Anworth's Q2 Dividend Is Lipstick On A Pig. All Dividends Are Not Created Equal

Jul. 3.14 | About: Anworth Mortgage (ANH)


Our proprietary model projects net income attributable to common shareholders in Q2 to be $13.485 million, assuming amortization charges of $11 million.

Anworth invests in 15-year agency MBSs and agency ARM MBSs. The increased use of hedges may be limiting returns to common stockholders by reducing the net interest margin.

The 15-year MBSs are carried at an amortized premium to par value. NPV analysis indicates the cash flows discounted at spot rates may be worth less than recorded value.

Anworth has recently undertaken a plan to invest in single-family homes.

There may be significant agency costs resulting from a conflict of interest.

Anworth (NYSE:ANH) is a REIT with a heavy focus on agency ARM MBSs. It operates almost exclusively with agency-backed MBS, and has been trading at a heavy discount to book value. Despite the heavy focus on ARM MBSs, the company's income is very susceptible to changes in interest rates and to changes in the curvature of the yield curve. According to Bloomberg, Anworth was recently the subject of a proxy fight, as activist investor Arthur Lipson declared, "Existing management… has certainly failed shareholders". The company has a fairly substantial loss carried in AOCI, which may be indicative of deeper flaws. The loss can be viewed in its most recent 10Q. The company has recently modified its strategy by expanding into residential real estate management, though the extent to which it will invest is unclear.

This report is fairly complex; for your convenience, it will be organized by the following framework:

Financial Statements

1. Projected Income Statement

2. Rate Shocks

3. Assets

Adjustable Rate Mortgages

1. Characteristics

2. Amortization

3. WAC to FRA Spread & FRA usage

15-Year Mortgage-Backed Securities

1. Characteristics

2. Libor Spot Rate Curve

3. NPV Analysis w/ spot rate curve & various CPR

Residential Properties

1. Strategy

2. Progress

3. Drawbacks

Preferred Stock


1. Overview

2. CEO/Chairman/President

3. External Manager Structure

4. Golden Parachutes

5. Non-performance Based Compensation

6. Indemnification

7. Other Employment

8. Customized Definition of "Equity"

9. Proxy Fight

10. Things management could do

11. Recent History



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Financial Statements - Income Statement

This projected income statement was prepared using a proprietary model.


Projected Income Statement

For Three Months Ended June 30, 2014

Projected by Colorado Wealth Management Fund

(in thousands, except per share amounts)

June 30th

Gross interest income before amortization


Amortization charge


Stated interest income

Interest on Agency MBS


Other income



Interest expense

Interest expense on repurchase agreements


Interest expense on junior subordinated notes



Net interest income


Gain on sales of Agency MBS

Gain on interest rate swaps, net

Recovery on Non-Agency MBS



Management fee to related party


Other expenses


Total expenses


Net income


Dividend on Series A Cumulative Preferred Stock


Dividend on Series B Cumulative Convertible Preferred Stock


Net income to common stockholders


Basic EPS


Diluted EPS


Basic weighted average number of shares outstanding


Diluted weighted average number of shares outstanding


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Notice that no values have been assigned to gains on sales of agency MBS or interest rate swaps. Because the realized values may be different from the actual impact as recorded in AOCI, no change in positions is recorded in this projection.

Financial Statements - Rate Shocks

Unfortunately, this feels like a best-case scenario. Anworth can be significantly damaged by rates moving in either direction. In a way, that represents one of the most fundamental problems for the strategy Anworth is using. The following table is pulled from Anworth's financial statements.

