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Dividend Living
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Ive been investing in stocks and mutual funds since 2005 on a personal level. I occasionally read books on investing. I am focused on Mortgage REITs analysis.
  • MREITs Turning Around 18 comments
    Feb 18, 2014 10:12 PM | about stocks: WMC, NCT, NRF

    The taper starting has been a great thing for mREITs as no one predicted that I know of. Long term rates are lowering and now stabilizing in the 2.75% range for the 10 year treasury. mREITs are recovering their price to book value as the rates stabilize and people start to come back into this beaten up sector. My investments finally are in the black after being in the red ever since the May and June carnage of last year. The dividends over time have made up my losses in stock price and I have made some good picks in NRF, NYMT, WMC, and NCT that have helped my principal invested recover. Even MORL is only down 6.6% in total returns for me and that can be made up in a good week or from 4-5 months of dividends. So far so good in 2014. The only thing Im concerned with are rates rising too fast or short term rates going up, but that will always be a concern for mREITs and it doesn't seem either of those scenarios will materialize in the near term.

    Near term concern is WMC's book value taking out the recent gains. The BV is probably below 15$ while the stock is at 16.35$ and well above its peers in price to book value.

    Im thinking of trying to stabilize my portfolio without dropping my dividend yield too much by going more into NYMT, which has shown remarkable price stability in the last 5 years and has the 4th highest dividend of the bunch (WMC, ORC and CYS are higher) , without any recent dividend cuts as most mREITs have done.

    Seems most of February has been rising stock price days in mREITs even on days rates aren't dropping. Just the recovery the sector deserves I think, they usually don't trade at Decembers low price to book value. The end of the year selling and the taper fears were just a perfect storm of worry that seems to have passed. For all who stayed long through this downturn, I hope you are getting back in the black as well and your long term dividend returns will trump this recent setback. Dividends may finally have stabilized as well and if that is true, it will bring more people back to this sector as management probably knows.

    Disclosure: I am long NYMT, MORL, NRF, NCT, WMC.

    Stocks: WMC, NCT, NRF
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Comments (18)
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  • KRT_investor
    , contributor
    Comments (338) | Send Message
     
    I would agree that WMC BV was probably below $15 at the end of Q4 2013. Using the last unofficial BV given by WMC on 12/1/13 of $16.80 and subtracting the 10.5% stock dilution of $1.76 ($16.80-(10.5%*$16.80)) I would get a BV of $15.04 on 12/1/13 but we know BV dropped in December so mid $14 range makes sense. I would guess BV has recovered and WMC has covered the cash part of the Q4 dividend so a BV of $15.04 now is probably close to actual. A long way from current price of $16.60 at 11:30am on 2/19/13. I've got a stop loss of $16.40 set and I keep moving it up as the stock climbs. I'll catch it near its peak hopefully and then wait until it bottoms and then buy it back with a bunch more shares. I am long on WMC but I can't pass up this chance to catch a WMC stock bubble.
    19 Feb 2014, 12:35 PM Reply Like
  • KRT_investor
    , contributor
    Comments (338) | Send Message
     
    Well WMC made it down to $16.40 (i was hoping I could track it higher) so I'm sold out of WMC for the moment. I'll now wait until after the earnings call to buy back in. I bought just before the exdividend date ($17.10) and managed to make 11% with the share dividend and subsequent price appreciation. The way I look at it i got the "normal" 4th quarter dividend of 5% plus an additional quarter dividend of 5% plus 1% toward another quarter and I've taken the earnings report risk off the table. I wish all my trades went this well. I'll be back in if the earnings report shows WMC can support its current quarterly dividend ($.70 when you factor in the stock dilution).
    21 Feb 2014, 12:54 PM Reply Like
  • Dividend Living
    , contributor
    Comments (322) | Send Message
     
    Author’s reply » Nicely done, Im still in it without a stop put on yet, but still considering it. The wash sale it would bring is not a big deal to me. Im not that great at timing with mREITs, so I rarely trade out and in.
    21 Feb 2014, 01:56 PM Reply Like
  • KRT_investor
    , contributor
    Comments (338) | Send Message
     
