Today - Sunday, March 9, 2014
- A judge has ruled that a conflict of interests caused bankers at RBC Capital Markets to persuade Rural/Metro Corp. to accept a low offer of $438M from Warburg Pincus when the latter bought the national ambulance service in 2011.
- Judge Travis Laster found that the Royal Bank of Canada (RY) division misled Rural/Metro directors about the valuation of the company in order for the sale to be completed quickly. RBS also failed to disclose that it was looking to help Warburg finance the acquisition.
- Laster agreed with Rural/Metro's former investors that they should have received more money, although he has yet to decide how much RBC should pay in compensation. The ex-shareholders want $172M.
Saturday, March 8, 2014
- "MetLife (MET) is one of the cheaper stocks in a sector that is, itself, cheap relative to the market," says Eric Hagemann, an analyst at Richard Pzena's Penza Investment Management (an owner of the shares). A check of price/book (excluding investment gains) finds Met at 1.1x - grouped with Hartford (HIG) at 0.9x and Lincoln Financial (LNC) at 1.1x - but well less than Prudential's (PRU) 1.6x.
- Why the discount? Met is one of few remaining large financials not yet buying back any stock as it awaits direction from D.C. (which isn't expected until late this year or early next). In same boat, AIG and Prudential have both thrown caution to the wind and begun repurchases.
- On the other hand Met has boosted its dividend to $1.10 per share annually and the payout could approach $1.50 in 2015. There was also last year's $2B acquisition of Chilean pension fund provider Provida. If the new regulatory capital rules are too onerous, a breakup of Met into domestic and international businesses is a possibility.
- "In a record stock market, MetLife offers a nice package for investors: a rock-bottom P/E and price/book ratio, an attractive global franchise, and a financially astute management team," writes Andrew Bary.
- EFC's estimated book value of $23.65 per share as of February 28 slips from $24.45 at the end of January, but a dividend of $0.77 was paid. Book value was essentially stable after adding back the payout.
- Press release
- Friday's close of $24.14 puts the stock at 1.02x book. Mortgage REITs (EFC is actually a partnership) near or above book were a rare sight at the start of the year, but the species is making a comeback.
- Yesterday: 3 mREITs lose Buy ratings for valuation reasons; trading above book value, Javelin Mortgage is punished after earnings
- Related ETFs: REM, MORT, MORL
Friday, March 7, 2014
- Hardest hit in the mREIT sector today is Javelin Mortgage (JMI -5.3%) after reporting core EPS of $0.45, down from $0.54 in Q3, but inline with the current monthly payout of $0.15.
- Book value per share fell to $14.28 from $14.69 at the end of Q3 (if you add the dividend back, it actually rose a few pennies), leaving the stock (before today's decline) trading at a premium to book. Net interest margin of 1.78% gained six basis points with CPR falling to 4% from 5.4%.
- Leverage declines to 4.9:1 from 6.48:1 as the agency portfolio falls to $802M from $1.3B and the non-agency to $284.3M from $267.2M.
- 1.5M shares repurchased at average price of $12.72 each during Q4, leaving about 12M shares outstanding.
- The company previously announced a boost in the buyback authorization to 3M shares.
- Press release
- It hardly needs saying with 15% of the portfolio (and 50% of firm capital) now allocated to non-agency paper, but Western Asset Mortgage (WMC -3.9%) management is comfortable (CC transcript) with the firm now being described as a hybrid REIT instead of its traditional agency REIT classification.
- The upshot: The recent foray into non-agency securities isn't a temporary move; management is committed to having a substantial investment in this area going forward.
- Previous earnings coverage
- Mortgage REIT fans will be interested in this transcript of a roundtable yesterday led by JPMorgan analyst Matt Jozoff, and including executives from Apollo Residential (AMTG -1.9%), Annaly (NLY -2.4%), MFA Financial, Invesco (IVR -2.5%), and Two Harbors (TWO -1.6%). At a minimum, it makes clear - for those who would lump the sector together - the significant differences in investment approaches and assets held.