Change in Interest Rates

Percentage Change in
Projected Net Interest Income

Percentage Change in
Projected Portfolio Value
















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As you can see, a parallel shift in the yield curve would be unfortunate for Anworth. Ironically, Anworth is primary invested in ARMs, but that has not been able to shield the company from the effects of rate fluctuations. Is there a way for its current strategy to be successful? Yes, but it seems very unlikely. It seems to me, based on my analysis of the 2013 10K and 2014 Q1 10Q, Anworth could benefit from a change in the yield curve, but not a parallel shift. The required change in curvature might be fairly specific. Anworth uses FRAs to hedge its interest rate risk, but the positive slope of the yield curve might be increasing its interest costs. An increase in the one-year LIBOR rates would be advantageous for Anworth, because most of its ARMs are using the one-year LIBOR plus a spread, to set their rates. Glancing at the Balance Sheet would show liabilities generally being less than 3 months, but those positions are regularly rolled. Intuitively, it might seem like an increase in 3-month LIBOR would hurt Anworth. It would, but the damage would be far less than it would seem. The interest expense is really being dictated by the notional values and rates of the FRAs. Anworth pays a rate similar to 3-month LIBOR on the repurchase agreements, and receives the 3-month LIBOR in its FRAs. Effectively, a substantial portion of its interest cost is fixed.

Financial Statements - Assets

Here is a look at the breakdown in the type of assets Anworth is holding. This table is pulled from its financial documents.

March 31,


December 31,


(dollar amounts in thousands)

Total assets



Fair value of Agency MBS



Adjustable-rate Agency MBS (less than 1 year reset)



Adjustable-rate Agency MBS (1-2 year reset)



Adjustable-rate Agency MBS (2-3 year reset)



Adjustable-rate Agency MBS (3-4 year reset)



Adjustable-rate Agency MBS (4-5 year reset)



Adjustable-rate Agency MBS (5-7 year reset)



Adjustable-rate Agency MBS (>7 year reset)



15-year fixed-rate Agency MBS



20-year and 30-year fixed-rate Agency MBS





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Adjustable Rate Mortgages - Characteristics

Anworth carries a substantial amount of ARMs. Ideally, that would dramatically reduce interest rate exposure. Unfortunately, as we have seen from its projections of the impact from a hypothetical rate shock, there is still significant interest rate exposure.

In my opinion, these are the most important things to understand about the ARMs:

  1. A significant majority of the ARMs, about 75%, are more than a year out from the reset date.
  2. The assets are carried at a premium to par value. Prepayment rates require significant amortization charges.
  3. The yield curve is positively sloped. That's a good thing for mREITS, but the current slope doesn't leave a large spread between the initial fixed coupon and the FRA with the same maturity, which would be acceptable, if only temporary. It is my belief that the spread between the initial rate and the five-to-seven year LIBOR rates will remain too small to make a significant return during this fixed rate period without reducing hedges. Since these rates are already locked in, changes now would now fix the situation.
  4. When you combine points 2 and 3, you see that the already mediocre spread must be significantly reduced by large amortization charges to account for prepayment risk.

Adjustable Rate Mortgages - Amortization

In Q1'14 and Q2'13, amortization charges were $10 million and $19 million, respectively. According to the most recent 10Q, the reduction in amortization charges was primarily due to lower CPR assumptions. Anworth did encounter lower prepayment rates; however, I do not think the reduction in prepayments was significant and sustainable enough to justify the entire change. It is my opinion that the amortization charge in Q1 2014 was lower than it should have been. The reduction in amortization expense, as a percentage, was roughly equivalent to the reduction in the CPR experienced in the first quarter. However, that level of CPR may have been an outlier, rather than representing a new normal. If the new level of CPR is sustained, the amortization charge is correct. If CPR rates increase in the second quarter, amortization charges will need to be increased. The sharp decrease in amortization increased net income attributable to common shareholders to nearly $12 million. Without the decrease in amortization, net income attributable to common shareholders would have been between $3 and $4 million. The net income of $12 million represents a basic EPS of 9 cents per share. Dividends were 14 cents per share. A reduction in the level of amortization charges limited the disparity between EPS and dividends.

