MORL Projected To Pay September Monthly Dividend Of $0.0762, For 21.9% Yield

Aug.19.14 | About: UBS ETRACS (MORL)

Summary

I have projected a dividend for MORL of $0.0762 for September 2014 and have included all of the intermediate numbers and calculations I used in arriving at that figure.

I have added some additional refinements to the calculation procedure to adjust the assets upon which the dividend calculation is based for the accrued fees and dividends of the components.

Based on my projections, MORL will be yielding 21.9% on a monthly compounded basis.

Only two of the 24 mREITs that comprise ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) and Market Vectors Mortgage REIT ETF (NYSEARCA:MORT) have an ex-dividend date in August 2014. Those two components are: Armour Residential REIT (NYSE:ARR), which pays monthly, and thus goes ex-dividend during the relevant period and NorthStar Realty Finance Corp. (NYSE:NRF), which goes ex-dividend August 14, 2014 with a pay date of August 22, 2014. Thus, it is now possible to project that the monthly dividend that MORL will declare for the month of September 2014 will be $0.0762.

This relatively low dividend is no surprise since only two of the components, which comprise a total of 7.82% of the portfolios, go 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 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 table below shows the weight, ex-date, pay date and dividend for all of the 24 components. Additionally, for the two components that have ex-dates in August, the price as of August 15,2014, the imputed value, the imputed number of shares and the imputed gross dividend are shown.

The calculation of the September 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 August 15, 2014 of $22.49 by the shares outstanding of 13.2 million and multiplying that product by 2X to account for the 2X leverage. This results in an asset total of $593.796 million.

For each of the two components with ex-dates in August, a value of the holding is computed by multiplying the weight of the component by the net asset total of $593.796 million. For NRF with a weight of 4.84%, this results in a value of $18,519,599. Dividing the value of $28.7368 million by the $18.05 share price of NRF results in an imputed share count of 1.5921 million. Multiplying the imputed share count of 1.5921 million by the dividend of $0.50 gives an imputed gross dividend of $0.796034 million.

For ARR with a weight of 2.98%, multiplying the weight of the component by the net asset total of $593.796 million results in a value of $17.6933 million. Dividing the value of $17.6933 million by the $4.20 share price of ARR results in an imputed share count of 1.5921 million. Multiplying the imputed share count of 4.2127 million by the dividend of $0.05 gives an imputed gross dividend of $0.210635 million.

The imputed dividends for both are added up to give a total of $1.006669 million. This is divided by the number of shares, 13.2 million, to give a projected dividend for the month of September 2014 of $0.0763.

I have refined the procedure by which I calculate the projected dividend to make it more accurate. As some readers have noted, the exact weights of each of the components can change between August 15, 2014, the date that I am using for the calculation and September 2, 2014 when the actual payment is determined. For the September 2014 dividend, payment will be based on the valuations on September 2, 2014 since the 30th of September is a Saturday and Monday, September 1, 2014 is Labor Day. Furthermore, an increase in the net asset value due to improvements in the market prices of the individual components will increase the dividend. This would occur even if there was no change in any of the dividends paid by any of the components. Likewise a decrease in the net asset value due to declines in the market prices of the individual components will decrease the dividend. The relationship between the net asset value of a 2X leveraged ETN and the dividend is explained more fully in: MORL's Net Asset Value Rises - Implications For The Dividends. Thus, there will always be some noise when predicting a dividend that will be based in part on market conditions a few weeks in the future.

Obviously, on August 15, 2014, you can only assume that the market prices of the individual components will be the same on September 2, 2014. The effect of changes in the weights due to market action is very minor in terms of calculating the dividend.

There is a refinement in the calculation that can make it more accurate. The rationale for this refinement is explained in detail in my article: CEFL September Dividend Projected To Bring Yield To 18.2%. Previously, I multiplied the net asset value, which is also referred to as the "indicative value" by twice the number of shares outstanding to obtain a proxy for the total assets of the portfolio. See: CEFL August Dividend Projected To Bring Yield To 18.4%. However, indicative value takes into account accrued dividends and fees.

