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Value Plus Incentives

 
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  • Cherry Hill: Strong Value With Low Credit & Interest Rate Risk [View article]
    That's right. Duration will change whenever rates move or just due to the passage of time. The MSRs actually do a pretty good job of hedging the extension risk of the RMBS, since under a scenario of rising rates they increase in value for the same reason the RMBS may lose value due to extension.
    Jul 8 08:59 AM | Likes Like |Link to Comment
  • Cherry Hill: Strong Value With Low Credit & Interest Rate Risk [View article]
    Mingran - Thanks for reading. To address your questions in order:

    1. I don't see regulatory risk as being a significant factor. The greatest threat here I think is actually at the Freedom Mortgage level if the Feds start placing much greater restrictions on these low cost non-bank servicers, raising their costs to service these mortgage pools. I think the IRS has permanently opened the door to placing MSRs into the mREIT structure as multiple mREITs are starting to ramp up their MSR allocations recently. Not sure I follow on the capital ratio question.

    2. Higher inflation is the greatest risk since it is the one thing that can pressure the Fed to raise short term interest rates. If the Fed raises short term rates, the repo rates that all these mREITs are financing themselves with will rise as well. If rising short term rates results in a flattening yield curve, that would put significant pressure on mREIT's profitability and force deleveraging. Derivatives don't do a good job of hedging basis risk or spread duration. Thankfully, much of this is already reflected in discounts to book values in the mREIT sector.

    3. These are projected discounted rates that will be updated for every quarter. Each discount rate is unique to each pool of MSRs when purchased, and they may be lower rates of return going forward. I think the purchase agreement with Freedom Mortgage may offset some of that pressure though. Time will tell though.

    Those are my added two cents.
    Jul 7 08:03 PM | Likes Like |Link to Comment
  • Zais Financial Is Misunderstood And Undervalued With A 16% Yield And Strong Margin Of Safety [View article]
    ZAIS is still trading at around 82% of book value. The problem management faces is simply one of scale. ZAIS's common equity is $158 million... that's really too small for a public company executing this strategy in most cases. In 1Q 2014, Operating Expenses were $4.1 billion vs. net interest income of $5.6 billion - that makes no sense as an ongoing strategy unless management can grow the business by tapping capital markets to raise additional equity.

    Every quarter management speaks of scaling up the business, but you can't do that without significantly diluting current shareholders because ZAIS is trading at such a significant discount to book. That's why they tried to issue equity through the back door through a convertible offering paying 8% (cheaper than issuing common equity). They need to cut their dividend to a sustainable level, since they're paying out one that's well in excess of core earnings. Unless the market value of this stock recovers, enabling the management team to grow into their market (which is very attractive), book value is going to continue bleeding lower as it has for nearly every quarter. At least stockholders have a generous dividend.

    Overall, I like the team and the strategy. The problem is they raised too little equity in the IPO and are a sub-scale, illiquid micro cap as a result that will continue to struggle to build scale. Given the situation, I wouldn't consider this deep value.
    Jul 2 10:56 AM | Likes Like |Link to Comment
  • Cherry Hill: Strong Value With Low Credit & Interest Rate Risk [View article]
    Yes, these are pretty much all FHA and VA mortgages.

    What these higher LTVs suggest is that these mortgages will likely not be prepayed until the borrower moves, especially given how low rates are. Credit scores are good, so default & foreclosure is less likely. These are the types of mortgage pools you want to back MSR assets.
    Jun 15 04:32 PM | Likes Like |Link to Comment
  • Managed Duration Investment Grade Muni CEF: ~10% Tax-Equivalent Yield, 9% Discount To NAV [View article]
    I think you're looking at the hedges they have in place. The largest three holdings account for only ~11%: JP Morgan, Southern Calif Edison, and GE.
    Apr 9 02:57 PM | Likes Like |Link to Comment
  • Managed Duration Investment Grade Muni CEF: ~10% Tax-Equivalent Yield, 9% Discount To NAV [View article]
    There was a bigger dislocation in pricing at the time between the market and the fund's NAV. Since then, that gap has partially closed. LDP is another good preferred CEF that trades slightly cheaper to FPF today.
    Mar 28 01:56 PM | Likes Like |Link to Comment
  • Managed Duration Investment Grade Muni CEF: ~10% Tax-Equivalent Yield, 9% Discount To NAV [View article]
    I'd rather see a CEF cut its distribution slightly, as MZF has done, and for it to remain fully covered by interest income than see a CEF fall into the trap of trying to maintain a distribution level through the return of capital. That's what many CEFs are doing currently. While ROC is tax-advantaged, it's not a sustainable way to maintain a distribution level.