- As tipped off during his company's earnings call a few days back, David Finkelstein - head of agency MBS trading at Annaly - sounds the most bullish: "Technicals over the near-term are relatively supportive of MBS, and we also believe that even beyond the Fed’s departure from being a - or from adding to their portfolio, we think that the landscape will still be favorable to MBS due to relatively low volatility the fact that we will not have a significant portion of the MBS market actively hedging their portfolio, which should reduce volatility day to day."
- MFA CEO William Gorin doesn't want any part of long-dated agency MBS: "We came into the year owning zero 30-year agency paper ... which we are happy with. When you are competing with a non economic, non profit maximizing competitor in the space [the Fed] ... we’ve decided not to be in that space."
- Related ETFs: REM, MORT, MORL
- The trustees originally had until March 16 to accept JPMorgan's (JPM +0.6%) $4.5B settlement offer, but have asked for and have been granted another three months to mull it over.
- The deal is to pay bond investors for MBS investments that didn't quite work out as hoped, and is part of continuing and apparently futile efforts by JPM to put the last cycle behind it. The agreement was originally announced in November, just ahead of the $13B settlement with the GSEs.
- Eyeing the lawsuit in the $8.5B Bank of America private mortgage settlement, the JPMorgan trustees no doubt don't want to find themselves in court for taking it too easy on JPMorgan.
- A sign of growing interest in distressed real estate and credit in Italy, five U.S. private equity funds are sniffing around the "bad bank" unit of Italy's Banco Popolare (BPMLF, BPMLY), reports Reuters, with sources saying Apollo Global (APO -1.3%), Blackstone (BX +0.6%), and Fortress (FIG -0.3%) are among those in the running.
- The unit's name is Release and it mainly owns loans linked to leasing contracts with Italian clients, "so it's business is in both property and credit," says one source. An analyst puts the business' book value at about €300M.
- Due diligence is set to start in April, with binding offers to follow.
- The mortgage REITs are maybe the poorest performing sector amid a big move higher in interest rates, and formerly bullish Deutsche Bank ringing the register on New York Mortgage Trust, CYS Investments, and American Capital Mortgage after nice runs for all have pulled them close to (or above in NYMT's case) book value.
- There's also an earnings miss this morning from one of the last of the players to report Q4, Western Asset Mortgage.
- Annaly (NLY -2.1%), American Capital Agency (AGNC -2.3%), Armour (ARR -1.4%), Two Harbors (TWO -1.8%), Invesco (IVR -2.7%), Capstead (CMO -1.2%), MFA Financial (MFA -2%), Apollo Residential (AMTG -1.7%)
- KKR is suffering a "black eye" over its investment in headed-for-bankruptcy Energy Future Holdings, but - says Oppenheimer's Chris Kotowski - other investments in that 2006 flagship fund are doing fine and should lead to further gains.
- Among them are Capsugel, Biomet, and Go Daddy. Then there's "works in progress" like First Data and Samson where marks have already been taken, but KKR - traditionally conservative in its marks - is working to improve the situation. Kotowski thinks if the fund were liquidated at current prices, it would generate $0.89 in earnings per share.
- "The news is not always good, but KKR seems to take the bitter medicine early when it needs to," says Kotowski ... [We] think KKR is the best organic growth story in the [P-E] group because it has used its balance sheet investments to fund numerous first generation funds in Energy, Infrastructure, Real Estate, Credit and long/short equities."
- "The investor community is very aware of our brand," says ING. U.S. (VOYA +0.8%) CEO Ewout Steenbergen in a WSJ interview. " Now we need to fully make that transition with distributors, plan sponsors and individual customers. The transformation will take two years. It’s a large exercise."
- In a few weeks, the ING spinoff will change its name and logo to Voya Financial.
- ROE of 10.3% in 2013 grew from 8.3% in 2012, and the company has set a goal for 12-13% by 2016. "The other message is we have strengthened the balance sheet and capital position of our company. Our focus on retirement is a very big topic in the market. We are one of the largest players in the retirement space in the U.S."
- Why rebrand when ING is so well known, particularly in Europe? "There is confusion if you have two companies with the same name and different businesses ... One thing brand experts says is you have to keep your current brand strong before you make a change ... We will spend additional money on advertising, but the amount has not been set."
