MORL August Dividend Projected To Bring Yield To 22.2%

|
 |  About: UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL), Includes: AGNC, ARR, DX, MORT, NLY, PMT, RAS
by: Lance Brofman

Summary

I have projected a dividend for MORL of $0.0802 for August 2014 and have included all of the intermediate numbers and calculations I used in arriving at that figure.

A number of readers have requested that the intermediate numbers and calculations be included in my articles. This will allow astute readers to check my figures and spot possible errors.

Based on my projections MORL will be yielding 22.2% on a monthly compounded basis.

The prospects for future dividends for both the mREITs in general and MORL in particular depend on the future path of short-term interest rates.

Only four of the 24 mREITs that comprise ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) and Market Vectors Mortgage REIT ETF (NYSEARCA:MORT) will have an ex-dividend date in July 2014. Those four components are: Armour Residential REIT (NYSE:ARR), which pays monthly, and thus goes ex-dividend during the relevant period. PennyMac Mortgage Investment Trust (NYSE:PMT) which goes ex-dividend July 11, 2014. RAIT Financial Trust (NYSE:RAS) which goes ex-dividend July 11, 2014 and Dynex Capital Inc. (NYSE:DX) goes ex-dividend July 1, 2014. Thus, it is now possible to project that the monthly dividend that MORL will declare for the month of August 2014 will be $0.0802.

This relatively low dividend is no surprise since only four of the components, which comprise a total of 8.6% of the portfolios, goes ex-dividend during the relevant period. 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 about 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, ex-dates and pay dates of the 24 mREITs are shown in the table below.

A number of people have requested in comments on my articles where I have projected dividends for various securities that I include all of the calculations and intermediate numbers that I used to arrive at my projections. Previously, I have not done so because on some browsers and with small screens only a limited number of columns will show up. Those complaining about the lack of all intermediate numbers in my articles were proven correct when an error in the calculations resulted in a miss in the estimates for the dividends that MORL and MORT would pay in July. Possibly, if all of the intermediate numbers were shown in the article: MORL's July Dividend Projected To Increase Significantly - Yield To Be 24.5% On A Monthly Compounded Basis, astute readers could have spotted the error and it could have been corrected. Thus, I will now include every intermediate step, number and calculation.

The table below shows the weight, ex-date, pay date and dividend for all of the 24 components. Additionally, for the four components that have ex-dates in July, the price as of July 14,2014, the imputed value, the imputed number of shares and the imputed gross dividend are shown.

The calculation of the August MORL dividend begins with a computation of the total assets of the portfolio. This is done by multiplying the net asset value of MORL on July 14, 2014 of $22.07 by the shares outstanding of 12,450,000 and multiplying that product by 2X to account for the 2X leverage. This results in a net asset total of $549,543,000.

For each of the four components with ex-dates in July a value of the holding is computed by multiplying the weight of the component by the net asset total of $549,543,000. For PMT with a weight of 3.37% this results in a value of $18,519,599. Dividing the value of $18,519,599 by the $21.79 share price of PMT results in an imputed share count of 849,913. Multiplying the imputed share count of 849,913 by the dividend of $0.059 gives an imputed gross dividend of $501,449.

This calculation is done for the other three components that have July ex-dates and is shown on the table below. The imputed gross dividends for all four are added up to give a total of $998,798. This is divided by the number of shares, 12,450,000 to give a projected dividend for the month of August 2014 of $0.0802.

The projected dividend for the month of August 2014 of $0.0802 is a 10.8% increase from the May 2014 dividend of $0.0724. For the three months ending August 2014, the total projected dividends are $1.1135. That would be a 1.01% increase over the three months ending August 2014, which had dividends totaling $1.1024.

The prospect for future MORL dividends is mostly a function of interest rates. The mREITs that comprise the index upon which MORL is based use leverage to enhance their yields. Higher short-term rates would reduce the dividends paid by the mREITs. 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. ARR reduced its monthly dividend over the past year from $0.11 to $0.05. The individual mREITs 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. An increase in the net asset value of MORL would increase the dividend, even without any change in the dividends paid by the component mREITs. This effect has caused the dividend paid by MORL to increase over the last nine months. 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.

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 $0.0802 for the August 2014 MORL dividend is accurate, the annualized dividends based on the most recent three-months ending in August 2014 would be $4.454. This is a 20.2% simple annualized yield with MORL priced at $22. 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 $272,871 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 $60,577 annually.

Holdings of MORL and MORT as of July 14, 2014

weight

ex-date

pay date

dividend

price

value

shares

dividend

NLY

Annaly Capital Management Inc.

16.84%

6/27/2014

7/31/2014

0.3

AGNC

American Capital Agency Corp.

12.73%

6/26/2014

7/28/2014

0.65

STWD

Starwood Property Trust Inc.

7.66%

6/26/2014

7/15/2014

0.48

TWO

Two Harbors Investment Corp.

5.71%

6/30/2014

7/22/2014

0.26

CIM

Chimera Investment Corp.

4.73%

6/26/2014

7/24/2014

0.09

NRF

Northstar Realty Finance Corp.

4.62%

5/15/2014

5/23/2014

0.25

MFA

MFA Financial Inc.

4.43%

6/25/2014

7/31/2014

0.2

CLNY

Colony Financial Inc.

4.38%

6/26/2014

7/15/2014

0.36

IVR

Invesco Mortgage Capital Inc.

3.84%

6/25/2014

7/28/2014

0.5

NRZ

New Residential Investment Corp.

3.80%

6/25/2014

7/31/2014

0.175

NCT

Newcastle Investment Corp.

3.50%

6/20/2014

7/31/2014

0.1

PMT

PennyMac Mortgage Investment Trust

3.37%

7/11/2014

7/30/2014

0.59

$21.79

18519599

849913

501449

ARR

ARMOUR Residential REIT Inc.

3.08%

8/13/2014

8/29/2014

0.05

$4.27

16925924

3963917

198196

HTS

Hatteras Financial Corp.

2.99%

6/20/2014

7/25/2014

0.5

BXMT

Blackstone Mortgage Trust Inc.

2.91%

6/26/2014

7/15/2014

0.48

CYS

CYS Investments Inc.

2.88%

6/20/2014

7/16/2014

0.32

CMO

Capstead Mortgage Corp.

2.50%

6/26/2014

7/18/2014

0.34

MTGE

American Capital Mortgage Investment Corp.

2.04%

6/26/2014

7/28/2014

0.65

RWT

Redwood Trust Inc.

1.87%

6/11/2014

6/30/2014

0.28

ARI

Apollo Commercial Real Estate Finance Inc.

1.37%

6/26/2014

7/15/2014

0.4

RSO

Resource Capital Corp.

1.35%

6/26/2014

7/28/2014

0.2

ANH

Anworth Mortgage Asset Corp.

1.26%

6/26/2014

7/29/2014

0.14

RAS

RAIT Financial Trust

1.21%

7/9/2014

7/31/2014

0.18

$8.13

6649470

817893

147221

DX

Dynex Capital Inc.

0.94%

7/1/2014

7/31/2014

0.25

$8.50

5165704

607730

151932

Click to enlarge

Disclosure: The author is long MORL, AGNC, RAS, CYS, ARR. 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.