The amortized carrying value of the assets was 103.24% of par value. (Note: All MBSs - this is not strictly ARMs.) This fits the trend for the company. The previous three quarters, this figure was 103.23%, 103.26%, and 103.16%. However, the expense of $9.9 million would annualize to $39.6 million. Compared to a premium over par value of $269.414 million, that indicates if no new securities were purchased, it would take 6.8 years to amortize the entire premium. The following table compares this amortization speed with the rates over the previous 3 years. It should be noted that actual CPR in the first quarter of 2014 was significantly lower than the long-run average. See table below. Information was gathered from the 2013 10K, 2012 10K, and 2011 10K.

Amortization expense as a function of time

Numbers in thousands, except years


Total MBS @ Fair Value March 31, 2014


Implied par value


Premium carried in BS


Annualized expense based on Q1


Years to amortize entire premium


Total MBS @ Fair Value Dec 31, 2013


Implied par value


Premium carried in BS


Annual expense


Years to amortize entire premium


Total MBS @ Fair Value Dec 31, 2012


Implied par value


Premium carried in BS


Annual expense


Years to amortize entire premium


Total MBS @ Fair Value Dec 31, 2011


Implied par value


Premium carried in BS


Annual expense


Years to amortize entire premium

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Based on this increase in the years required to fully amortize the securities, earnings in the first quarter of 2014 may have been overstated. If the amortization rates are increased in future quarters, net income may be materially reduced.

The spread between the weighted average coupon and the rate paid on FRAs has stayed within reason.

WAC-Swap spreads

Mar 31 2014

Dec 31 2013






Swaps average


Swaps average


WAC-Swap spread


WAC-Swap spread

Dec 31 2012

Dec 31 2011






Swaps average


Swaps average


WAC-Swap spread


WAC-Swap spread

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However, the notional value of the swaps compared to the value of the portfolio has expanded drastically, from around 35% to around 65%. See table below.

Notional value of swaps relative to par value of assets

Mar 31 2014

Dec 31 2013


Notional value


Notional value


Notional / Par value


Notional / Par value

Dec 31 2012

Dec 31 2011


Notional value


Notional value


Notional / Par value


Notional / Par value

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That's a problem for investors. Despite those spreads being reasonably stable, the increased use of FRAs, as measured by notional value / par value of assets, has created a very strong downtrend in the margin for net interest income. See table below.

Net Interest Margins since 2011

Values in Thousands, except for Margin

Mar 31 2014

Dec 31 2013


Interest income


Interest income


Interest expense


Interest expense


Net interest income


Net interest income





Dec 31 2012

Dec 31 2011


Interest income


Interest income


Interest expense


Interest expense


Net interest income


Net interest income





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This issue is reflective of extensive FRA use. I recalculated some numbers from the March 31, 2014 10Q. Using the company's average FRA rate for the period, estimated at 1.802%, it appears if the company had reduced its swap position to covering 35% of its MBS, the margin would have been 61.7%. This is one way management could capitalize on the benefits of its adjustable rates mortgages. By having a much smaller hedge, the company could maintain much stronger net interest margins. If the company were holding fixed rate assets, this would be extremely risky. Remember that Anworth used about these levels of hedges during 2011 and 2012.

15-Year Mortgage-Backed Securities - Characteristics

The 15-year mortgages create a very troubling dynamic for Anworth. The following numbers will pertain only to 15-year agency fixed-rate MBSs. Here are a few key facts to consider:

  1. The percentage of the portfolio here has slightly increased, to 20%.
  2. As of March 31, 2014, the WAC is 2.68
  3. As of March 31, 2014, the 5-year LIBOR swap was 1.810
  4. As of March 31, 2014, the 10-year LIBOR swap was 2.843
  5. As of March 31, 2014, the 20-year LIBOR swap was 3.436
  6. The average amortized cost of these securities was 103.10%

15-year mortgages at these rates contain a significant scheduled repayment of principal. The required payments including principal clearly make it more predictable. Almost all of the company's debt (excluding junior sub notes and preferred shares) is based on LIBOR in one way or another. So, if we develop a LIBOR spot rate curve, we can get a feel for the appropriate discount factors.