A more accurate estimate of the proxy for assets that consist of the portfolio securities can be obtained working backwards from the indicative value by computing the accrued fees and accrued dividends on the portfolio securities. Since the accrued fees are subtracted and accrued dividends on the portfolio securities are added, they tend to cancel out. However, if one is larger than the other, the proxy for assets could differ from the indicative value. The proxy for assets is equal to the indicative value plus the accrued fees minus the accrued dividends on the portfolio securities.

It might be noted that requests for some exact figures as of the valuation dates from the managers of the UBS ETRACS ETNs have not be successful. This is in sharp contrast to the public relations officers of components companies in the ETNs which, as a result of my Seeking Alpha articles have contacted me, unsolicited, offering to arrange meetings with the president of the component company and/or supply me with any information I might require in writing an article.

The accrued fees are relatively easy to estimate. The annual tracking fee for MORL is 0.40% and the financing spread is 0.40%. The financing fee is the financing spread plus three-month LIBOR, which is now 0.23% for a total financing fee of 0.63%. To calculate the accrued dividends, we have to look at each component security and see if on August 15, 2014 there are any that went ex-dividend but have not yet paid their dividends. While we cannot forecast price changes from August 15, 2014 to September 2, 2014, we can predict which component securities will have gone ex-dividend but have not yet paid their dividends as of September 2, 2014. We can use the difference in accrued dividends to further refine the prediction for the September 2014 dividend.

Both NRF and ARR were ex-dividend as of August 15, 2014 but had not yet paid the dividend. Thus, there are $1.006669 million in accrued dividends. For the 16 days from July 30, 2014 to August 15, 2014, the accrued fees are $0.134038 million. The proxy for assets is equal to the indicative value of $296.868 million plus the accrued fees of $0.134038 million minus the accrued dividends of $1.006669 million on the portfolio securities. This results in a value of the proxy for assets equal to $295.995369 million.

If we were trying to predict what the dividend would be if it were to be based on the of August 15, 2014 numbers, we would adjust the projected dividend for the month of September 2014 of $0.0763 by the ratio value of the proxy for assets of $295.995369 million to the product of the shares outstanding by the indicative value $296.868 million. That would be $0.0760. Of course, we are actually interested in the dividend, which will be paid based on the September 2, 2014 numbers. To obtain that, we have to adjust the proxy for assets to reflect the accrued fees and dividends that will be the case on the September 2, 2014. As is shown on the table below, given the information as of August 15, 2014, there will be no components that will have gone ex-dividend but not yet paid as of September 2, 2014. Thus, we have to add back the $1.006669 aggregate of the dividends on MORL components that were ex-dividend as of August 15, 2014 but had not yet paid. We also have to subtract the additional accrued fees that will be taken out on September 2, 2014 relative to the accrued fees as of August 15, 2014. For those 18 days, the accrued fees are $0.15079268 million. Thus, the predicted proxy value is $296.717207 million. This gives us a prediction for the September 2014 CEFL dividend of $0.07622

As I indicated in MORL August Dividend Precisely My Prediction - mREITs Will Benefit From Attitude Shifts, I think we are moving into an environment where it becomes less important what the market consensus thinks interest rates will do, rather than what the consensus thinks the Federal Reserve should do with regard to interest rates. This could be a paradigm shift. My net take on this is that the return on mREITs may be higher over the next few years than many expect, as the dividends remain stable while prices of mREITs actually rise. This could occur as the double-digit yields become irresistible to more investors. Cypress Sharpridge Investments (NYSE:CYS) is an example of a well-run mREIT paying a steady $0.32 quarterly dividend priced at $9.24 yielding 13.9%. Even with no growth in the dividend rate, I could see an improvement in the price, which would still result in a generous double-digit yield. Leveraged mREIT instruments, such as MORL, would do even better in such an environment.

