Update: Javelin Mortgage Investment's Second Quarter Earnings Impact

| About: Javelin Mortgage (JMI)


Javelin Mortgage released Q2 earnings and reported core taxable REIT income of $4.9 million of $0.41 per share.

This is in-line with most expectations, although slightly worse than my prediction for performance for the company I made to start the year.

Shareholder equity was $161 million or $13.40 per common share, a 1% premium to the current price of $13.27.

The stock sold off hard following the report, but has since begun to rebound.

Currently the dividend is safe, but Javelin came in $0.04 per share shy of complete coverage.

Javelin Mortgage Investment (NYSE:JMI) just reported its second quarter earnings figures. Core Income and estimated ordinary taxable REIT income was approximately $4.9 million or $0.41 per share. On a comprehensive basis, GAAP net loss for the second quarter was approximately $8.8 million. The company paid dividends of $0.15 per common share of record for each month in the quarter, resulting in payments of approximately $5.4 million, or a $0.5 million shortfall. Further, at the end of the quarter, the company's agency securities portfolio consisted of fixed rate Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) mortgage securities valued at approximately $1.2 billion. The company's non-agency securities portfolio was valued at approximately $282.0 million at quarter end, including securities underlying linked transactions. During the quarter, the annualized yield on average assets was 3.20%, and the annualized cost of funds on average liabilities (including realized cost of hedges) was 1.50%, resulting in a net interest margin of 1.70%. This is still incredibly strong relative to past quarters.

In my January article, I argued that Javelin Mortgage was the one mortgage real estate investment trust that should easily rise into 2014. Unlike its larger competitors that I frequently cover, namely Annaly Capital (NYSE:NLY) American Capital Agency (NASDAQ:AGNC), Javelin had started the year with extreme strength while Annaly Capital and American Capital were languishing at all-time lows. I predicted that the rebalancing of the portfolios to deleverage risk (currently 7.6 to 1), and adjusting the balance of agency and non-agency mortgage backed securities would generate strength.

Thus far the call has been so-so. The earnings report was certainly worse than I had expected. I predicted that Javelin Mortgage would reach $15.00 in 2014, and it did. However it has slowly fallen from these levels this spring and summer, and these earnings drove shares into the low $12s, which drove me to recommend picking up shares through my personal email distribution list to clients. What is interesting is that Annaly and American Capital's earnings were both pretty strong, so Javelin's mediocre report was a touch concerning. What I believe is happening is that Annaly and American Capital are both benefiting from their portfolio rebalancing efforts. Javelin was late to the party. Thus, I suspect that we may begin to see the positive impacts of Javelin's portfolio rebalancing efforts in Q3 and Q4. With this in mind, I am still behind the stock, and I think that shares under $13 are a bargain. However, should Q3 earnings show failure to provide dividend coverage, then I may reevaluate my thesis. Until then, I maintain my "buy" rating on the stock, but no longer believe shares are far superior to Annaly and American Capital as I originally opined earlier this year. However, I think it is still a good place to park money for income and share appreciation while interest rates remain low and are not moving with extreme volatility.

Disclosure: The author is long AGNC, NLY, JMI. 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.