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It's a jittery mortgage REIT sector as last night's election assures the Fed will continue to...
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Wednesday, November 7, 2012, 9:40 AM ETIt's a jittery mortgage REIT sector as last night's election assures the Fed will continue to strangle the leveraged operators' net interest margins. Annaly (NLY -2.8%) - the purest of the pure-play agency REITs - still reeling from Monday's poor earnings, leads to the downside. AGNC -2%, TWO -2.3%, HTS -2.1%.
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Since Bernanke doesn't have to worry about being fired, I'd think REITs would be okay -- except maybe for possible higher tax threat on dividends.
For tax purposes, dividends are allocated to ordinary income, capital gains, and return of capital. As REITs do not pay taxes at the corporate level, investors are taxed at their individual tax rate for the ordinary income portion of the dividend. The portion of the dividend taxed as capital gains arises if the REIT sells assets. Return of capital, or net distributions in excess of the REIT's earnings and profits, are not taxed as ordinary income, but instead applied to reduce the shareholder's cost basis in the stock. When the shares are eventually sold, the difference between the share price and reduced tax basis is taxed as a capital gain."
BDCs, mReits and so much more are down down down.
Maybe a selloff is healthy!
Look here for instance:
"NEW YORK (Reuters) - The Dow industrials lost more then 300 points in a sell-off on Wednesday that drove all major U.S. stock indexes down over 2 percent in the wake of the presidential election as investors' focus shifted to the looming "fiscal cliff" debate and Europe's economic troubles."
"The market's losses were broad, with pessimism exacerbated by overseas concerns after the European Commission said the region would barely grow next year, dashing hopes for improvement in the short term."
Armour Residential REIT (NYSE: ARR) is not the kind of company I'd normally invest in. I pretty much swore off mortgage-backed securities when I realized that banks were just selling them and had no commitment to making them into proper investments. However, the 72% profit margin, the PEG ratio of .61 and the dividend yield of 15.3% do a lot to sway me. Added to these tasty features is the fact that Armour was started by Marc Bell, who has his hand in a lot of successful businesses. With fat profit margins and a major shareholder with serious chops, this might be worth looking into further.
Now we have certainty and we know Bernanke won't get fired and the market collapses. Hard to figure this stuff out.
so div tax breaks expiring does not impact how agnc divs are taxed?
This seems illogical to me.
- ARR is a pure agency MBS play.
- Agency MBS are guaranteed (directly or indirectly) by the US Govt
- Borrowers with crappy credit typically have a hard time prepaying their loans
- Lower prepayments (technically, less directional prepayments) are a good thing for agency REITs
Hence, if it is true that banks make crappy loans and get rid of them through securitization, then buying agency MBS backed by this loan is actually an opportunity.
If this was about non-agency MBS, the statement would make sense. But here, I am really struggling to understand.
I thought ARR invested in Agency Fixed and Agency ARM. Since the Agency ARM is not on the governments buying list right now, ARR doesn't have as many problems with prepayments as the Agency Fixed Only mREITs like NLY and AGNC.
John
My point on prepay speed/directionality is also valid for ARMs as for FRMs, although it's true that ARMs are only exposed to the negative effect of prepay speeds increases through periodic or life caps, so not as much as FRMs.
But last time I read through ARR's quarterly, it seemed to me in any case that their ARMs holdings were not that significant vs fixed-rates, nothing like HTS.
It just doesn't get better than this.
"Buy when there is blood in the street".