15-Year Mortgage-Backed Securities - LIBOR Spot Rate Curve

Using the data from The Wall Street Journal for March 31, 2014, I built this spot rate curve. Lacking data for every period, the rate of increase in payments in between the known values had to be estimated. A simple straight-line method was used. It may cause the data to be a little more volatile. The Y-axis contains the relevant interest rate for the period. The X-axis contains the year.

Using this spot rate curve, we can apply capital budgeting principles to the cash flows. Since the securities are carried at a premium to par, we know an immediate payback should be bad for us. The financial statements indicate unrealized losses, but do not contain enough specific information regarding these losses to evaluate whether the losses are related to the 15-year MBSs or the ARM MBSs.

15-Year Mortgage-Backed Securities - NPV Analysis w/ spot rate curve and various CPR

Now, with the spot curve, we will try to establish the CPRs that would not detract from company value. To simplify the analysis, cash flows are being treated as annual flows, rather than monthly. The WAC has been used to forecast required payments. We start by examining the effects of extension. What if CPR was zero?

Outstanding PAR


Accrued interest


PV of Payment @ hedge cost













































































Total PV




Purchase price


NPV w/o prepay


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The discount rates are being pulled directly from the spot curve. The analysis is suggesting the relative value of holding these securities assuming they are 100% financed with swap rates. Assuming leverage is effectively unlimited, any positive NPV at the discount rate on debt would be an increase to shareholder wealth. The problem with these securities is not simply that they fail to deliver an adequate return to shareholders at a normal level of leverage; it is that they can easily deliver a negative return assuming complete leverage. Applying a real WACC, we would expect the cost for equity financing to be significantly higher than LIBOR spot rates. Consequently, the NPV analysis would return substantially lower numbers.

Since a CPR of 0 or 100 would both destroy value, we should be able to establish boundaries on each side of the CPR. A table summarizing the findings is included here:

Using FRA Spot Curve



























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The primary findings from the graphs are:

  1. If the CPR is constant over the life of the security, the lowest CPR that would allow for a positive NPV would be slightly over 20%.
  2. According to its financial statements, the boost to income in Q1 2014 was largely due to a reduction in the amortization of premiums when it lowered its projections of CPR. The actual CPR experienced by the fund, according to the 10Q, in that quarter was 14%. How that 14% is divided between ARMs and 15-year FRM is not stated.
  3. The highest CPR that would allow a positive value is between 50 and 55%.
  4. In my opinion, the most likely case for a very high CPR would be a large drop in interest rates. Such a drop might damage the flows of cash from the ARM side of the business, depending on the curvature of the new yield curve. If Anworth has used FRAs to lock in its interest rates, it would be unable to benefit from the low rates. Further, new securities being issued would have even lower rates, resulting in further downside.
  5. Low prepayment rates will raise reported NI by lowering the amortization charge, but based on the LIBOR spot curve, they won't produce positive net present value in the 15-year MBS for investors. So celebrating low prepayment rates might be a little premature, especially without knowing which securities were being prepaid.

A quick modification to the most recent 10Q income statement shows what happens to NI if CPR returns to the levels seen over the previous few years. In 2013, Q1 amortization was $19 million. If that level of amortization was used in 2014 Q1, the EPS for the quarter would have been around 2.7 cents, down from the stated 9 cents. The 15-year FRM requires a relatively high level of CPR to avoid a loss. The ARM side of the business does not do well in a high-CPR environment. If the CPR levels are similar across mortgage types, either the 15-year securities will fail to provide an adequate return, or the ARMs may require rapid amortization. While having opposite risk factors usually reduces volatility, the best-case scenarios for a new 15-year FRM, at the WAC reported in the most recent 10Q and carried at the premium reported in the 10Q, is still a weak return if the spot curve is an accurate predictor of future costs. If, however, these 15-year mortgages are seasoned by several years already, they could be reliably hedged to a shorter life. Of course, if they are seasoned by several years, we should wonder why they are still holding such a large unamortized premium.

