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Ocean Man

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  • Insanity in mREIT Trading Friday Morning [View article]
    Can you guys tell me what your limit orders are so I can go a penny higher?
    Jul 30 08:01 PM | 2 Likes Like |Link to Comment
  • Insanity in mREIT Trading Friday Morning [View article]
    It's time for a new political party called "not incumbent". I would vote for anyone on that ticket. Teach these guys a lesson.
    Jul 30 07:58 PM | Likes Like |Link to Comment
  • High Yields: Buying the Panic in Mortgage REIT Stocks [View article]
    No, reinvested dividends don't shorten the period. The dividends are the return, or interest, and reinvesting them is what makes the return compound return. The compounding is what makes it 7.2 years and not 10.

    Now, if the dividend increases (as we hope), then that shortens the period. And that's because you're earning more than 10% then.
    Jul 30 07:43 PM | Likes Like |Link to Comment
  • Building a Model Income Portfolio Sector by Sector: Part 5 - Health Care [View article]
    For Novartis, should mention their dividend is paid once a year, in Feb. Also, they have a foreign tax withholding, 25% I believe.
    Jul 30 10:55 AM | 2 Likes Like |Link to Comment
  • Gain Nearly 10% Annual Yield With This Unlevered Dividend Portfolio [View article]
    You're pretty close, but it looks like you're pro-rating the dividends, while they're actually paid quarterly. So you would have received 2 dividends since Jan for 65 cents, but you'll get another one later this month to get you up to 98 cents.
    Jul 30 10:28 AM | Likes Like |Link to Comment
  • Agriculture Stock Ideas for Portfolio Growth [View article]
    July 28, 2011 /PRNewswire/ -- On July 26, 2011, CVR Partners, LP (NYSE:UAN - News) announced a second quarter 2011 cash distribution of 40.7 cents per common unit for the period of April 13, 2011 (the closing of its initial public offering) through June 30, 2011. CVR Partners today reaffirms its previous distribution guidance of $1.92 for the twelve months ending March 31, 2012, as reported in its prospectus dated April 7, 2011, in connection with its initial public offering.
    Jul 29 02:31 AM | 1 Like Like |Link to Comment
  • REITs: Ideal Investments for the 'New Normal' [View article]
    No, the best time to buy them wouldn't be after the latest crisis. They will have shot up in price. You want to buy them just before the market reacts to the latest crisis being over. Which could be today. Or Monday.
    Jul 29 02:15 AM | Likes Like |Link to Comment
  • Cheapest Asset Management Stocks With the Best Dividend Yields [View article]
    I thought MCGC was cheap at $6.60. Now it's at $5.60.

    I'd stay away from that one. They put themselves out to bid, and nobody bought them. I predict a dividend decrease. There are better BDCs out there. I'd suggest SLRC or ARCC.
    Jul 29 01:59 AM | 1 Like Like |Link to Comment
  • Sell Your mREITs Immediately [View article]
    If the stock price doubled, you'd still be getting 18%, it's just the next guy to buy wouldn't.

    If AGNC keeps making their SPOs accretive, then it could sustain until the yield curve changes enough to outweigh their hedges. It's not like AGNC management is sitting around saying "hope interest rates don't go up". They're ready for a few increases, and they're not worried about the haircuts that were being discussed in the comments above either. Read for yourself (the AGNC conf call):

    Gary Kain

    Thanks Katie. Good morning, everyone, and thanks for joining us. Deja vu is probably the best way to describe this quarter. The similarities to the second quarter of 2010 are striking and this only reinforces what we stressed last quarter. Our portfolio must be able to perform if rates move in the either direction. Therefore, we really do feel good about continuing to produce strong results this quarter, despite the unexpected rally in the bond market.

    Now, before we discuss the quarter, we realized that many of you have questions around the debt ceiling, the risk of a downgrade of US government debt and the implications on agency MBS.

    And, now while political wrangling clearly seems to dominate the thinking or lack thereof in Washington, we strongly believe that the debt ceiling will be raised at the last minute.

