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No bid for mortgage REITS as yields rise

  • There's no mercy for the mREIT sector (REM -1.6%) as this morning's strong economic data sends the 10-year Treasury yield five basis points higher to 2.80%. Among the new 52-week lows today are sector giants Annaly (NLY -1.6%) and American Capital Agency (AGNC -1.8%).
  • Also down sharply are Armour (ARR -2.4%), CYS Investments (CYS -2.4%), Dynex (DX -2.5%), American Capital Mortgage (MTGE -2.8%), AG Mortgage (MITT -2.4%), and Arlington Asset (AI -3.1%).
  • Management matters, and investors have clearly lost some faith in the leadership of Annaly and American Capital - both of which trade at more than 20% discounts to book value. The newest favorite is that of Ellington Financial (EFC), where management has mostly been able to preserve book value this year. Company structure may have helped too - Ellington is a partnership, not a REIT and has somewhat more flexibility with its portfolio. The stock trades at just a 6% discount to October 31 reported book.
  • ETFs: MORT, MORL
Comments (48)
  • Doyle3000
    , contributor
    Comments (1256) | Send Message
     
    this is retail income investors capitulating. we all know the taper is coming.....doesn't anyone think that a 20% discount to BV already prices that in? no wonder the average investor is terrible at making money; they truly do buy high and sell low.

     

    and the beauty of these stocks is that they pay you double digit dividends to ride the storm out
    2 Dec 2013, 03:53 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2080) | Send Message
     
    One would think with their hedges Doyle is might be.

     

    But like the article said.
    At times this year management made bets on a direction and was dead wrong.
    So something like what 25% of book has been lost already and tapering hasn't even started.
    2 Dec 2013, 04:49 PM Reply Like
  • caribsurfking
    , contributor
    Comments (22) | Send Message
     
    What good is a double digit dividend if its related to the share price and the share price completely tanks!

     

    Paying 15% on $100,000 and paying 15% on $50,000 is not the same!
    2 Dec 2013, 08:00 PM Reply Like
  • Doyle3000
    , contributor
    Comments (1256) | Send Message
     
    but you're selling the stock at 20% below it's actual cash value. These are highly liquid assets. it's just not smart to sell your dollars for $0.80 because your psyche can't take the red!
    3 Dec 2013, 11:19 AM Reply Like
  • alphsim
    , contributor
    Comments (12) | Send Message
     
    You don't seem to understand yield. If the dividend stays the same ($2.40/share), you get the same total dividend no matter what the share price is.
    3 Dec 2013, 02:27 PM Reply Like
  • bagleytravis68
    , contributor
    Comments (74) | Send Message
     
    I think the above comment was inferring as BV drops the divvy is dropping with it.
    3 Dec 2013, 02:42 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1255) | Send Message
     
    The yield you earn (%) is the current annual dividend paid ($) divided by your purchase price of the stock ($) multiplied by 100 to convert to a percent. A change in the daily stock price will not change that.
    5 Dec 2013, 04:49 PM Reply Like
  • antiqueron
    , contributor
    Comments (84) | Send Message
     
    After a 31% drop how much are we supposed to take?
    2 Dec 2013, 03:58 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1255) | Send Message
     
    I prefer to buy low (that would be between now and mid Q1), and sell high (that was many months ago), unless I think the mREIT business model is totally flawed and the companies will ultimately fail (which I don't). I also DRIP the dividends to decrease my basis.
    2 Dec 2013, 04:47 PM Reply Like
  • jpmist
    , contributor
    Comments (312) | Send Message
     
    Todays WSJ had an article on repo might have scared some.

     

    However even during credit freeze of 2007-8 NLY had no problem getting repo loans. Plus mREIT leverage is safer than most banks.
    2 Dec 2013, 03:59 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (445) | Send Message
     
    AGNC did not establish a new low today. Today's low was 19.86, previous low was 19.85.
    2 Dec 2013, 04:09 PM Reply Like
  • SkiDad13
    , contributor
    Comments (94) | Send Message
     
    Actually, neither NLY nor AGNC set new 52-week lows today. They were both set last week.on Nov. 26th.
    2 Dec 2013, 10:30 PM Reply Like
  • Chucklesg
    , contributor
    Comments (49) | Send Message
     
    Despite the yields, I am thinking of dumping all REIT's and buying BDC's. They seem more stable with similar yields. Any thoughts?
    Thanks
    2 Dec 2013, 04:53 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2080) | Send Message
     
    Chuck,most BDC's say like PSEC are trading on the higher side.
    I don't think your idea is bad, but it's prudent to watch the entry point on BDC's.
    2 Dec 2013, 04:56 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1255) | Send Message
     
