Patrick Harden

Cypress Sharpridge Has Sweet Surprises in Store

Well, strike one for me...CYS declared a dividend of $0.35/share in respective of the third quarter for a forward annualized dividend yield of just under 10%.

I'm curious to find out more about normalized post-IPO core earnings when the Company releases third quarter results.

AmREITs on Fire: Prelude or Crescendo?

The agency-backed mREITs generally have two main risks:

1) interest-rate risk
2) counterparty risk

If short-term interest rates rise quickly and long-term rates don't move much (a flattening of the yield curve), the net interest spread available to earn disappears. See Annaly's stock price from June 2005 - December 2005 for an example of what happens in a flat or inverted yield curve environment.

Counterparty risk is sort of intertwined with fat tail or Black Swan risk. Should the liquidity associated with agency-backed MBS be threatened, the ability to finance the portfolio with cheap short-term debt may disappear. See Annaly's stock price in the last week of February 2008 (when Carlyle Capital blew up) for an example of counterparty risk.

AmREITs on Fire: Prelude or Crescendo?

Continued great coverage of the agency-backed mortgage REITs! I thank you for continuing to bring these articles to SA to help investors distinguish among the various types of mortgage REITs, especially with all of the distressed debt mREIT IPOs pricing recently. It's very important to make a distinction between those mREITs bearing credit risk and the amREITs.

I guess JMP Securities has made the first call for a crescendo, downgrading both HTS and AGNC to Mkt Perform this morning. The amREITs have gotten very richly valued on a market to book basis, so it's tough to see much more forward upside performance above S&P returns.

One agency-backed name that has sort of stayed below the radar is Cypress Sharpridge Investments (CYS), which IPOed earlier this year before the rush of mREIT IPOs. CYS is trading at a modest 1.13x premium to 6/30 book value and produced $0.74/share in core earnings for Q2. I also like CYS because the company marks all its assets to fair value like RICs do, which makes for a much easier set of financials to parse.

Why I'm Long Mortgage REIT Chimera

I'm not entirely sure that I buy into Annaly's divide and conquer methodology on the distressed debt orgy. First of all, they were way too early in effectively calling the non-agency backed RMBS bottom with the Chimera IPO. On the heels of that disaster, Annaly now has another spinoff for the commercial side of the house in CreXus (how do you even pronounce that?).

I'm not convinced that the Annaly machine has enough experience outside of the agency arena to run either REIT, frankly. Chimera's only defensive strategy during the 2008 crisis was to launch one dilutive secondary after another -- perhaps just throwing good money after bad in an attempt to bury bad paper deep in the portfolio.

I think investors stand a better shot with Redwood Trust (RWT), which has much more relevant experience in non-agency MBS than Chimera & crew. Even one of the newly launched vulture REITs will have a cleaner balance sheet and less share dilution.

American Agency Mortgage: Huge Dividend REIT

One minor housekeeping note: the company in focus is named American Capital Agency Corporation (AGNC).

As for the agency-backed mortgage REITs in general, the entire sector is guaranteed to succeed in an environment where there is a steeply positive yield curve. The agency backing of their holdings minimizes credit risks, so their business model becomes a virtually pure-play interest-rate gambit. The Federal Reserve has not yet indicated the need to push rates back to historical norms, so the available spread to be earned remains quite wide.

Of course, the companies within the agency-backed mREIT sector differ in certain respects, and as mortgage rates have fallen over the last few years, those companies that have seasoned fixed-rate debt should outperform those with short-reset adjustable-rate holdings. Another factor to consider is those companies with short-duration swaps that are due to roll off. Many of the agency mREITs have swap-adjusted cost of funds that are much higher than the unadjusted market cost of repurchase agreements. Those with higher swap-adjusted COF have limited their spread potential.

As for AGNC itself, although I have criticized AGNC's sponsor, American Capital Ltd as "questionable", AGNC's Q2 financial results were quite robust. The company earned $1.98/share in Q2 taxable income and still has $0.79/share in undistributed taxable income to support the dividend for the rest of the year. I believe the $1.50/share dividend is sustainable for Q3 & Q4 2009 based on AGNC's remaining taxable earnings. 2010 may be a different story.

Snowjob3 made a good point about the capital gains. AGNC's taxable income calculations appear to include both ordinary & capital gain income. Capital gains, of course, are typically non-recurring. Plus, REITs are only required to distribute 90% of ordinary taxable income.

Are High Yielding aMREITs Ready to Run?

Great overview of the agency-backed mREITs. While this group as a whole has become more expensive of late, the high dividend yields are fully sustainable as long as the yield curve remains steeply sloped. Empirical evidence of the aMREIT success has come in the large number of copycats that have or will come public (e.g. Cypress Sharpridge - CYS, Invesco Mortgage Capital - IVR).

However, it is worth doing some digging to find out which of these companies is best for your portfolio. For example, American Capital Agency (AGNC) has a questionable external sponsor in struggling BDC American Capital Ltd. (ACAS), while Annaly Capital (NLY) seems to be adding on extra risk by venturing into non-agency MBS through its investments in Chimera Investment (CIM) and recently created CreXus (CXI), which filed an S-11 on Friday.

Glad to see this group of stocks getting some much-deserved attention and clarification.

Annaly Capital Clicking on All Cylinders

Annaly shares did pull back sharply in early March after Carlyle Capital, a private hedge fund with a similar investing strategy was margin called to the point of bankruptcy. However, Carlyle was levered 30:1, whereas Annaly is just levered 8:1 and has a reasonable amount of cash and unencumbered assets available to meet any margin calls. The stock obviously has some liquidity risk priced in (hence the 11% dividend), but Annaly is a strong player that has good relationships with its counterparties.

Annaly Capital Clicking on All Cylinders

Lots of great comments - thanks for your input.

Let me just clarify that Annaly declared a Q1 dividend of $0.48/share with respect to first-quarter earnings. The next dividend will be based on second-quarter core earnings, which should be around $0.55/share given that additional capital raises and lowered leverage will offset the widened spread. I expect Annaly's dividend to be $0.50 - $0.52/share for Q2.

Also, Annaly most likely did not buy any Thornburg assets. Thornburg focuses on non-agency jumbo lending, which is not part of Annaly's strategy of holding only agency-backed securities.

Annaly Capital Management: More Than One Way To Milk a Cash Cow

Annaly has long had a standard of basing executive compensation on book value. It's sort of a Catch-22 in that the Company needs to constantly raise capital in order to feed its business model, yet the accretive offerings also line management's pockets.

Annaly Capital Management Selloff Overdone

Mortgage REITs are generally dependent upon access to capital markets, both debt and equity, to finance their portfolios. However, prudent balance sheet management has allowed NLY to maintain a dividend throughout its 10-year history. If Annaly can invest my money at a leveraged spread and return 5% - 15% in pre-tax dividends, I'll take it.

Annaly Mortgage Management Raises $1B on Secondary Offering

This would be a fine investment thesis if Annaly invested in "distressed" RMBS, which they don't. They only invest in GSE-backed MBS, which have maintained liquidity and price visibility throughout the credit crunch. That's why Annaly has enjoyed a relatively strong stock price and can do a huge accretive offering at this point. I think it's worth considering that Annaly's management is compensated based on book value, which is immediately raised in any accretive offering.