    That being said, there is a risk of a downgrade of US debt below its historical AAA rating. However, we believe the impact on government and agency debt of a downgrade will be limited.

    The markets are clearly aware of this risk and US Treasuries actually rallied with prices higher and yields dropping yesterday. Additionally, agency mortgages are also holding up reasonably well given the headlines and prices of all generic mortgages were higher yesterday.

    Lastly, I want to address some misconceptions that seems to be floating around with respect to agency repo. First of all, the agency repo market is functioning normally and we have not seen pressure on haircuts. Agency repo is readily available and rates remain extremely attractive.

    Furthermore, even in the unlikely event that at same point in the future we saw a 1% or 2% increase in haircuts to something like 5% to 6% on agency MBS from the current levels of near 4%, this would not impact our comfort level with our leverage.

    To demonstrate why we are not concerned, remember in early 2009 when the equity market was at its lows, agency repo haircuts averaged around 7% to 8%. Why is that significant.? Because at that time the average leverage in the REIT space was very close to where our leverage currently is.

    In other words, we would be comfortable running our current business and could fully fund our positions with ample cushions, even if haircuts increased two or more percent.

    To further provide comfort here, at the depths of the market in the second half of 2008, agency REITs with eight or more times leverage were able to make it through the worst liquidity period we have witnessed.

    In conclusion, we continue to repo at terms consistent with or better than where we were earlier in the year and our business model can handle any reasonable increase in haircuts.

    So with that out of the way, let’s move on to a more pleasant subject a review of AGNC’s performance for the quarter. First, GAAP net income totaled $1.36 per share and if we exclude the net loss of $0.05 a share in other investment income that leaves a $1.41 per share of what some like to describe as core income versus the $1.30 per share of last quarter.

    Taxable net income was a $1.56 per average share. Our undistributed taxable income increased again this quarter by $23 million as our taxable earnings continue to exceed our dividend. So, as of June 30th, UTI totaled $78 million or $0.44 per share off of our ending share count of nearly a 179 million shares.

    Book value rose $0.80 per share to $26.76 during the quarter. Importantly, our economic return which is the combination of dividends plus the increase in book value totaled 8% for the quarter or 34% on an annualized basis.

    So, as you can see on the next slide, our mortgage portfolio totaled $40 billion as we deployed a large percentage of the almost $1.4 billion in accretive equity we raised towards the end of the quarter. But really what’s most important is that this growth did not come at the expense of the asset quality, and Chris will address this in some detail in a few minutes.

    But now let’s turn to slide five, and look at what happened in the markets during Q2. As you can see in the top two panels on the left, interest rates dropped materially during the quarter with the five-year part of the curve outperforming. If you look at the changes in swap rates, two-year and 10 years swaps drop around 30 basis points. While five-years swaps dropped by 43 basis points. Notice that the two-year and five-year swap spreads widened significantly during the quarter as well.

    But now, let’s look at generic mortgage performance. Overall, we were impressed with the performance of agency mortgages during the quarter. When rates rally significantly, we assume prepayment fears will escalate, providing resistance to mortgage price increases. This did end up happening, but only late in the quarter when the rally appeared to be more powerful and more sustainable.

    That being said, while mortgages weakened later in the quarter, their overall performance was quite respectable with 30-year, 4.5 coupons increasing by almost 2 points. Also as you can see on the bottom left, 30-year 6% coupon mortgages rose by a 1.25 during the quarter. Interestingly, the price of that 6% coupon mortgage reached a high of over 110.5 in early June as the market became somewhat complacent about prepayment exposure and risk premiums.

    In 15-years, shown on the top right, performance was also reasonable as the price of 15-year, 3.5 and 4s increased by 1.75 and 1.6 points respectively. Now importantly, the prices of prepayment protected mortgages, such as low loan balance and HARP loans increased by more than generic mortgage products. As a result, the aggregate performance of our assets outpaced the losses on our total hedge book, which drove a large portion of the increase in our NAV during the quarter.

    So now, I’m going to turn the call over to Chris, who will discuss why we believe our portfolio is even better positioned going forward.

