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laterre

laterre
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  • Annaly Capital Management, Inc. 4Q12 Results In A Snapshot [View article]
    So you borrow at a cost of capital of 8% (NLY-A), then use that money to buy securities with a NIM of less than 1% over your short term repo and hedging costs. Lever that up 6 or 7 times to yield a staggering 8% ROE!

    Sounds like a hell of a business model on a going-forward basis. Sign me up.
    Feb 7, 2013. 02:00 PM | 2 Likes Like |Link to Comment
  • A Housing Recovery Investment, And A 15% Dividend Yield Opportunity [View article]
    No worries, TJ, that's what makes a market! And I agree totally about getting paid to wait--except when things are *stupid* cheap like JOE got to be last year.

    Would you believe, interestingly, that over the past 12 months JOE has outperformed TWO (even inclusive of dividends)? Who'd have thunk that! Just goes to show the power of buying things that are cheap and overlooked--even if that means vacant land in NW Florida. They've started building again down there, actually, and some nicer developments than JOE's south on route 98 are selling lots pretty steady.

    Give it a couple of years; it'll turn. Subprime and non-agency, on the other hand, have nowhere to go but down from these price levels. 5-7% loss-adjusted on Alt-A = too rich for my poor blood.
    Jan 29, 2013. 03:12 PM | Likes Like |Link to Comment
  • A Housing Recovery Investment, And A 15% Dividend Yield Opportunity [View article]
    Fair enough. It's not Pine River's day job, but smart money is smart money.

    As a leveraged RE play (albeit without the positive carry), I prefer JOE. Nothing rises higher and falls deeper than vacant land in a tertiary market. I know their developments, and the NW FL market's turning faster than JOE's stock price.
    Jan 29, 2013. 08:20 AM | Likes Like |Link to Comment
  • A Housing Recovery Investment, And A 15% Dividend Yield Opportunity [View article]
    Hey TJ,

    Agree about this being a decent leveraged play on RE recovery. And the guys at Pine River are among the smartest in the HY/ FI game. They made serious $bank for LPs in their leveraged mbs funds in 2012. TWO has always been a good operation. But all that's from trading mbs, not flipping fixer-uppers.

    Smart of them to spin this Silver Bay thing off to retail, as the mid single digit ROE you can get on single family RE rentals is lower than TWO's usual cost of capital. I guess once they get their inventory cleaned up and fully rented they could start adding some leverage, but I can't see this throwing off more than 5-6% net yields, if that. At the margins profits in single family real estate are made with local knowledge from mom and pop who know a cheap electrician or how to root out a clogged toilet on a Sunday night. I've yet to be convinced that this business model is scalable without major inefficiencies. Maybe they'll be able to make it work, but you've got to go into SBY thinking cap gains in 5 years from resales based on a major reflation of housing prices, not mreit-like yields. Maybe TWO will hold onto a piece of the SBY equity, but wouldn't be surprised to see them offload more of their % via successive SPOs.
    Jan 29, 2013. 07:52 AM | 3 Likes Like |Link to Comment
  • 5 Reasons To Stick With Mortgage REITs [View article]
    Hey CK,

    Just wanted to say, belatedly, that this is an outstanding article. Even I don't feel the need to quibble: you pretty much nailed it. Nicely done, and happy new year!
    Dec 30, 2012. 11:51 AM | Likes Like |Link to Comment
  • The Uncertainty In Annaly Could Now Be Faced By Non-Agency REITs [View article]
    The devil is in the details, as always, but scenarios I've seen floated involve some variation of the following two proposals, neither of which is plausible for different reasons: (a) refiing underwater high coupon non-agency mortgages into a new GSE-backed mortgage, which would involve relaxing current GSE standards; or (b) a "voluntary" (i.e. negotiated btwn fed and bondholders) modification of existing non-agency mortgages that bondholders would presumably find mutually beneficial. One version contemplated is an IR reduction for some period (say, five years) with the gvt picking up the tab of the diff for the initial term and the bondholder swallowing the loss after the initial period 5 year period passes.

    Neither of these will happen, and even if they did, they'd be neutral to mildly positive with respect to most of the non-agency universe.