    Chuck - FSC seems to be in turn-around mode and might be a good buy here.
    2 Dec 2013, 05:25 PM Reply Like
  • Doyle3000
    , contributor
    Comments (1256) | Send Message
     
    dumping all mREITS today is the worst possible time to sell. you'd be locking in maximum losses. it's like liquidating your 401K when the DOW was at 6600 a few years ago. just wait for the pricing to head back towards BV. in the meantime, collect the dividends and if you want to sell calls that provides padding too. it's easy if you've never done it.
    3 Dec 2013, 11:21 AM Reply Like
  • Chucklesg
    , contributor
    Comments (49) | Send Message
     
    Thanks to all. I hold PSEC, FSC, and HRZN and they have done well, but CYS and ARR are killing me! I'll wait awhile longer and with the dividends reinvested at these low prices, but I am starting to question management rather than the market or interest rates for the sharp declines.
    3 Dec 2013, 04:28 PM Reply Like
  • bagleytravis68
    , contributor
    Comments (74) | Send Message
     
    With ARR I feel like I own a black box. I paid for it and it pays me dividends, but I really have no idea what is going on. My unrealized losses are so large that I can't bring myself to sell. I will either have nothing or if I ever break even I will sell.
    3 Dec 2013, 09:12 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1255) | Send Message
     
    If you have another choice that guarantees you more total return faster, you should always take it. In a non-IRA, tax advantages might also be a motivator to "switch elevators".
    5 Dec 2013, 04:56 PM Reply Like
  • 511southkstreet
    , contributor
    Comments (70) | Send Message
     
    The more important reason to head to BDC's is that a lot of them operate on flexible rates, so when rates go up so does what they charge. At that point your exposure would be default rather than interest rate risk.
    2 Dec 2013, 05:02 PM Reply Like
  • Leroy Jackson
    , contributor
    Comments (83) | Send Message
     
    I keep hearing things are priced in. The problem with that is the price continues to drop. All of this has happened with QE in place. The drop has come as a result of the news that QE may be tapered. Its time for QE to just disappear. So then would the news and the stock would level out. I grow weary of having stock that beats on profit and revenue but the stock drops because of taper talk. However, I will not sell stock in a company that is doing OK and I will buy on the dip the stock of a company that is making money. Consider it a gift.
    2 Dec 2013, 05:09 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1255) | Send Message
     
    I agree with Leroy on buying dips! Once you've identified a company that is well managed, dips caused by short term extraneous entities/factors are gifts! I like BDCs, MLPs, and even some mREITs during this temporary turmoil.
    2 Dec 2013, 05:29 PM Reply Like
  • DAVE22Q
    , contributor
    Comments (217) | Send Message
     
    I guess I am in that small minority who do not think wishing will make it so. Taper talk scares are not new. they are largely driven by right wing paranoia about the Fed not returning to the good old gold standard and QE being baaad.
    My analysis is that no rational Central Banker would assume the GOP congress would not continue their insanity and create a shutdown/default scare. Therefore, no policy change will even be seriously considered until that threat is past AND the indicators look good. A year end 10 year of 3.60-3.70 looks likely to me as taper hysteria again subsides..
    2 Dec 2013, 05:39 PM Reply Like
  • jong82
    , contributor
    Comments (7) | Send Message
     
    I was not aware $EFC was not a REIT. Does that mean the dividends are not taxed as ordinary income rates and considered qualified dividends?
    2 Dec 2013, 06:27 PM Reply Like
  • 14784462
    , contributor
    Comment (1) | Send Message
     
    Any thoughts on ARR for a 20 year hold in a 401k?
    2 Dec 2013, 06:29 PM Reply Like
  • bagleytravis68
    , contributor
    Comments (74) | Send Message
     
    For a 20 year stretch I would pick one with a better management track record. ARR has questionable management at best and the business is pretty opaque. Take JMI over ARR even though the management is the same. Or try NYMT for a smaller REIT and NLY for a giant with a long history. Rule of thumb select the management that actually gives 2 cents about shareholders.
    2 Dec 2013, 08:19 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1255) | Send Message
     
    I like ARR for a 20 year 401k hold...it will probably go through several cycles in that time. Between now and mid Q1 is my call for the bottom.

     

    For such a period I also like NYMT, CMO, MFA, WMC, TWO, but I suspect you want the monthly payments. Since mREITs in general are near a cyclic low, check out some articles on SA about MORL too.
    5 Dec 2013, 05:00 PM Reply Like
  • 8766921( Rajendra Agrawal)
    , contributor
    Comments (12) | Send Message
     
    Assuming you had done your research and bought the mREIT such as DX because they were good value and provided double digit dividends - even during the 2008 deep recession - then selling it now may not be the smartest thing to do. I am hanging on to them and expect them to recover once the current noise has subsided.