- Analyst Kevin Reynolds takes some chips off the table on Pinnacle Financial Partners (PNFP +0.5%) after a big run for the stock, with a downgrade from Buy to Hold. Calling it the premier commercial bank with a market-share-moving strategy supporting above-average organic growth, he notes the stock is up 33% over the last six months vs. 23% for an index of Southern banks and 16% for the Nasdaq.
- "PNFP’s performance suggests a premium valuation is warranted; however, the current 10% to 15% premium on 2015E EPS appears reasonable, limiting potential upside in the near-term."
- There's a time to sow and a time to reap, said Apollo Global founder Leon Black last year, and it's reaping time for many P-E insiders.
- The most recent sellers are insiders at Carlyle Group (CG -0.5%), including co-founders William Conway and Daniel D'Aniello who each sold about $40M-$50M of stock this week (the sales were part of a secondary offering by the company on Tuesday).
- The Carlyle sales are smallish compared to the amounts unloaded by Apollo's top executives in 2013. All of the sellers still hold major stakes in their firms and the moves seem simply aimed taking advantage of recent IPOs to whittle down holdings. In the past, P-E partnership shares could be sold to incoming executives, but the amounts involved these days have become too large to continue that practice.
- Another reason for selling: Some of the money will be churned back as investment's in the P-E firms' investment funds.
- Also selling this week are executives at Oaktree (OAK -0.5%) which had a secondary of its own to cash out certain insiders.
- Originally inked in 2010, the agreement gives Schwab (SCHW) customers access to JPMorgan's new issue and secondary municipal and corporate bonds. Since the deal started, Schwab clients have had access to over 800 corporate deals and total orders for these grew 70% Y/Y in 2013.
- "Retail demand for access to this traditionally institutional product has exceeded our expectations," says Schwab SVP Peter Crawford. "We believe this agreement has been an important step on the road to changing a market that previously was the near-exclusive domain of institutional investors."
- Press release
- The life insurers open strongly in the green as interest rates shoot higher following this mornings jobs report. Up the most is Prudential (PRU +3%) after BAML upgrades to Buy and boosts the price target to $103 from $94.
- The team views PRU's valuation as attractive after its sluggish start to the year - off 6% vs. a 1% increase in the median life name. There's also increased confidence the company can sustain an ROE above 14%, and a rising equity market means a lower cost of capital for the industry.
- Noting PRU's status as a SIFI, BAML takes a conservative view towards buybacks, assuming just $500M over the next five quarters. "However, we would not be surprised if PRU continued its current $1B a year pace of buyback, which we believe would help support the ROE."
- Others: MetLife (MET +2.1%), Lincoln National (LNC +2.2%), ING U.S. (VOYA +1.1%), Protective Life (PL +1.3%).
- "We view shares of New Media (NEWM) as an opportunity to invest in a viable business strategy with a clean balance sheet at a price that appropriately reflects well known industry challenges," says analyst Jason Stewart, starting the Newcastle (NCT) spinoff with a Buy and $18 price target. "At a high level, NEWM’s business strategy is simple: implement technological improvements and make strategic acquisitions. The company has several levers to pull for growth, and unlike some of its peers, a clean fair value balance sheet and minimal leverage."
- Stewart's earnings estimates already account for declining circulation volumes and lower advertising per publication, and he notes the stock trades at a EV/2015 EBITDA ratio of 5.7x vs peers at 7.5x, despite better growth prospects and a cleaner balance sheet for New Media.
- Core earnings of $0.70 per share fell from $0.83 in Q3.
- Book value per share of $15.27 fell from $16.81, but the decline includes the payout of $2.35 (cash and stock) in dividends. The stock portion of the dividend boosted the share count to 26.85M shares from 24.3M.
- Net interest spread of 2.15% falls 13 basis points from Q3. CPR of 5% dips from 5.3%. Leverage drops to 6.4x (6.9x when adjusted for TBA position) from 8.1x (9x when adjusted for TBA position).
- Company continues to move portfolio more into non-agency holdings which account for 15% of exposure at year's end vs. 8% at the end of Q3.
- WMC -0.9% premarket to $16.19.
- CC at 11 ET
- Press release, Q4 results
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