    Thanks @DL. My WMC was in a retirement account so I don't have to facter in tax considerations. I'm really concerned about the apparent disconnect between price and BV and the day of reckoning that will come when Q413 earnings are reported. It may not be a rational market reaction initially.
    21 Feb 2014, 09:29 PM Reply Like
  • Dividend Living
    , contributor
    Comments (322) | Send Message
     
    Author’s reply » You've got me considering doing the same thing. WMC may report a more current BV along with the earnings report to try to save some of the stock price appreciation, but Im guessing its still going to be well below the 16.58 I see right now. You wont miss the dividend as thats not coming until the end of march.
    19 Feb 2014, 01:40 PM Reply Like
  • jpmist
    , contributor
    Comments (346) | Send Message
     
    "The taper starting has been a great thing for mREITs as no one predicted that I know of. "

     

    Whoa, I kinda did. . .

     

    In November I wrote in my own Instablog: "All we need to do is get past the next Clown Show [debt ceiling extension] episode, and the long awaited beginning of the Fed Taper of MBS purchases for rate volatility to subside. Once that happens mREITs can spend less on hedging, expand their leverage and take advantage of the increased net spreads that are already showing up in their reports."

     

    If you look at the numbers that mREITs reported this month, all the above has happened. The mREIT sector bottomed in December.
    19 Feb 2014, 04:17 PM Reply Like
  • Dividend Living
    , contributor
    Comments (322) | Send Message
     
    Author’s reply » Kudos on that. I think most thought it would cause another rate jump and consistent rise in long term rates, which has not materialized yet as rates have fallen. With the hint of taper being so inflating to long term rates, it was tough to see the actual thing not being inflating as well. Hope your back in the black jpmist. Staying with it hasn't turned out to be all that bad, just wish I could have avoided may and June.
    19 Feb 2014, 05:00 PM Reply Like
  • jpmist
    , contributor
    Comments (346) | Send Message
     
    Hey, DL

     

    I just looked at MORL's chart today and saw the dive it took at 2:00 when the Fed minutes came out. Then this hits my in-box from the WSJ:

     

    "Federal Reserve officials in January started to debate when to start raising interest rates, with a few arguing they might need to move sooner than expected.

     

    "A few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon," according to minutes of the Jan. 28-29 meeting, released Wednesday after the customary three-week lag."

     

    Yikes. The consensus before hiking the Fed Funds rate was mid 2015 wasn't it? As we saw last spring, the MBS market immediately adjusted for Fed tapering 8 months before it happened. I'm very concerned that the mREIT market will start pricing in a 25bp rise in repo rates just when mREITs were starting to enjoy net spread increases.

     

    It could be deja vue all over again here, I dunno if I can stomach a repeat of 2013. . .
    19 Feb 2014, 06:25 PM Reply Like
  • KRT_investor
    , contributor
    Comments (338) | Send Message
     
    That Fed meeting was before the bad job creation data, before the record drop in house builders confidence, the recent drop in housing starts and the recent bad weather. The jobless rate creeps down but that is mostly do to people dropping out of the job market rather than actual jobs being created. I bet you won't see that short term rate hike discussion in the next Fed minutes. I think the economy is still just to weak to support a short term rate increase. Also the inflation rate is below target so there is no pressure from that quarter to raise short term rates either.

     

    Mortgage REITS are in a sweet spot now...long term rates are high enough to create a decent spread to cover larger dividends and long term rates are relatively stable so leverage can be increased and hedging can be reduced to also support larger dividends.
    19 Feb 2014, 07:20 PM Reply Like
  • Urbannek
    , contributor
    Comments (1162) | Send Message
     
    I do not like REITS but started buying them when the price went down. I think they are way too scary for someone like me but like the dividend so I only buy them at bargin prices. I want to buy more now but they are no longer a bargain and I think too much risk to pay a lot.

     

    I really like NYMT but read one should buy it under $7 a share. Impossible to do that now.
    21 Feb 2014, 04:43 AM Reply Like
  • Dividend Living
    , contributor
    Comments (322) | Send Message
     
    Author’s reply » If you keep watching NYMT for earnings reports or when it goes ex dividend, you might be able to catch a deal. still waiting on 4Q earnings. It could be a year or never for it to get below 7$ again.
    21 Feb 2014, 09:59 AM Reply Like
  • jpmist
    , contributor
    Comments (346) | Send Message
     
    @ KRT

     

    I hope you're right and I agree that the Fed won't raise rates until next year, but the market isn't always rational. Last April MBS values plunged simply because the Fed announced that the tapering of QE was going to be discussed. All hell broke loose for mREITs then.

