Interest rates are important to mortgage REITs, but don't overlook the importance of management,...

Interest rates are important to mortgage REITs, but don't overlook the importance of management, writes John Lewis. Aggressively buying MBS ahead of what he expects is more QE, AGNC president Gary Kain has levered up his balance sheet far higher (and produced better returns) than the hunkered-down Mike Farrell at NLY.

Comments (9)
  • TwistTie
    , contributor
    Comments (2429) | Send Message
    Which is better at this point, levering up or hunkering down?


    I don't have a clue.
    19 Jun 2012, 01:34 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2856) | Send Message
    From its IPO til today, Gary Kain has steered AGNC wonderfully. I'd have to see a disaster at the company to lose faith in his ability to lead that company.
    19 Jun 2012, 02:37 PM Reply Like
  • chowzer
    , contributor
    Comments (42) | Send Message
    IMO levering up with a low rate book makes perfect sense. It is a bet that the future the Fed will be an aggresive buyer of low rate mortgage-backed securities, raising the prices. That raises the book value of AGNC's securities with "mark to market" accounting.
    19 Jun 2012, 02:10 PM Reply Like
  • Brian Bobbitt
    , contributor
    Comments (2083) | Send Message
    Question to all, 'specially the author. I have two investments both pay 15% and one has a debt of [$40,000,000.00,] so to speak, and the other is not leveraged at all, no debt. Both have fine track records and seem to have no spiders or warts. Which would you chose. Look at NLY, which I own, and will soon sell, and look at HTS [Hattaras] which NO leveraged no debt, and is looking about the same as NLY. Methinks I switch to HTS.


    Happy jumping ship .
    Capt. Brian
    The Lost Navigator
    19 Jun 2012, 02:34 PM Reply Like
  • Lucas Krupinski
    , contributor
    Comments (596) | Send Message
    I'd suggest you do a little more due diligence - HTS's investor fact sheet makes it quite clear they they utilize every bit as much leverage as AGNC, and the leverage limit they've set out for themselves is 12x rather than AGNC's 10x.


    Yahoo finance doesn't pick up their borrowings and repurchase agreements properly, but the company itself is quite clear that leverage is a central part of its strategy.


    Not that there's anything wrong with that. I'm long several names. But i don't want anyone thinking that Hatteras is a aafe, unleveraged entity.

    20 Jun 2012, 10:22 AM Reply Like
  • David in NV
    , contributor
    Comments (353) | Send Message
    As we now know, NLY has reported it will pay the same dividend of .55 for Q2 as it paid for Q1.


    Yes, it could be said that Mike Farrell has "hunkered down," but the conservative "barbell" approach of NLY and its competent management has stood it well over a long period of time. And its current low leverage rate leaves NLY in position to leverage up if opportunities warrant.


    We put 25,000 shares of NLY into our retirement portfolio years ago, and it has returned nearly $350K in dividends to us since we have owned it.
    19 Jun 2012, 05:14 PM Reply Like
  • Jack Rice
    , contributor
    Comments (1421) | Send Message
    While mREIT risks -- rates, liquidity, prepayments -- are transparent and straightforward, they aren't simplistic. For example, falling rates are not good for mREITs, and gradually rising rates are good. I don't place leverage in the risk category, because leverage isn't itself a risk -- it doesn't act on the assets -- but it's rather the stake management is willing to subject to risk.


    Nor is low leverage always good thing. AGNC CIO Gary Kain:


    "[W]hile we closed the quarter at 8.4 times leverage, which was on the higher end of where we've operated over the last two or three years, we said we have brought that down, because valuations and April had been very strong, and we felt that the risk return was much more two-sided. So we've brought that down some.


    "But one thing that we stressed was...we were very reluctant to be at low leverage, going into in a scenario where there was a reasonable probability of a QE3. Why? Because when you're underweight or when you have low leverage, that means that you're kind of saying, I'm going to buy later.


    "Yes, you could potentially maintain that for a long period of time, but you're still, especially if you have faster securities...going to be doing a lot of reinvesting. And you're going to be competing with a multiple hundred-billion dollar program from the Fed. The...last thing we want to do is wait till the Fed starts buying, to then...increase our purchases of mortgages.


    "We'd rather, if anything, reduce our purchases going forward if the Fed drives mortgage prices to...extreme levels. So for that reason, we weren't comfortable in running with...low leverage in that kind of environment."


    The Fed has signaled, and the market is anticipating, QE3 or an extension of TWIST or both. As long as Fed policy is to keep money cheap, then higher leverage is not only not bad but the right thing to do. Good management is the adroit adjustment of leverage to meet changing conditions.
    19 Jun 2012, 10:43 PM Reply Like
  • aschroed
    , contributor
    Comments (130) | Send Message
    Hunkered down NLY, not really. NLY has recently increased their leverage from 5.3 to 5.8. That is almost 6. It is less than AGNC yes, but hunkered down, no.
    20 Jun 2012, 10:07 AM Reply Like
  • no_eyes
    , contributor
    Comments (110) | Send Message
    at what price point is it good to buy nly or any mreit given their current unit price today>?:
    20 Jun 2012, 11:04 AM Reply Like
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