The projected dividend for the month of September 2014 of $0.0762 is a 10.3% increase from the June 2014 dividend of $0.0691. For the three months ending September 2014, the total projected dividends are $1.1206. That would be a 0.6% increase over the three months ending August 2014, which had dividends totaling $1.1135.

If the projection of $0.0762 for the September 2014 MORL dividend is accurate, the annualized dividends based on the most recent three-months ending in September 2014 would be $4.482. This is a 19.9% simple annualized yield with MORL priced at $22.49. On a monthly compounded basis, the effective annualized yield is 21.9%.

If someone thought that over the next five years interest rates would remain relatively stable and thus MORL would continue to yield 21.9% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $268,679 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $21,900 initial annual rate to $58,841 annually.

Holdings of MORL and MORT as of August 15, 2014

weight

price

ex-date

pay date

dividend

frequency

value

shares

dividend

NLY

Annaly Capital Management Inc.

17.37%

$11.76

6/27/2014

7/31/2014

0.3

q

AGNC

American Capital Agency Corp.

12.74%

$23.42

6/26/2014

7/28/2014

0.65

q

STWD

Starwood Property Trust Inc.

7.57%

$23.71

6/26/2014

7/15/2014

0.48

q

TWO

Two Harbors Investment Corp.

5.69%

$10.53

6/30/2014

7/22/2014

0.26

q

CLNY

Colony Financial Inc.

4.87%

$22.34

6/26/2014

7/15/2014

0.36

q

NRF

NorthStar Realty Finance Corp.

4.84%

$18.05

8/14/2014

8/22/2014

0.5

q XA

28.7368

1.5921

0.796034

CIM

Chimera Investment Corp.

4.76%

$3.25

6/26/2014

7/24/2014

0.09

q

MFA

MFA Financial Inc.

4.37%

$8.33

6/25/2014

7/31/2014

0.2

q

IVR

Invesco Mortgage Capital Inc.

3.79%

$17.35

6/25/2014

7/28/2014

0.5

q

NRZ

New Residential Investment Corp.

3.59%

$6.20

6/25/2014

7/31/2014

0.175

q

PMT

PennyMac Mortgage Investment Trust

3.34%

$21.97

7/11/2014

7/30/2014

0.59

q

NCT

Newcastle Investment Corp.

3.16%

$4.38

6/20/2014

7/31/2014

0.1

q

ARR

ARMOUR Residential REIT Inc.

2.98%

$4.20

8/13/2014

8/29/2014

0.05

m xA

17.6933

4.2127

0.210635

CYS

CYS Investments Inc.

2.97%

$9.24

6/20/2014

7/16/2014

0.32

q

HTS

Hatteras Financial Corp.

2.93%

$19.66

6/20/2014

7/25/2014

0.5

q

BXMT

Blackstone Mortgage Trust Inc.

2.81%

$28.55

6/26/2014

7/15/2014

0.48

q

CMO

Capstead Mortgage Corp.

2.42%

$13.05

6/26/2014

7/18/2014

0.34

q

MTGE

American Capital Mortgage Investment Corp.

2.07%

$20.42

6/26/2014

7/28/2014

0.65

q

RWT

Redwood Trust Inc.

1.80%

$19.23

6/11/2014

6/30/2014

0.28

q

ARI

Apollo Commercial Real Estate Finance Inc.

1.35%

$16.71

6/26/2014

7/15/2014

0.4

q

RSO

Resource Capital Corp.

1.29%

$5.39

6/26/2014

7/28/2014

0.2

q

ANH

Anworth Mortgage Asset Corp.

1.21%

$5.14

6/26/2014

7/29/2014

0.14

q

RAS

RAIT Financial Trust

1.13%

$7.71

7/9/2014

7/31/2014

0.18

q

DX

Dynex Capital Inc.

0.93%

$8.61

7/1/2014

7/31/2014

0.25

q

Click to enlarge

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

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.