     

    It's somewhat comforting that a hike in repo rates won't affect BV as drastically as the plunge in MBS did last year, but a hike will hurt net interest income which will make it harder to keep dividends at current levels. . .
    19 Feb 2014, 07:58 PM Reply Like
  • KRT_investor
    , contributor
    Comments (338) | Send Message
     
    I'm a neophyte in the area of repo rates but I've always thought the repo rates are tied pretty closely to the fed discount rate unless something pretty catastrophic happens (like 2008). Any education on this subject would be appreciated. I agree that short term rate changes would be easier for MREITS to handle than long term rate gyrations.
    20 Feb 2014, 09:29 AM Reply Like
  • Dividend Living
    , contributor
    Comments (322) | Send Message
     
    Author’s reply » Short term rates rising would hurt the spreads, but Ive been looking at it in this way: If the long term rates go up the same amount as the short term rates, the spread will stay the same, but BV will take a hit with the increase in long term rates. In no fan of short term rates rising, but I think it will be overfeared at the onset.
    20 Feb 2014, 11:19 AM Reply Like
  • jpmist
    , contributor
    Comments (346) | Send Message
     
    @KRT You're right that the Fed funds rate is tied closely to repo rates, but the Fed is testing something called a Fixed-Rate Reverse-Repo (FRRP) Program which may supplement it. It's way over my pay grade to understand it, but it's worth keeping an eye on. The only quotes I can find on MBS repo is from DTCC whose data is used in the WSJ. http://bit.ly/1fgtlQy
    Scroll down and you'll see their MBS repo quotes, which I assume means what short term repo costs with MBS as collateral. At 5 bp, I also think these are overnight rates. If memory serves mREITs report paying as much as 42 basis points for longer term repo but they don't report much about term or the haircut. (The haircut is the difference between the amount of MBS pledged and the amount of the loan the company gets for the collateral, usually 5%)

     

    Another source of info on Repo is Scott Skyrm's site: http://bit.ly/1fgtnrA I don't pretend to understand everything he reports on, but it's a good general overview of the Repo market.

     

    @DL For long and short rates to go up in parallel would be fine with me, but we don't know yet how strong the economy turns out. All we need is another Euro crisis and the flight to safety will keep long rates down and along with it the yield spread.

     

    A shrinking spread isn't necessarily a death knell for mREITs. They have managed rising short rates in the past. The worst case would be a repeat of what happened in 2003-2004 when Greenspan started hiking the Fed rate from 1% to 4% in a span of 24 months. During this time NLY's dividend held up fairly well for 4 quarters before cratering in late 2005. (I put together a google doc chart of this here:http://bit.ly/1fgtnrC)
    21 Feb 2014, 12:36 AM Reply Like
  • KRT_investor
    , contributor
    Comments (338) | Send Message
     
    @JPMIST Thanks for that helpful info. It would seem short term rates are somewhat rationally controlled by the fed (and therefore more predictable and planned) whereas long term rates are emotion driven (fear & euphoria) when unexpected events occur but after a while rational thinking settles in and rates stablize.
    21 Feb 2014, 12:23 PM Reply Like
  • Dividend Living
    , contributor
    Comments (322) | Send Message
     
    Author’s reply » That chart of the spreads and dividend is good, you should write an article on here with that and get some extra investing money.
    21 Feb 2014, 01:59 PM Reply Like
  • jpmist
    , contributor
    Comments (346) | Send Message
     
    Thanks, I got the idea from Doug Short. He keeps his chart updated so I don't have to.

     

    http://bit.ly/WIMX5H

     

    The 3rd chart down is the most interesting, it shows how large the spread was during mREITs "salad days" back in the 2010s when dividends were really healthy. The spread has been increasing for the last 9 months so it's just a matter of time before mREIT dividends stop dropping.

     

    My chart goes further back and illustrates the cyclical nature of the yield spread. It also seems to show that 2013 was the first time ever that the spread shrank from the long side instead of the short side as it did in the past. Perhaps that's why all the mREITs got hammered with book value losses they weren't hedged for.
    21 Feb 2014, 02:46 PM Reply Like
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