 was fairly close to the actual dividend for CEFL of $0.3300, with an ex-date of June 10, 2014 and a pay date of June 20, 2014.

The table below shows a number of differences from the table of weights, dividends, ex-dates and pay dates for each of the MORL and MORT components published in the May 26, 2014 article. Northstar Realty Finance Corp. (NYSE:NRF), Starwood Property Trust Inc. (NYSE:STWD), Chimera Investment Corp. (NYSE:CIM), Colony Financial Inc. (NYSE:CLNY), Redwood Trust Inc. (NYSE:RWT) and Apollo Commercial Real Estate Finance Inc. (NYSE:ARI) have different ex-dates and pay dates, which reflects information that became available to me after the publication of the first article. Additionally, the most recently declared dividend for CLNY is now $0.36, as compared to the $0.35 reported in the earlier article. All of the other dividend amounts are the same in the table below as they were in the article published on May 26, 2014.

The weights of each of the components are slightly different in the table below from the weights in the earlier article. This is due to changes in market prices of the components. However, none of the weight changes are large enough to be significant in terms of impacting the dividend. Only one of the discrepancies between the table below and the article published on May 26, 2014 has any significant effect on the calculation of my projected June MORL dividend. That is the ex-date of NRF, which now places it in the period to be included in the June dividend. That accounts for essentially the entire discrepancy.

As I explained in: 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. Thus, a three-month moving average is the most relevant indicator.

The January, April, October and July "big month" MORL dividends are much larger than the "small month" dividends paid in the other months, since most of the portfolio components pay quarterly, typically with ex-dates in the last month of the quarter and payment dates in the first month of the next quarter. The most recent dividends, weights and ex-dates of the 24 mREITs are shown in the table below.

The $0.0691 MORL dividend in June is a 304% increase over the March 2014 dividend of $ 0.0171. This is not very meaningful as a comparison, since the NRF quarterly dividend was not included in the March 2014 dividend.

The prospect for future MORL dividends is mostly a function of interest rates. Higher short-term rates would lower the dividend on MORL in two ways. First, the 2X leverage utilized by MORL involves an imputed interest rate cost, which is based on LIBOR. Additionally, almost all of the mREITs that comprise the index upon which MORL is based also use leverage to enhance their yields. Higher short-term rates would reduce the dividends paid by the mREITs as well.

Higher long-term rates would lower the values of the mREITs that comprise the index upon which MORL is based. This would lower the value of MORL accordingly. This would tend to reduce the dividends paid by the mREITs, as they sell securities to reduce leverage. Also, a lower value of MORL would reduce the dividends paid by MORL. In addition to the decline in the dividend due to the reduction in the dividends of many of the mREITs, MORL is further impacted by the rebalancing of the portfolio each month to bring the amount of leverage back to 2X. As the value of the mREITs in the portfolio declines, portfolio assets must be sold to maintain the leverage level. This reduces the dividend, in addition to any reductions from cuts by the mREITs in the portfolio. This factor is, of course, a major cause of the reductions in many of the dividends of the mREITs in the portfolio. The individual mREITs in MORL, such as Annaly Capital Management Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC), have been selling assets to bring their leverage down to their targets, and in some cases, reducing the leverage beyond that in response to the market volatility.

Since last October, the effect of the rising MORL NAV has tended to increase the MORL dividend. The relationship between the net asset value of MORL and the dividend is explained more fully in: MORL's Net Asset Value Rises - Implications For The Dividends.

With the June 2014 MORL dividend of $0.0536, the annualized dividends based on the most recent three months ending in June 2014 is now $4.62. This is 5.2% more than $4.39 for the three months ending in May 2014, and 5.7% more than the $4.37 for the three months ending in April 2014. This suggests a rising trend for MORL's dividends, due mostly to the rising NAV effect described above.

The annualized dividends based on the most recent three months ending in June 2014 represents a 20.2% simple annualized yield, with MORL priced at $22.84. On a monthly compounded basis, the effective annualized yield is 22.2%.

If someone thought that over the next five years, interest rates would remain relatively stable and thus MORL would continue to yield 22.2% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $272,492 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $22,200 initial annual rate to $60,493 annually.

Holdings of MORL and MORT as of June 3, 2014

Weight

Dividend

Ex-date

Pay Date

(NLY)

Annaly Capital Management Inc.

17.46%

$0.30

3/28/2014

4/30/2014

(AGNC)

American Capital Agency Corp.

13.12%

$0.65

3/27/2014

4/28/2014

(NRF)

Northstar Realty Finance Corp.

8.09%

$0.25

5/15/2014

5/23/2014

(STWD)

Starwood Property Trust Inc.

6.13%

$0.48

6/26/2014

7/15/2014

(NYSE:TWO)

Two Harbors Investment Corp.

5.78%

$0.26

3/27/2014

4/21/2014

(CIM)

Chimera Investment Corp.

4.45%

$0.09

6/26/2014

7/24/2014

(NYSE:MFA)

MFA Financial Inc.

4.22%

$0.20

3/27/2014

4/28/2014

(CLNY)

Colony Financial Inc.

4.07%

$0.36

6/26/2014

7/15/2014

(NYSE:NCT)

Newcastle Investment Corp.

3.89%

$0.10

3/21/2014

3/25/2014

(NYSE:IVR)

Invesco Mortgage Capital Inc.

3.75%

$0.50

3/27/2014

4/28/2014

(NYSE:NRZ)

New Residential Investment Corp.

3.49%

$0.18

3/27/2014

3/31/2014

(NYSE:ARR)

ARMOUR Residential REIT Inc.

3.03%

$0.05

6/12/2014

6/27/2014

(NYSE:HTS)

Hatteras Financial Corp.

2.94%

$0.50

3/26/2014

4/25/2014

(NYSE:PMT)

PennyMac Mortgage Investment Trust

2.84%

0.59

4/14/2014

4/30/2014

(NYSE:CYS)

CYS Investments Inc.

2.84%

$0.32

3/21/2014

4/17/2014

(NYSE:CMO)

Capstead Mortgage Corp.

2.39%

$0.34

3/27/2014

4/17/2014

(NYSE:BXMT)

Blackstone Mortgage Trust Inc.

2.09%

$0.48

3/27/2014

4/15/2014

(RWT)

Redwood Trust Inc.

1.87%

$0.28

6/11/2014

6/30/2014

(NASDAQ:MTGE)

American Capital Mortgage Investment Corp.

1.73%

$0.65

3/27/2014

4/28/2014

(NYSE:RSO)

Resource Capital Corp.

1.34%

$0.20

3/27/2014

4/28/2014

(NYSE:ANH)

Anworth Mortgage Asset Corp.

1.31%

$0.14

3/27/2014

4/29/2014

(NYSE:RAS)

RAIT Financial Trust

1.23%

$0.17

4/30/2014

4/30/2014

(ARI)

Apollo Commercial Real Estate Finance Inc.

1.05%

$0.40

6/26/2014

7/15/2014

(NYSE:DX)

Dynex Capital Inc.

0.90%

$0.25

4/2/2014

4/30/2014

Disclosure: I am long MORL, CEFL, AGNC. 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.

Source: Why The June MORL Dividend Was Much Higher Than My Projection.