     

    My view...
    2 Dec 2013, 07:59 PM Reply Like
  • kobetiha
    , contributor
    Comments (9) | Send Message
     
    Yes indeed. I saw this name as a dividend play not a growth strategy.
    2 Dec 2013, 11:00 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8145) | Send Message
     
    When dollar bills go on sale for 80ยข ea. I am backing up the truck.

     

    My fear is that the discounts will close before I can fill up the trailer.
    2 Dec 2013, 08:33 PM Reply Like
  • 0123
    , contributor
    Comments (29) | Send Message
     
    Situation with NLY similar to CA Muni 3 yrs ago - yld on 30 yr at 6.1% and no one buying. It has turned around completely for Muni.
    NLY lowered leverage to very defensive 5 to 1. Tapering is already built into 10 yr yld. Higher mortgage rates and extremely low short term rates positive for NLY. It is prepayment of mortgage that hurt until now. Do not see that an issue going forward. Swaps amount to 75% of portfolio to guarantee future rates. Great opportunity exists.....
    2 Dec 2013, 10:29 PM Reply Like
  • diabh
    , contributor
    Comment (1) | Send Message
     
    I am a retired engineer, As a hobby, I have been day trader for over 10 years. I make good money and I lost some . My philosophy is, stay in the market no mater what. By not using all your money in the stock. So when you loose , you can still go back in the market.
    My family fortune is in real state.
    3 Dec 2013, 06:16 AM Reply Like
  • berloe
    , contributor
    Comments (1575) | Send Message
     
    Seems like forever I have been reading commenters raving about these babies and their super yields. All I see is lower dividends and lower prices.

     

    NLY went x div of #0.65 on June 28, 2011 at a stock price of ~18. Latest dividend was $0.35 and stock price now ~10. In June of 2011 the yield was ~14%. Yield now still ~14%.
    I agree I would buy now rather than June 2011 but I'll pass.
    When I traded commodities the rule was "wait, don't anticipate" when looking for a bottom. I'll wait and hope someday someone will say, "See, I told you to grab that 14% yield-er". But my retort will be "Yeah, but I still have the money".
    3 Dec 2013, 03:05 PM Reply Like
  • 8766921( Rajendra Agrawal)
    , contributor
    Comments (12) | Send Message
     
    This yield discussion is quite interesting and topical. I have a question that I have been pondering upon but do not have an iron clad answer. Perhaps some one in the SA community can help.

     

    So, here is my question. Assuming the yield on a stock is 12% and assuming the dividend record has been good and the company has historically maintained its dividend, I will get my principal back in about 8.5 years. After that what ever the stock price is - it is just a bonus ( I realize the opportunity cost etc. but at current interest rates these are small). So, what does it matter what is happening to the stock price at any instance of time and why should I be worrying about the underlying Book Value of the stock if I am in it for the income and for the long term.
    3 Dec 2013, 04:54 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1255) | Send Message
     
    Raj - I agree. If you have already paid yourself back your principle, and put it somewhere else, the stock price of the remaining investment doesn't matter to an income investor.
    5 Dec 2013, 05:11 PM Reply Like
  • teeth26
    , contributor
    Comments (46) | Send Message
     
    As long as the dividend is not dropping you are still receiving dividends on the # of shares not the $. At these prices it is not a bad idea to purchase these mreits @15 Yields and ride out the storm, eventually these stocks will stabilize.
    6 Dec 2013, 10:58 AM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    Hi Raj!

     

    These stocks are not made for capital appreciation but instead for dividends and dividend reinvestment. If you bought a mREIT yielding 12% and reinvested all dividends and overtime neither the stock price nor the dividend changed in about 6 years you would have doubled your investment.
    11 Jan, 06:44 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1255) | Send Message
     
    It is true that mREITs are not typically going to enjoy much price appreciation, but after such a drastic emotional and sudden 2013 price drop, the probability is high that the price will appreciate from the floor with some stabilization in the environment.
    11 Jan, 07:14 PM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    I agree prices will work there way back up to NAV and will likely get back to a premium at some point when dividends peak again. But the rise in share price really benefits trades rather than the long term investor who is reinvesting the dividend and would thus all things being the same would continue to benefit from a low share price.
    12 Jan, 09:26 AM Reply Like
  • COBeeMan
    , contributor
    Comments (1255) | Send Message
     
    Agreed.
    12 Jan, 11:12 AM Reply Like
  • Dividends#1
    , contributor
    Comments (2232) | Send Message
     
    Hi Rob,

     

    Love your comment. I wonder why so many on the mREIT threads do not get this simple concept. Amazes me.
    12 Jan, 09:50 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1255) | Send Message
     
    I think the point here is that now is a good time to get in...as long as you trust the management company. Even a long term income investor benefits from buying low.
    13 Jan, 11:44 AM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    Hi Dividends!