Residential properties

Anworth has decided to "branch out" into residential property management. Unfortunately, there is no evidence that any of its employees have extensive experience managing property from a distance and at this scale. Some members may have experience on a small scale. The financial statements indicate that management intends to engage in this business by seeking significant outside help and relying on the advice and performance of those outside parties. This could further increase the expenses the firm incurs.

As of March 31st, 2014, the company owned 5 single-family residential properties. From April 1st to May 5th, 2014, Anworth acquired and committed to acquire 57 single-family residential properties in southeast Florida.

One of the difficulties here is that the properties are single-family residential. These kinds of properties usually have lower capitalization rates than apartment buildings. When investing in single-family residential, a significant portion of the return comes from growth. This is a bet on house prices rising. It feels like a terrible bet for the shareholders, not because house prices won't rise, but because the return to shareholders won't be there due to transaction costs, management costs, and agency costs.

Competition in this sector may be very intense. Private landlords in the area may not have the same economies of scale, but they do have the ability to perform repairs and assessments at less than market rates. By hiring a management company and relying on the advice of several outside professionals, Anworth may be required to pay market rates for the services it uses to operate these properties.

If the intent of acquiring physical real estate is to reduce the risk inherent to investors from investing in REITs, it is misguided. It is the duty of the investor, or his or her agent, to adequately diversify and determine if equity REITs are a good fit for their portfolio. If the shareholder wishes to hold shares in an equity REIT, he or she can seek out an equity REIT with a proven track record.

Preferred Stock

Anworth has two kinds of preferred stock, A and B. As of closing of the market on June 24th, 2014, Series A is trading for $25.70, which is a 70 cent premium to both its liquidation value and call value. The current yield is 8.39%. The annualized dividend is $2.15625. The Series B stock is trading for $23.60, which is a $1.40 discount to its liquidation value. It is not callable, but it is convertible into common stock. The current yield is 6.62%. The annualized dividend is $1.5625. Originally, I was contemplating the validity of a long/short strategy, because the return on price difference is very attractive. With the same liquidation value, the potential loss in liquidation would be limited. The initial conversion ratio was 2.3809 shares of common stock per share of Series B. At that conversion ratio, the conversion factor would have been nearly irrelevant.

The conversion factor is quite relevant, though. The conversion ratio is not static, and the stock can be redeemed for cash if certain events occur, such as a change in control. The conversion ratio, as of March 31, 2014, is 4.0411 shares of common stock per share of Series B. The book value per share as of that date was 6.3134. If the company were trading at book value, that would allow a conversion into $25.5131 of common stock. Of course, shares are not trading at book value. However, if book value per share increased rapidly as a result of buybacks while trading at a discount, or if discount to book value decreased for any reason, the Series B stock might be slower to respond to the price movements. Based on the new conversion factor, I do NOT recommend a long/short play here.

Management - Overview

One of the fundamental problems for this company, in my opinion, is the way it has been managed. The company is plagued with conflicts of interest. To adequately analyze this company requires an understanding of the limitations on future performance created by the agency costs.

Management - CEO / Chairman / President

The first conflict is not as uncommon as it should be. The chairman of the board and the CEO are the same person. Shareholders are not being represented in negotiations on executive compensation. If you look up the company profile on Yahoo Finance, you'll find that the CEO is paid $274,000 per year. Actual compensation for executives includes fees paid under the Management Agreement.

Management - External Manager Structure

That compensation "agreement" for Q1, 2014 had the management company receiving a payment of over $2.9 million. This is a contract that appears to have been negotiated between the chairman of Anworth and himself as a major beneficiary of the management company. By structuring the pay in this manner, an outside observer might think the management fees were negotiated in an arm's length transaction, but the financial statements inform us that is not the case.