    Chris Kuehl


    Thank you, Gary. As you can see on slide six, we maintained significant diversification on growing our asset base to approximately 40 billion given the increase and our equity base.

    During the quarter, we increased our holdings of select types of 15-year and 30-year mortgage backed securities with an emphasis on securities with prepayment protection on maintaining our discipline with respect to extension risk.

    As you can see on the bottom left chart, prepayment speeds on our portfolio remained very well behaved. Our portfolio CPR averaged just 9% during the second quarter. Additionally, despite the decrease in interest rates, our portfolio prepaid at only 8% in the most recent release in early July.

    The CPR performance is a function of specific attributes of our holdings and as slide seven shows, the percentage of securities backed by loans that provide significant prepayment protection increased materially during the quarter.

    As you can see on the chart on the top right, prepayment protected 15-year pools represent largest holding. And while 15-year pass-through have the obvious benefit of shorter durations, given a shorter amortization schedule, they’re also generally backed by borrowers with very high FICO and low LTVs. And unfortunately, everything else being equal, very strong credit translates the considerably greater prepayment risk.

    To mitigate this risk, more than 85% of our 15-year holdings, up from 76% last quarter are backed by loans with either low loan balances or were originated through the HARP program. While these pools do trade at a premium to TBA, the premium paid is a small fraction of the value of having the more stable cash flows. We’ll show you an example of just how important this is on the next slide.

    Now, within the 30-year sector, we have reduced our holdings of our highest coupons securities as the valuation of these instruments got to levels where the risk return equation no longer made sense. As an example, we sold the significant amount of 30-year 6% pass-throughs and we replace these assets with newer lower coupons pools, the result as you can see in the chart, more than 65% of our 30-year holdings now have some form of explicit prepayment protection. This category is comprised primarily of pools backed by HARP originations, and to a lesser extent backed by lower loan balances.

    As we discussed on prior calls, we continue to maintain our disciplined approach with respect to evolving the composition of holdings in response to the ever-changing market environment while maintaining responsible diversification.

    As Gary mentioned, the substantial decline in interest rates and the increase in mortgage prices looks very similar to what happened during Q2 and Q3 of 2010. And our strong performance during that period was driven by our asset quality, but we didn’t have this information back then, slide eight shows just how important it is to own the right assets when rates fall significantly.

    The graphs at the top of the page show the prepayment performance of low loan balance versus more generic 15-year securities during 2010. Even more striking is the difference relative to the higher loan balance 15-year securities. It’s important to recognize that if you have purchased TBA or generic 15-year 4’s or 4.5’s you have to assume that the dealer will always give you the cheapest to deliver or fastest prepaying security available.

    The graphs at the bottom are even more striking, highlighting the difference in performance between the high LTV, 100% REIT buyback pools versus more generic 30-year cohort and cheapest to deliverables. As a levered investor in mortgage securities, were only as good as our assets and so we’ll continue to optimize our holdings to ensure we are properly positioned as market change.

    And with that, I’ll turn the call over to Peter to discuss our hedging activity on slide 10.

    Peter Federico

    Thanks, Chris. Let me start by reviewing our interest rate risk management objective. As we have stressed before, the primary goal of our hedging activities is to maintain our book value within reasonable bands under a wide range of interest rate scenarios.

    Our goal is not to eliminate risk or to lock-in particular net interest margin, but rather preserve book value over a wide range of interest rate scenarios. Book value and net interest margin are not mutually exclusive measures.

    By definition book value is the present value of all future cash flows. So, by focusing our hedging strategies and protecting book value, we also protect the portfolio’s long run cash flows and net interest margin.

    The foundation of our interest rate risk management framework is careful asset selection. As Chris just discussed in some detail, our current portfolio is comprised mostly of assets to give us significant down rate protection. As such, we have structured our hedge portfolio to give us protection against a rise in interest rates. To do that, we use combination of instruments such as interest rate swaps, swaptions, treasuries, total returned interest-only swaps and TBA mortgages.

    As you can see on slide 10, our swap portfolio totaled $22.2 billion at the end of the quarter. Given the growth in our asset portfolio and a decline in interest rates experienced during the quarter, we increased our swap portfolio by $7.1 billion or 47% during the quarter.

