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What's up with mortgage REITs and special dividends (first CYS, now AMTG)? REIT dividends have...

What's up with mortgage REITs and special dividends (first CYS, now AMTG)? REIT dividends have always been taxed as ordinary income, and thus won't be hit by a hike in the dividend tax rate. It smells of the companies trying to throw in some nominal good news amidst big dividend cuts. Trouble is, the use of this "slush fund" money now makes bigger cuts more likely in the new year. AMTG now -0.2% premarket.
Comments (13)
  • Perhaps it's because ordinary income tax rates for the vast majority of shareholders will be higher next year.
    14 Dec 2012, 09:06 AM Reply Like
  • And perhaps retained earnings would be taxed at higher rates than a dividend to shareholders?
    14 Dec 2012, 09:08 AM Reply Like
  • And lastly (to JG and Ob) could be they cut dividends too soon or too deep and now have a pile full of money that they didn't expect that they are mandated to dole out. or all of the points suggested so far.
    14 Dec 2012, 09:20 AM Reply Like
  • CYS talked about this in their Oct. earnings conference call. They sold MBS at a profit in cash, which is a one-time deal. Since they are a REIT they must pay that cash profit as dividends and thus there isn't much choice for their management. Timing-wise, its possible they opted to do the special dividend in 2012 rather than 2013 due to anticipated changes in dividend taxation.


    Its true that selling MBS means recurring income from those MBS is no longer available to the seller. But one can always simply reinvest the cash dividends received to compensate for the drop in future dividends. And/or management can increase leverage; stock buybacks (which CYS is also doing) decrease capital and thus increase leverage.
    14 Dec 2012, 09:25 AM Reply Like
  • Another thing you are seeing is 4th qtr dividends are being paid in December rather than Jan. So far AI, ARR, CYS. I suspect others may follow.
    14 Dec 2012, 09:41 AM Reply Like
  • Maybe that is what is holding up the AGNC announcement.


    14 Dec 2012, 10:08 AM Reply Like
  • There is a very simple explanation to this. Because a REIT is a unit trust, it must pay out 90% of its income to its unit holders (read, shareholders), or it will be subject to tax at the Trust level. Here's a basic explanation of how REITs work:


    AMTG did not increase its dividends during the year to account for its increasing levels of income. As a result, it needed to declare a special dividend for Q4. I think this was widely expected by the market, as a well-informed Alpha writer predicted this special dividend several months ago.


    Also, please note that the dividend will be paid in January of next year and recipients will be taxed at the prevailing income rates for 2013, which are currently unknown. So the idea that the special dividend is designed to save shareholders taxes is incorrect.


    Others on Alpha have analyzed AMTG and understand the fundamentals of the company much better than I do. However, I don't think the special dividend means that the company is now rushing to increase dividends which will decrease their ability to pay a consistent yield in the future.


    As with all mREITs, AMTG's income will depend on interest rate movement, whether they buy agency or non-agency mortgages, the overall performance of the mortgage market, and actions by the Fed to buy mortgages which can distort the market quickly.


    I am long AMTG.
    14 Dec 2012, 10:33 AM Reply Like
  • TMK:
    Why do you think AGNC is holding off on their 4th Qtr dividend announcement?


    14 Dec 2012, 12:20 PM Reply Like
  • Agree with TMK. In addition, REITs' will do what they perceive is good for them, sans the investor. Therefore, the only thing that would force the REIT to pay are the regulations, (there is always the exception, CIM?). One explanation, dividend security, as the mkts unfold, hold to ensure dividends, til the end, when regs cut in.
    14 Dec 2012, 07:50 PM Reply Like
  • Some good news:
    $AGNC announcement date:12/14/12
    Ex-div date: 12/24/12
    Payment date: 1/28/13
    Payment: $1.25


    Dividend announcement: 12/14/12
    Ex-div date: 12/24/12
    Payment date: 01/28/13
    Payment: $ 0.90


    15 Dec 2012, 08:35 AM Reply Like
  • AMTG's 4th quarter dividend announcement was more complicated than I knew. The company had high income in 2012 due to MBS sales and will have lower income in 2013. Management lowered the base dividend rate in anticipation of lower income, which is wise. Other mREITs will likely have similar experiences.


    Here's a really good summary of AMTG's status from another Alpha member:
    15 Dec 2012, 01:28 PM Reply Like
  • Based on 2013 forecasted earnings and a 90% minimum payout, a quick estimate is that theAMTG dividend payout will be in the $.66 range/qtr. At current pricing the annual rate will be 12.44%. If the dividend rate does drop, a price drop should follow driving the rate higher. Keep some cash ready. We may see some stock price drops in March for a number of REITs. I think AI, CMO, CODI, ARR,NCT and NYMT will be able to hold the line in 2013. I actually think NCT and AI might even be able to increase their dividends. All this of course is based the current earnings forecasts.
    16 Dec 2012, 01:27 PM Reply Like
  • AMTGs quarterly earnings have been well ahead of its payout obligations. They raised the payout/share last yr 3rd qtr from $.75 to $.85. Now 4th qtr its $.70 + $.35 special payout. I dont expect a payout cut here and I expect AGNC will probably maintain value through its expected payout cuts with the stock buyback program.
    17 Dec 2012, 01:49 PM Reply Like
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