     

    Thanks for the complement! I think a number of things scare investors in this product. As you know based on how you have studied the articles of experts like Mortgage REIT, Scott Kennedy and Positive Concavity its a complicated business model to understand. The leverage scares people. NAV dropped 22% in association with a little over 100 basis point rise in interest rates. Interest rates are historically low what will the next 200 basis point rises do? I don't think many investors are aware to what degree mREITs like AGNC accepted the pain now so the next 100 basis point rise would have a much smaller material impact on NAV. I think the psychology of the retail investor is that things are cheap for a reason.... that the big discount to NAV is because something is fundamentally wrong with the sector that maybe only the wall street insiders are privy to.

     

    That being said I personally still have concerns here: 1. The up and down rates drive me crazy. I wish the 10 yr. T bill rates would gradually get up to the 3.5 - 4 range while AGNC is nicely positioned defensively. From there you could enjoy the increased spread between short and long term rates, management could increase leverage and position the portfolio for maximum income. While rates coming down some over the last few days might have some short term benefits they also extend the period of time management needs to be defensive. 2. I have concerns about the future challenge of managing rising long term rates that are precipitated by the Fed ending its zero short term interest rate policy. Could this be the next shot to NAV?
    13 Jan, 04:51 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2232) | Send Message
     
    Hi Rob,

     

    Your first paragraph in your above most recent comment is excellent and right on the money once again.

     

    Your second paragraph as you know is out of our control. We can guess how the rates will move or when the FED will change its current policy and how these events will affect AGNC in the future, however that causes one's emotions to dictate ones investments. The events that I have zero control over are often imagined to turn out for the worst. These variables are always part and parcel of being an investor in the mREIT sector.

     

    What is in my control?

     

    1) Which mREIT I would invest in?
    2) How much capital I am willing to risk in order to meet my income goals?
    3) Studying as much as I could to become comfortable with the risks and rewards.

     

    Since I decided that I wanted to be an investor of a mREIT( in order to benefit from the dividends reinvested and eventually living off the dividend income), I have spent the last couple of years trying to determine which mREIT was the best of breed. Initially I believed NLY was the best of breed, when Michael Farrell was in charge. As, soon as he was not capable of managing NLY, I sold my shares and bought AGNC. I felt AGNC had become the best of breed. After, reading Scott Kennedy's articles and learning from him, I became even more confident that I had a solid investment. As, you know Scott owns AGNC for the long term prospects. Then I read Positive Concavity's articles and learned from him. He is also long AGNC. The last time REIT Analyst wrote about AGNC, he was long AGNC. I felt I was in good company knowing these very intelligent, knowledgeable mREIT investors, all with unique perspectives were long AGNC.

     

    I know all my thoughts and my belief that AGNC is going to turn out to be a very good investment does not make it a guarantee of it happening. Maybe, this group of AGNC longs, is wrong. However, I did my due diligence to the best of my ability, I invested in my 3 best ideas, AGNC, MO and KMR and as I heard Warren Buffett say, I will not let any others fears of the unknown deter me from my conviction.

     

    Lastly, do not forget as, you stated in your first comment " But the rise in share price really benefits trades rather then the long term investor who is reinvesting the dividend and would thus all things being the same would continue to benefit from a low share price". That is the crux, the key to my AGNC investment. Our shares could double in 5-6 years, without any price appreciation, we will have a very profitable investment.
    13 Jan, 05:54 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2080) | Send Message
     
    Rob, the drop in tresury and rise in mbs prices is bad for AGNC's hedging.
    They are short the treasury and short TBA's which needs things to move in the opposite direction as it's been doing that past few days.

     

    Concur with you to.. it would be nice if the treasury move up just happens and it's done.
    13 Jan, 05:00 PM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    Great comments dividends and xxavatarxx!

     

    So I will sit in wait... my cost basis is 20 and my sense is we are either at the end or close to the end with dividend cuts...so 13% dividend and reinvest ... the 1 month to 10 year treasury spread historically has peaked at 4 and has not hung there for long so I see the cap in the ten year to be a max of 4.0 until the 1 month moves... the closer to 4 it gets the less AGNC has to hedge and the wider spread means more dividends.... Once the fed lets go of short term rates though (hopefully not until 2016 or later) I will significantly cut back, get on the sidelines and then wait for things to settle
    13 Jan, 06:58 PM Reply Like
  • Doyle3000
    , contributor
    Comments (1256) | Send Message
     
    the real frustration is that the government jobs number will prove to be inaccurate but it was the reason that the 10 year yield dropped the other day. so it's bad news begetting more bad news and none of it is accurate. the next round of 'non-governent' reporting on jobs will show that we are still doing well and that'll make the 10 year creep towards (and above) 3% where it should be by now.
    14 Jan, 10:20 AM Reply Like
  • Dividends#1
    , contributor
    Comments (2232) | Send Message
     
    Doyle3000.

     

    That is all noise.
    14 Jan, 10:48 AM Reply Like
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