    (a) would be Nirvana for the mreits and bondholders, as they'd get paid back at par for something that they're currently marking at 70, 60, or even lower in some cases. But there is no way in hell that Congress approves FNMA and Freddie onboarding more underwater junk onto their balance sheets. The only presumable losers would be holders of extremely high quality prime non-agencies that trade above par, say, a really nice vintage 2005 JPM slice, who'd stand to lose a few points back to par

    (b) is even more improbable. Unless they want to throw contract law out the window, you can't force a private bondholder to agree to a mod or write-down. Any cramdown like this would be litigated for years. That's why in the scenarios being floated, there's some kind of sweetener being proposed. But the problem is, if there were any kind of financial advantage to the bondholder to be gained by mods, forgivenessm or IR reductions, they would have done so themselves voluntarily. If a program along these lines materializes it will be carefully negotiated, voluntary, and only bondholders with extremely crappy paper where they saw some financial advantage would agree to participate.

    But don't listen to me, the newspapers, or the fear-mongers: be an empiricist. The non-agency bond market has basically yawned at all these stories. If anything, the problem with the non-agency market right now is it's too rich, not too skeered...
    Dec 30, 2012. 11:37 AM | 1 Like Like |Link to Comment
  • Why Eagle Preferred Shares Could Triple [View instapost]
    A fascinating case, and I've also been scratching my head at how this all played itself out: the trifling 3 month "extension," the non-existent cash, the bankruptcy bluff that folded with the keys just being handed over. Who were the big losers, the secret winners? Ah, to be a fly on the wall...or a lawyer with discovery motions.

    And speaking of incentives, something about this never smelled quite right, beginning with all the conspicuous chatter about these preferreds.

    Imagine the following purely hypothetical game theory proposition. For an average cost of $1, I can buy a security with a highly asymmetric risk-reward set of 0 or $15. It's not a continuous distribution, but binary: I'll either get the $15 or I'll get diddly squat. Provided there's a modestly plausible scenario for the $15, I take that bet all week long and Sundays.

    Suddenly, though, voila and something changes. Now I have the option to take $5 (for a guaranteed 400% profit!) or wait around to find out what's behind Door #2. Selling off even 30% of my holdings takes me out of that original binary scenario and into a new opportunity set whereby with heads I win a little, tails I still win an awful lot. Who wouldn't rationally migrate from scenario A to B?
    Dec 23, 2012. 02:55 PM | Likes Like |Link to Comment
  • Chimera Maintains $0.09 Dividend, But Likely Two-Thirds Is A Return Of Capital [View article]
    I've long ago said my piece on CIM.

    (a) the fact that they know there's *any* ROC at this point means that they aren't earning the dividend. If you care about your money, this is all you need to know. When it comes to reits in particular, isn't it a purely academic question as to how much of what you're getting back they aren't earning? It also isn't news to anyone who understands their business model. They've always paid out more than their actual cash earnings because of how they booked accretion on securities they purchased at discounts. These "earnings" are premised on assumptions about cash flows and recoveries that go back to 2009 or 2010. These need to be revisited and OTTI booked. For whatever reason, they are dragging their feet on doing this.

    (b) On the accounting. Is this tricky? Obviously. It may even involve revisiting cash flows received from servicers that were actually advances, and these will have to be recouped by the servicers upon liquidation of defaulted loans. But is it rocket science requiring nine months to go back and recalculate everything? Come on. This should have been tidied up long ago but for the fact that the results will be inconvenient.

    (c) Presumably the mgmt and NLY have a clear vision of the cash flows and impairments. And yet they aren't buying, and haven't been for some time, even at significant discounts to NAV. Why is this? I watch what people do, not what they say, and actions speak louder than words.
    Nov 29, 2012. 03:07 PM | 2 Likes Like |Link to Comment
  • A double-take is necessary to believe some of the handles in the mREIT sector, undergoing another savage selloff as the Fed hints at even more QE. The pure-agency REITs - in direct competition with the Fed for paper - are hit hardest. AGNC -3.4%, ARR -8.1%, CMO -4.9%, WMC -7.1%, to name a few. [View news story]
    Interesting question about asymmetric information. Yes, that's right, virtually anyone with a modicum of savvy in the financial world who spends 3 hours with a spreadsheet, BBG, and a couple of old 10-Qs can monitor in real time what's going on in most mreits within a comfortable margin of error. They all have their niches and strategies, so even the changes they make between quarters are pretty predictable. You are playing poker against people who can see your hand.