Management - Golden Parachutes

The company has (or had) golden parachutes in place ensuring that a change in the ownership of the firm would trigger payouts to the executives. As a backup to the traditional golden parachute strategy, Anworth Management, LLC will continue to manage the portfolio and be paid according their historical compensation, in the event of a change in ownership or election of a new board. Terminating the contract that makes payments to Anworth Management, LLC without "cause" triggers a large payment to Anworth Management, LLC. Specifically, one of the highlights of this section reads:

"We are required to provide 180-days prior notice of non-renewal of the Management Agreement and must pay a termination fee on the last day of the initial term or any automatic renewal term, equal to three times the average annual management fee earned by the Manager during the prior 24-month period immediately preceding the most recently completed month prior to the effective date of termination."

Management - Non-performance Based Compensation

Quoting from page 37 of the 2013 10K:

"The Manager's entitlement to substantial nonperformance-based compensation may reduce its incentive to devote sufficient time and effort to seeking investments that provide attractive risk-adjusted returns for our investment portfolio. This in turn could harm our ability to make distributions to our stockholders and the market price of our common stock."

Management - Indemnification

Anworth has agreed to indemnify the "Manager" from virtually all claims that would not require significant evidence in court. These statements combine to hold Management harmless if they choose not to seek attractive risk-adjusted returns. Management is neither compelled to seek risk-adjusted returns nor to spend any minimum amount of time working for Anworth. That might create another conflict of interest if they had other jobs working for a privately-held company. They can collect their salary without being required to show up to work, so they have the option to focus on creating value in a second company.

Management - Other Employment

According to page F-21 of the 2013 10K,

"Nothing in the Management Agreement prevents the Manager or any of its affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including investment in or advisory service to others investing in any type of real estate investment, other than advising other REITs that invest more than 75% of their assets in U.S. agency residential MBSs. Directors, officers and employees of the Manager may serve as our directors and officers.

Messrs. Lloyd McAdams, Joseph E. McAdams, Charles J. Siegel and John T. Hillman and Ms. Heather U. Baines and others are officers and employees of PIA Farmland, Inc. and its external manager, PIA, where they devote a portion of their time. PIA Farmland, Inc., a privately-held real estate investment trust investing in U.S. farmland properties to lease to independent farm operators, was in incorporated in February 2013 and acquired its first farm property in October 2013. These officers and employees are under no contractual obligations to PIA Farmland, Inc., its external manager, PIA, or to Anworth or its external manager, Anworth Management, LLC, as to their time commitment. Mr. Steven Koomar, the Chief Executive Officer of PIA Farmland, Inc., has no involvement with either Anworth or its external manager, Anworth Management, LLC."

Management -Customized Definition of "Equity"

So what is management entitled to? Each year, they will be paid 1.2% of book value. That is .1% per month. One of the strange things about this compensation agreement is that the definition of book value. Specifically, two major accounts are excluded. In their words, "Our Equity is defined as our month-end stockholder's equity, adjusted to exclude the effect of any unrealized gains or losses included in either retained earnings or other comprehensive income, each as computed in accordance with GAAP." We saw earlier that the dividend payments for the first quarter were unsustainable. It turns out that paying out equity does not reduce the value of "equity" that is used in this calculation. If shares are issued, and the proceeds are then paid out as dividends, actual equity is unchanged. However, in this compensation agreement, the value of "equity" has been increased, because the negative value in retained earnings is excluded.

As of March 31, 2014, retained earnings held a loss. How much have its dividends outpaced its income? It has a retained loss of over $269 million. So even though the managers' compensation is based on "equity", paying out dividends that exceed net income does not reduce that value. How are those AOCI accounts? On Agency MBS, the loss is over $28 million. On derivatives, it is over $42 million. Combined, these accounts would normally represent a reduction of $339 million in equity. By using a value that is $339 million higher, the management company receives an additional $4 million and change per year.