    Our swap portfolio had an average maturity of 3.6 years and an average pay fixed rate of 1.68%. At the end of the quarter, our swap portfolio hedged 62% of our repo balance when accounting for unsettled positions.

    During the quarter, we entered into $7.3 billion worth of new pay fixed swaps, which had an average maturity of 3.9 years and an average pay rate of 1.44%.

    Our swaption portfolio also increased materially over the quarter. At quarter end, our portfolio of put swaptions, which give us the rate to enter into a pay fixed swap at a predetermined rate totaled $4.1 billion.

    During the quarter, we added $2.7 billion of swaptions at a cost of $36.3 million. The cost of the outstanding swaption portfolio totaled $53 million at the time of purchase, and at quarter end, had a market value of $36.4 million.

    While, the combination of our swaps, swaptions, TBA securities, and other hedges provide considerable protection against a significant rise in interest rates, this is not our expectation. However, as the levered leveraged investor and a steward of your capital, we must we must endeavor to protect net asset value against this risk, even if it is not our base case expectations, given the current state of the global economy.

    To illustrate this point further, let’s turn to slide 11, where we show the market value profile of our swaption portfolio over a wide range of interest rates. As this the case with any long option position, the maximum one can lose is the amount paid for the option. In the declining rate scenarios on the graph, you could see that the maximum loss of the swaption portfolio is $36 million, corresponding to its current market value.

    Conversely, if the interest rates increase significantly our put swaptions will gain considerable value. If interest rates were to increase by 200 basis points for example, the market value of our put swaptions would increase by about $240 million, or in per share terms, the value would increase by about a $1.35 per share.

    Now, let’s turn to slide 12 for a brief review of our duration gap. The net duration gap of our assets and our hedges provides an estimate of the sensitivity of our portfolio to changes in interest rates.

    As you can see from the slide, we ended the quarter with a duration gap of 0.6 years, unchanged from the prior quarter. For 100 basis point increase in rates, a positive duration gap of 0.6 years implies a loss of approximately $250 million. As a percentage of our net asset value, the $250 million loss would equate to a loss of approximately 5%. Of course, as we say in the slide, and in our Q, and as Gary has said in the past, this excludes the effects of convexity and is only a model based estimate.

    Actual results could obviously differ materially from these estimates. That being said these numbers should give investors some broad insight into changes in our interest rate exposure overtime.

    And with that I will turn the call back over to Gary.

    Gary Kain

    Thanks, Peter. And I can’t stress enough how important it is to have someone like Peter with over 20 years of market experience joining our team and leading our risk management activities.

    Now, on slide 13, let’s focus on the left-most column, which depicts the economics of our business as of June 30th. As you can see, our portfolio yields remain essentially unchanged, declining only 2 basis points to 3.45%.

    Our cost of funds at quarter-end increased from the prior quarter end by 4 basis points to 1.09% as a function of the larger swap Peter discussed earlier.

    Again, this cost of funds number includes our repo cost, our settled interest rate swaps and the detrimental effect of any forward starting swaps that begin in any point during the third quarter. It does not included any of the other supplemental hedge instruments outlined on the page 10.

    Leverage as of June 30th was 7.5 times when incorporating unsettled trades, which is somewhat below where we would expect to operate and is a function of the timing of our Q2 capital raise and market conditions. After subtracting our total expenses, you get a net ROE of just over 19%.

    So, now let’s turn to slide 14 because I want to give a quick illustration of how sensitive the ROE of a levered mortgage investment is to prepayments. I think this example in conjunction with the prepayment speed history that Chris reviewed with you earlier, should provide more insight into why we obsess about asset quality and why different companies in the same space can produce noticeably different returns.

    The table shows the yields under various prepayments or CPR assumptions for a hypothetical levered position in generic 15-year 4% coupon securities. The table also shows net margin and ROE estimates assuming 1% all in financing and eight times leverage.