    The difficulty is that most retail investors can't do this, or more specifically, don't know how to do this. So they get spooked. They read a lurid story somewhere, see red, and panic sell. This triggers stop losses, which triggers more panic, and so forth. I think that's a big part of what's gone on. That's the unnatural and irrational part of the process, the "animal spirits," if you will.

    That being said, everything in the market is in the process of re-pricing, particularly risk assets which have been way overbid, and I think premiums to book and mbs prices more generally had gotten complacent. It was obvious that those investor expectations about yields and premia to book weren't sustainable given the current shape of the yield curve. So the re-rack we've seen is actually a really messy (and scary) but entirely *rational* transition to a different price point that makes more sense in the face of the headwinds and uncertainty moving forward.
    Nov 15, 2012. 04:56 PM | 2 Likes Like |Link to Comment
  • A double-take is necessary to believe some of the handles in the mREIT sector, undergoing another savage selloff as the Fed hints at even more QE. The pure-agency REITs - in direct competition with the Fed for paper - are hit hardest. AGNC -3.4%, ARR -8.1%, CMO -4.9%, WMC -7.1%, to name a few. [View news story]
    Hey dividends#1

    I didn't have you personally in mind in the "rah, rah," crowd, if it's any consolation.

    Anyone selling mreits because they don't understand the tax rules shouldn't be running their own money, let alone buying mreits. Dividends from mreits are and always have been fully taxable. That's the reason why reits exist, and they have to pay out 90% of taxable earnings.

    Hey, it's great that Gary Kain is out there telling people to stay the course. He's a smart guy, and you can learn a lot from him. That being said, I stare at the same mbs quotes he stares at every day, as do most of the institutional investors in mreits, and so I don't think his revelation that the wheels weren't in fact coming off the bond market came as any surprise, much as it might have reassured some folks on seeking alpha. But also, what else is he supposed to say? Even if they were against the wall, would he (or any CEO) come out and say anything other than hold? Watch what they do, not what they say. He's got a big chunk of change in MTGE.

    Good for you in holding your AGNC. It's a lot more desirable now at a discount than it was 6 months ago at a premium. I've been nibbling here and there as well, picking up some WMC and MTGE at ridiculous prices, though the sell-off in mortgage related CEFs is what's really piquing my interest...
    Nov 15, 2012. 04:45 PM | Likes Like |Link to Comment
  • More from Tepper: Appaloosa raises its stake in Chimera Investment (CIM) by 160% to about $27M. The mortgage REIT (managed and partly owned by Annaly) fired its auditor last year and hasn't provided financials since. The shares closed at $2.56 today, and some speculate book value could be in the 3s. With Annaly on the lookout for alternative investments (see CreXus offer), there's also speculation Chimera could get a bid from its parent at a premium to book. [View news story]
    I trust that Tepper has done his homework thoroughly, otherwise the Lollapaloosa LPs are going to be pissed. Buying a non-compliant, non-reporting company with completely opaque books is a gutsy move....

    It's an interesting question, though, as to why--with all their presumable knowledge of CIM's books--NLY or CIM's mgmt didn't choose to buy more stock or buy it out, as they did for CXS. Size is the obvious difference--CXS is smaller than CIM, and a flea compared to NLY. But still, there have been times this year where the discount on CIM was obscene--if, that is, you accept the GAAP numbers. Why hasn't anyone pulled the trigger this year? I watch what people do, not what they say.

