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Jan Brzeski

 
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  • How Risky Is Annaly Capital? - Part 2 [View article]
    Jonk, you and I are saying different things. You are saying "this stock delivered great returns over the past year". From a quick look, I see NLY is priced almost exactly where it was a year ago, and the dividend seems to be down a little, but not much. True, a double-digit dividend yield is nothing to sneeze at.

    My articles on NLY aimed to analyze how the company makes money. My guess is lots of smaller investors who own the stock don't really understand how the business works. By all accounts there is real risk of capital loss with this stock. The fact that the relationship between NLY's short term borrowing costs and longer-maturity Agency bond yields remained favorable for the past year doesn't change the fact that the relationship could change at any time. In this respect, owning NLY is very different from, say, owning a portfolio of well-underwritten real estate loans, without using leverage.

    To address a few of your comments directly, you are correct that I don't own NLY (or any other MREITs). Instead, I run a private mortgage fund, so I do understand how the mortgage business works. We've made money on almost 100 loan investments in the past three years, without ever losing money on an investment. Clearly, there are multiple valid ways to make money in this market.
    Sep 21, 2012. 07:48 AM | Likes Like |Link to Comment
  • 3 REITs Sporting Very High Yields Along With Low Valuations [View article]
    The analysis in this article is not deep or very insightful, in my view. The methodology very simplistic. It should come as no surprise that all three companies that came up using the screening technique are the the same business--buying Fannie, Freddie and/or Ginnie Mae bonds with medium maturities, and then leveraging up using very short term cheap debt (also known as "crack cocaine debt"). As I have explained in some of my articles about Annaly Capital, there is a real risk of substantial capital loss if and when short term borrowing rates go up. The whole idea of investing in medium-maturity fixed income and leveraging that bet with much shorter term financing is a form of gambling, in my view. Investing in this strategy is basically a way of collecting far-above-market current income by taking substantial risk of capital loss. There is minimal real value created by these companies. Anybody could buy government-guaranteed bonds and leverage them up with short term debt.
    Jun 9, 2012. 02:18 PM | 2 Likes Like |Link to Comment
  • Warren Buffett Is Correct To Identify U.S. Housing As An Attractive Asset Class [View article]
    Thank you Newar, you are right, I was referring to EQR and typed EQU by mistake. I have contacted SA to request whether they can make this correction.
    Mar 21, 2012. 09:12 AM | Likes Like |Link to Comment
  • 2 Roads Diverge In Commercial Real Estate [View article]
    Hawkins, thank you for your comment. Are you able to quantify your contention that rents on the highest quality assets have held steadier than rents on lower quality assets? This may well be the case but the hypothesis needs to be tested against facts in some ways. One way to estimate the change in rents on high quality properties is to look at "same store sales" gains and losses reported by many REITs. Although I have not done the work to prove it, my sense is that the huge run-up in values of REIT-quality assets has taken place against a backdrop of fairly flat revenue in all asset classes. Property income dropped a few years ago and has been pretty flat since, in my experience.
    Oct 20, 2011. 11:04 PM | Likes Like |Link to Comment
  • PMT: A Different Style mREIT Now At An Attractive Entry-Point [View article]
    Bryce, I enjoyed your article. It was a nice, simple introduction to Penny Mac.

    Personally, I would like to see you publish more articles on the company. Providing more in-depth plain-spoken descriptions of how the business makes money would be particularly valuable.

    For example, you mention the dividend is 12.75%. I assume the underlying yield on the mortgages owned by PMT is in the mid single digits. If the company is buying mortgages at, say, 60 cents on the dollar, then how are they achieving such a high yield? There must be some "capital gains" flowing into their numbers because interest payments alone would not lead to this kind of yield (unless they were using leverage, which you have indicated that they do not use).

    Also, I would like to know more about how management is compensated. In addition, Patrick made some very specific comments. I would like to see those addressed, not necessarily with more comments, but with a follow up article using analysis gleaned from PMT's SEC filings to address the issues he raises, among others.

    That is my wish list, for what it is worth! Articles like yours demonstrate the value that Seeking Alpha can provide. Without the need for Wall Street lingo and polish, analysts like you can help us get to the heart of what is going on. PMT looks like an interesting business...I just want to know more about how they really make money and how risky or not risky their income stream is as a result.
    Oct 13, 2011. 09:31 AM | 1 Like Like |Link to Comment
  • How Risky Is Annaly Capital? - Part 2 [View article]
    Rallkl, in the case of Annaly, the interest rate they earn is the yield on their portfolio of Fannie Mae, Freddie Mac and Ginnie Mae bonds (collectively known as "Agency" bonds). The weighted average maturity of these bonds appears to be about 5 years, from the financial statements I reviewed for this article. The interest rate the Annaly pays on its debts is the rate charged by banks who lend to Annaly on a short-term basis.