Management - Proxy Fight

Remember that proxy fight we mentioned at the start of the article? That provides some context for this section. In March 31, 2014, the company paid an unsustainable divided to shareholders, while trading at a significant discount to book value. The company invested in new assets, despite trading at a discount to book value. By buying up shares, the company could have effectively reinvested its capital at a discount. It did buy some shares back, but it could have done more.

Management - Things Management Could Do

Here are some things management could do to create shareholder value, and the reasons I doubt they will do them.

  1. Begin aggressively buying back stock as long as it trades at a discount. - I think this is unlikely, because treasury stock is not excluded, yet. That might change.
  2. Exit the unattractive 15-year fixed rate market and the swaps used to hedge them. - I think this is unlikely, because realizing the losses would move it out of the excluded contra-equity account.
  3. If they invest in residential properties, hold them for an extended time to reduce transaction costs. - I don't think this is a good market for them to begin with, but holding those properties would create price gains in AOCI, which is excluded from the compensation equation.
  4. Limit dividends to amounts that can be sustained, rather than paying equity while the company is trading at a discount. - Dividends as a return of equity are excluded as "retained loss".

Management - Recent History

Consider these actions taken thus far this year.

  1. Share repurchase were significantly increased prior to the proxy vote. In 2013, share repurchases in dollars, not shares, were around $38 million. 2014 Q1 share repurchases were around $28 million. Between April 1st, 2014 and May 5th, 2014, nearly $28 million were spent on further share repurchases.
  2. Q1'14 paid out dividends that were significantly higher than EPS, creating a more "attractive" dividend yield.
  3. Q1'14 income was propped up by two actions. One was a decrease in amortization expense, though we proved the lower CPR does not help the 15-year securities.
  4. The second Q1'14 income action was "Gain on interest rate swaps, net". The realized gain went to the income statement and boosted income by $628,000. Given that net income to common shareholders was under $12 million, that isn't entirely immaterial. But what's the problem with having a gain on swaps? AOCI shows there is still a negative value in AOCI for agency MBS. The losses were kept in unrealized losses, while the gain was pushed onto the income statement.

These actions were all building up to the proxy vote, and they are the actions that would make it look like the company was back on track if you only took a glance.


Shares of the common stock are rated "Sell - Don't short". The potential for significant changes to behavior has been demonstrated by the decision to invest in real estate directly. While I don't think that is the optimal direction for the company, if that willingness to change was applied to its FRA practices, it is possible that the Net Interest Margin could increase dramatically, leading to a much higher return on equity. The ability of the company to repurchase its shares at a discount to book value represents another opportunity to get squeezed in a short position. I find both of these options unlikely, but would not recommend a short on a company that is this far below book value without further substantial cause.

Shares of the Series A preferred stock are rated "Sell - Don't short". The dividend yield is simply too high to short without evidence that indicated management would utilize the call option in the immediate future. Even though the shares are trading at a premium to book value, recalling them without issuing new equity would reduce management compensation.

Shares of the Series B preferred stock are rated "Watch". At this time, I am not convinced that they are a solid investment, but if certain factors change, they could be temporarily mispriced. If share repurchases continue, if they are funded by either improving net interest margins through decreased use of FRAs or by exiting the 15-year MBS part of the business, there could be a significant jump in share price. The discount to liquidation value is also appealing given the possibility of a change in control.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The analyst has no position in any of the stocks mentioned, any derivative with exposure to the stock, nor any intent to initiate a position within 72 hours of publication. Some incidental long exposure may exist from positions in mutual or index funds. All data gathered for this report, except calculations, were retrieved online. Most of that data comes from the 10Q and 10K. The numbers are assumed accurate, but not guaranteed. Please contact your personal financial advisor before following any advice you find on the internet.