    Also, interestingly, CIM's discount to NAV used to be its selling point vis a vis the other (overpriced at the time) mreits. Their hefty discount was a reflections of the greater uncertainty of its books. But now that "clean," i.e. compliant, transparent, and reporting mreits, are selling at 20% discounts, CIM looks overvalued relative to the rest of the space. I'd expect a re-rack once the NLY buyout overhang dissipates.
    Nov 15, 2012. 11:13 AM | Likes Like |Link to Comment
  • Western Asset Mortgage Offers Investors 16.75% Dividend Yield And Lowest Prepayment Rates [View article]
    Being newer and smaller is definitely an advantage for them. I've still got a small slug of this, my only remaining mreit, but looking to start accumulating this and others once the bottom is in. I'd like it even better 10% cheaper!
    Nov 14, 2012. 05:32 PM | Likes Like |Link to Comment
  • A double-take is necessary to believe some of the handles in the mREIT sector, undergoing another savage selloff as the Fed hints at even more QE. The pure-agency REITs - in direct competition with the Fed for paper - are hit hardest. AGNC -3.4%, ARR -8.1%, CMO -4.9%, WMC -7.1%, to name a few. [View news story]
    There are some terrific bargains to be had--approaching 20% discounts to NAV, but wait for the vol to settle. The whole market is unwinding, and I think the mreits go still lower before forming a bottom. With all the uncertainty and the headwinds it only makes sense they should trade with some discount to book. Those 25% premiums and 36 handle on AGNC back in the summer were nuts. Parenthetically, as a sociological observation, can't help but notice that the tone around here sure is diff than the "rah-rah," "safe as cash" crowd who were talking a big game three or four months ago.
    Nov 14, 2012. 05:28 PM | 2 Likes Like |Link to Comment
  • They're calling it the "DeMarco Trade," and it's nailing mortgage REITs (at least those who focus on Agency paper) already stung by vanishing interest spreads. Agency MBS paper has been falling in price since the election, as Ed DeMarco's days as FHFA chief seem numbered, paving the way for principal forgiveness, "the mother of all pre-payment waves." [View news story]
    He's an appointee--i.e. he can be fired or forced out. And he's been a major thorn in the administration's side. I'd lay good money he's gone come Jan. 1.

    Principal reduction=write-off=pr... This is no diff than when a mortgage goes to foreclosure. Fannie and Freddie make the bondholder whole, but minus the premium. It's exactly the same problem as that posed by refinances, i.e. you get paid back at par.
    Nov 13, 2012. 11:50 AM | Likes Like |Link to Comment
  • They're calling it the "DeMarco Trade," and it's nailing mortgage REITs (at least those who focus on Agency paper) already stung by vanishing interest spreads. Agency MBS paper has been falling in price since the election, as Ed DeMarco's days as FHFA chief seem numbered, paving the way for principal forgiveness, "the mother of all pre-payment waves." [View news story]
    Don't want to minimize the risk of this, or, more importantly, underestimate the stupidity of the current regime. What they did to GM bondholders was criminal.

    But let's put this in perspective, folks: who and what gets "written off" under a principal forgiveness plan. First, there is no way on god's green earth that they're going to make the mbs holders take the hit on principal write-downs. Cramming something like a principal loss on a govt guaranteed (if only by implication for Fannie and Freddie) instrument would destroy the bond markets. No one would ever be able to finance another home in the US. So basically what'd you have is FNMA and Freddie (i.e. the taxpayers) eating the difference to make the bondholder whole. The net effect to the bondholder is a prepayment, not a principal loss. You, me, and the taxpayers are going to swallow the really ugly pill.

    So who'd be in line to get this kind of relief? First, it would be, by definition, people who are underwater, i.e. folks who bought in 2005-2008 who haven't already found a way to refinance. Where are those kinds of mortgages? In high coupon (probably 4.5, 5, and above), low loan balance loans. This hasn't exactly been the bread and butter slice of the market where the mortgage reits have accumulated. Some of these folks are probably in GNMAs; others are in off-the- run, higher coupon mbs stashed away by passive holders like pension funds. I'd assume mbs that's been HARPed already would be ineligible.

    Are they going to push something like this after shoving out Demarco? Probably. Is it going to destroy the mbs market, particularly recent vintage 3.5s and 4s where the mortgage reits are currently parked? Not a chance.
    Nov 13, 2012. 10:18 AM | 5 Likes Like |Link to Comment
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