    The amount of spread that Annaly earns is a function of two different factors. First, Annaly is borrowing "short" and lending "long", taking advantage of the fact that the yield curve slopes up. Second, it is taking advantage of the fact that lenders to Annaly view their loans as very secure, since Annaly has billions of dollars of shareholders' equity to back up the loans, in addition to having the Agency bonds as security.

    Government policy does affect the spread, because the Fed sets certain important interest rates, however the Government does not directly control either Annaly's borrowing costs or its yield on the Agency bonds. As an example, the rate of interest that Greek banks need to pay today has spiked. The Greek government would like the rate to be lower, but things have gotten to the point there that the Government has little control over these rates.
    Oct 4, 2011. 10:05 AM | 2 Likes Like |Link to Comment
  • How Risky Is Annaly Capital? - Part 2 [View article]
    Thomas, thanks for your comment. You demonstrate detailed knowledge of the business that goes beyond my knowledge.

    My objective with this article was to explain to amateur investors who are enticed by the high dividend of NLY how the company's business model works. This may be common knowledge to most investors holding NLY in their portfolio, but I still think there is some benefit to making sure people who haven't gone through the numbers understand the basic business model. Your comment is compelling but it doesn't change the key point of my article about risks inherent in the business model of companies like NLY.

    Regarding the risk that rates of Agency paper with a +/-5 year maturity will rise, destroying shareholder's equity, I don't think the Fed can control those rates. The Fed can really only control very short maturity rates. And the Fed does not control yields on Agency bonds directly, only the short term rate that the Fed itself charges banks. Would you agree?

    Regarding the many repo lines in place, I don't really know why the major banks will lend to NLY and other mREITs at a 0.5% interest rate. Suffice to say there is no guarantee they will continue to do so. I would not do so because I don't think I would be getting paid for the risk. Of course, if I could borrow from the Fed at a 0% interest rate, I might change my view but I can't.

    I am not an NLY short. I have never had any position, long or short, in any REIT. I disagree that there is a need to be either long or short in one's view of public company share prices. I choose instead to be long on a portfolio of individual loans secured by real estate, where I have personally inspected each underlying property and assessed that my loan is well-secured.

    That being said, your approach seems logical and if I do ever initiate a program of investing in REITs, I will refer back to your comments as a good starting point for evaluating some of the key issues in determining fair value for a mortgage REIT.
    Sep 12, 2011. 06:57 PM | 1 Like Like |Link to Comment
  • A Real Estate Investor's Approach Towards Chimera Investment Corp. [View article]
    Billie, Ggrins and Katgod, thanks for your comments.

    I will have more input on my view of the risk-reward mix with Chimera given the current share price after doing more homework on the the non-Agency bonds held by the company. Whatever I can find out, I will put in my next article.

    To really have an opinion in this case, I would want to spend a lot more time evaluating the business, hearing and meeting management, etc. I understand that traders frequently form opinions based on very limited information but I am not wired that way, so I will just write up what I am comfortable saying, based on the amount of work I have done. This will probably fall short of a formal buy or sell recommendation, in the case of Chimera. There is a huge dividend yield but also clearly some risk of further capital loss.

    I am told there has been a lot of insider buying recently, but I have not confirmed this myself. The insiders clearly know a lot more about the company's prospects than I do, so if there is a lot of insider buying, I doubt the company's stock is about to drop dramatically.
    Sep 12, 2011. 03:55 PM | 2 Likes Like |Link to Comment
  • How Risky Is Annaly Capital? - Part 2 [View article]
    I looked up the "Barbell Strategy" and below is what the company says about it. If rates on the company's longer-dated holdings started to rise, and the company anticipated them rising quite a bit, maybe the company could sell those securities and replace them with shorter-dated securities and floating rate securities that perform better in a rising interest rate environment. That would reduce the dividend dramatically, but a smaller dividend is much better than a capital loss. I suppose a holder of this stock would have to be comfortable that management will recognize when the music is about to stop and would be quicker than average to grab a chair, so that "somebody else" takes the hit on the longer-dated fixed rate securities, rather than Annaly taking the hit.