    Interest rates have been low for a while. As high coupon bonds mature, investors should expect lower distributions from bond funds. When doing your own due diligence, remember that the components of the distribution are more important than level of the distribution in determining long-run sustainability.
    Mar 10 09:41 AM | Likes Like |Link to Comment
  • Managed Duration Investment Grade Muni CEF: ~10% Tax-Equivalent Yield, 9% Discount To NAV [View article]
    I think you're assuming a lot to claim that we've now entered a period where rates are in a long uptrend. I think rates are going higher, but given the amount of debt Gov'ts, Corps, and Individuals have taken on, it's going to be very challenging for the economy to grow at a trend rate above 2-3%. That's generally consistent with 10-yr UST yields at ~3% if inflation remains as low as it has been. Just checkout the post-WWII years to see how long rates fluctuated at very low levels as we worked off that debt.

    Structuring bond portfolios through the purchase of high coupon, callable issues to reduce interest rate risk while picking up yield makes perfect sense in this environment.
    Mar 8 11:30 AM | Likes Like |Link to Comment
  • Managed Duration Investment Grade Muni CEF: ~10% Tax-Equivalent Yield, 9% Discount To NAV [View article]
    Munis are long duration asset class to begin with. If the coupon rate is high and the issuer isn't under stress, the bond should be called, and if it not, it will likely just re-price to the next call date. If you closely examine the N-Q, most of the bond's coupons are in the 5-6% range, which is a good bit higher than where rates are at currently and should provide an adequate buffer if rates just continue to rise moderately. Currently, I don't think 10-yr UST rates above 3.5% are sustainable.
    Mar 5 09:04 AM | 1 Like Like |Link to Comment
  • Managed Duration Investment Grade Muni CEF: ~10% Tax-Equivalent Yield, 9% Discount To NAV [View article]
    Good point, but based on Guggenheim's 2013 numbers, the amount subject to AMT is only 13.7%. http://bit.ly/1crBSju
    Mar 4 02:59 PM | 1 Like Like |Link to Comment
  • BlackRock Multi-Sector Income Trust - Earnings Exceed Current Dividend [View article]
    Excellent analysis and write-up. Thanks for sharing. I've learned a good bit on how to think about the CEF sector from reading your articles.
    Feb 19 09:04 PM | Likes Like |Link to Comment
  • Biotech IPO pace stirs bubble chatter [View news story]
    Junior miners and biotech have a lot in common. Both companies use public capital to make out-sized, long-shot, go rich or go home bets, and repeatedly tap public equity markets to fund their exploration budgets. Sometimes their cost of capital is insanely low (like now for biotech) when the public fails to demand the appropriate risk premium. And, this works until it doesn't. Check out the junior gold miners performance in 2012- 2013, and you can probably get a pretty good read on where this latest biotech frenzy will eventually end up.

    Feb 10 08:38 PM | 4 Likes Like |Link to Comment
  • The First Trust Intermediate Duration CEF Offers 8.7% Yield, Total Return Potential Of 19%, And Minimal Rate Risk [View article]
    Short UST etf to reduce the carry in the position makes a lot of sense to me. You benefit from both volatility and higher expenses deteriorating the underlying capital. Going long PST makes less sense since all these leveraged etfs lose progressively to volatility/time. I don't like to be long any of these leveraged ETFs for any extended period of time as the position described above would require.
    Feb 9 09:40 AM | Likes Like |Link to Comment
  • The First Trust Intermediate Duration CEF Offers 8.7% Yield, Total Return Potential Of 19%, And Minimal Rate Risk [View article]
    Not sure I follow - shorting IEF is a hedge against rising rates. The hedge mentioned in the article is relatively low risk compared to the position you're describing (going long a short Treasury ETF managed through derivatives which loses principal continually to volatility). We're not trying to play significant shifts in interest rates here - the purpose of the hedge is to reduce the effect of interest rates movements on the hedged position.

    The hedge position was a description of a hedge fund strategy, not something I encourage your average investor to try at home for the first time! If credit spreads widen significantly, the position could lose a significant amount. Hedge funds have to model and monitor that risk continually.
    Feb 8 03:15 PM | 1 Like Like |Link to Comment
  • The First Trust Intermediate Duration CEF Offers 8.7% Yield, Total Return Potential Of 19%, And Minimal Rate Risk [View article]
    You may be buying it at a discount to par, but you're not buying it at a 10% discount to its current trading price. That's what FPF offers - a basket of preferreds trading below the current market trading price.
    Feb 8 12:54 PM | 2 Likes Like |Link to Comment
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61 Comments
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