    As you can see the ROE numbers drop off significantly as prepayment speeds increase. For example, on one end of the spectrum, at an 8% CPR, the projected ROE on the levered portfolio is just over 19%. However, when prepayment speeds increase, the expected returns drop off significantly as you can see in the table.

    So, the take-away is actually pretty obvious, the returns on a levered portfolio of mortgage securities will be a function of how those assets perform in the future coupled with how effectively the portfolio was hedged. As such, given the combination of what you heard from Chris and Peter today, we remain very optimistic about our ability to continue to produce strong returns for our shareholders in the current environment.
    Jul 29 01:44 AM | 1 Like Like |Link to Comment
  • Don't Buy Bonds, Buy Utility Stocks [View article]
    I sold when I read that. Not sure, but it sounded like they had board approval to issue X number of shares. X wasn't enough shares to buy Progress. But if each share was worth 3 times as much, then X would be enough shares. So let's do a 3 for 1 reverse split and MAKE each share worth 3 times as much.

    You'd only need to do that if the board wasn't willing to increase the issue allowance, or you were trying to hide dilution (was my thought). Plus reverse splits have a bad history, so people may flee the stock. So I fled first.
    Jul 29 01:09 AM | Likes Like |Link to Comment
  • Buy Telefonica on Sum-of-the-Parts Valuation [View article]
    I'm copying this from a comment I made in another VOD article:

    VOD is getting 45% of the $10B Verizon Wireless dividend, or $4.5B in January. Now here's why VOD is so much better than VZ:

    VZ is using their share to help pay their current dividend, which they need to since their payout ratio is 150%.

    VOD is using $3.3B to pay a special dividend in February, and the rest to pay down debt, which they can do since their payout ratio is 54%. I calc the special dividend to be $0.68, but I don't know if I'm allocating that over their entire float or just ADRs (I used 5.16B shares). If so that will take their yield from $1.44 (trailing) which is 5.4% on the pre-announcement price just under $27, to $2.12 which is 7.9%, or a 47% dividend increase.

    VOD had been getting pressure to get their yield up closer to TEF and FTE which are above 8%. The beauty is that VOD should get this dividend from Verizon Wireless every year, not just once.
    Jul 28 11:52 PM | 2 Likes Like |Link to Comment
  • Vodafone: High Yielder With Low Valuations [View article]
    VOD is getting 45% of the $10B Verizon Wireless dividend, or $4.5B in January. Now here's why VOD is so much better than VZ:

    VZ is using their share to help pay their current dividend, which they need to since their payout ratio is 150%.

    VOD is using $3.3B to pay a special dividend in February, and the rest to pay down debt, which they can do since their payout ratio is 54%. I calc the special dividend to be $0.68, but I don't know if I'm allocating that over their entire float or just ADRs (I used 5.16B shares). If so that will take their yield from $1.44 (trailing) which is 5.4% on the pre-announcement price just under $27, to $2.12 which is 7.9%, or a 47% dividend increase.

    VOD had been getting pressure to get their yield up closer to TEF and FTE which are above 8%. The beauty is that VOD should get this dividend from Verizon Wireless every year, not just once.
    Jul 28 11:21 PM | 4 Likes Like |Link to Comment
  • My Top 10 Must-Own Dividend Stocks [View article]
    Wow, what happened to STON today?! No news, but up 5.5% in one jump and then heavy volume above that jump the rest of the day. Up another point in after-hours.
    Jul 28 11:00 PM | Likes Like |Link to Comment
  • CVR Partners' Business Model Continues to Shine [View article]
    They said the 40.7 cents was pro-rated for the IPO being a couple weeks into the quarter on April 13th. If you take 91 days in the quarter over the 79 days that were pro-rated, times the 40.7 you get 46.9 cents. Take that times 4 and you get $1.88, which is pretty close to the $1.92 Todd was expecting.
    Jul 28 03:40 AM | 1 Like Like |Link to Comment
  • Debt Ceiling Debacle Strategy: Do Nothing [View article]
    Those hippies in Bolinas tear down the signs so the surfers and tourists won't come bother their quiet little town. How are they going to react when the military moves in next door?
    Jul 28 03:29 AM | 1 Like Like |Link to Comment
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