    FROM ANNALY'S WEBSITE:
    We structure our portfolio using the “Annaly MBS Barbell StrategySM®.” This strategy utilizes a combination of adjustable-, floating-, and fixed-rate mortgage-backed securities so that it can perform throughout a wide range of interest rate environments. At one end of the barbell are adjustable-rate and floating-rate securities or swaps. These securities tend to outperform when interest rates rise because their yields will increase as interest rates rise due to the adjustable nature of their coupons. On the other end of the barbell are fixed-rate securities. These securities generally experience capital gains when interest rates are falling, which help to offset the lower yields and faster prepayments associated with falling interest rates.
    Sep 8, 2011. 09:39 AM | Likes Like |Link to Comment
  • How Risky Is Annaly Capital? - Part 2 [View article]
    Harry, I don't think your question is a dumb question. But I don't really know the answer, either. I am hoping somebody can shed some light on your specific question.

    As a general observation, I don't think there is any playbook set in stone right now. Somebody in our society (probably everybody) is going to have to take a hit, either through higher taxes, or lower pension benefits, or a decrease in public services, or fewer subsidies for home ownership, or a loss of some principal here or there. Nobody is going to rescue us...we have to rescue ourselves.
    Sep 7, 2011. 05:27 PM | 1 Like Like |Link to Comment
  • How Risky Is Annaly Capital? - Part 2 [View article]
    Tondog and kwm3, thanks for both of your comments. I have gotten the sense from reading SA articles that NLY is well run, for a business of its kind. I only analyzed this company (rather than one of the others, more highly leveraged names) because it appeared to be the largest Agency mREIT. I undertand others may have more risk and/or less experienced management.

    Regarding the dividends paid out by NLY, it is interesting that they have paid out more than $18 of dividends in the past 10 years. Still, that doesn't protect someone who buys the stock today from a loss of principal, in case of turbulence in the coming months and years.

    As far as it being hard to get rich while being cautious, I am just trying to string together a series of successful investments, without taking losses. I don't have the stomach for huge ups and downs!
    Sep 7, 2011. 02:18 PM | 4 Likes Like |Link to Comment
  • How Risky Is Annaly Capital? [View article]
    Ayesha, I do not have any reason to question Annaly's books. That is not where I am suggesting the risk lies.

    In my view, this is just a leverage machine, not too different from many of the investment banks prior to the financial meltdown. Fortunately, Annaly has a very simple business model, whereas the Wall Street firms are very complex.

    There is probably some price at which it would be attractive, especially with the current dividend. But that price is far below the current value, from my perspective, given the risk and unknowns.

    I prefer to invest in loans secured by real estate, where I can go see the real estate myself and decide how much the collateral is worth. And I don't use much leverage at all. That keeps things simple. The yield may not be quite a juicy as Annaly's current dividend, but the risk of capital loss is minimal, if everything is done properly.
    Sep 7, 2011. 11:04 AM | 1 Like Like |Link to Comment
  • How Risky Is Annaly Capital? - Part 2 [View article]
    Chartreux, I have not been following this company for long at all. I am hoping that some members of the Seeking Alpha community who have followed the stock for longer than I have will provide some insight.

    One of my main concerns is that interest rates are so low now, there is only one direction they can go...up. (Admittedly, we could enter a Japan-like lost decade in which case rates could be low for many years, but let's hope the U.S. is different from Japan in this respect).

    So, one guess as to why the stock is a little lower now is that investors are pricing in the risk of a destruction of shareholders' equity via a drop in the value of Annaly's assets (if mid-term interest rates rise).
    Sep 7, 2011. 10:55 AM | Likes Like |Link to Comment
  • How Risky Is Annaly Capital? [View article]
    Brad, your question deserves a thoughtful response and I haven't done the homework to be able to answer that question in any detail. I did write an article recently analyzing one REIT, Equity Residential. In short, I think most REITs use much less leverage than Annaly does, making them inherently less risky. However, my sense is that REITs are trading at rich valuations as well, relative to the value of the underlying real estate. My article "2 Roads Diverge in Commercial Real Estate" outlines how commercial real estate has bifurcated into two separate markets. REITs own the "high quality" product but for that privilege, they are paying a huge premium--too high of a premium, in my view.
    Sep 7, 2011. 08:51 AM | 4 Likes Like |Link to Comment
  • How Risky Is Annaly Capital? [View article]
    YieldSeeker, your question is the right one to ask, in my view. As the second article in this series will outline, I don't think they will do well if rates rise. The value of Annaly's assets, which have a maturity of several years, will drop if rates rise. But the amount that NLY owes will stay the same. So a rise in rates will have an immediate impact on shareholders' equity.

    The effect on Annaly's earnings is harder to predict. That depends on which rate rises more, the yield on 5 year Agency bonds or Annaly's borrowing costs.
    Sep 6, 2011. 08:44 PM | 3 Likes Like |Link to Comment
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