REML With 21.6% Dividend Yield Is Attractive For Certain Investors

| About: Credit Suisse (REML)

Summary

REML is a 2X Leveraged ETN based on mREITs that has a 21.6% yield on a compounded annualized basis.

There are differences between REML and other 2X Leveraged mREIT based ETNs, that provided some possible advantages and disadvantages.

The recent decline in the market to book value from the end of April 2017 peak, makes REML and the mREIts more attactive.

The decline in the mREITs and thus REML that was due to concern over the problems with brick and mortar retail shopping malls losing to online retailers may be misguided.

The X-Links™ Monthly Pay 2xLeveraged Mortgage REIT ETN (NYSEARCA: REML) is an exchanged traded note that is based on the FTSE NAREIT All Mortgage Capped Index of mREITs. That is the same index used by the iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM). Thus, REML is a another way to get high yields from a leveraged ETN such as the UBS ETRACS Monthly Pay 2X Leveraged Mortgage REIT ETN (NYSEARCA: MORL).

REML is followed much less than MORL. The volume and liquidity of REML is in the category of what some would derisively refer to as a "trades by appointment" security. On May 18, 2017 the trading volume for REML was only 100 shares. For MORL it was 121,770 shares. Even MORL's less liquid essentially identical twin, the UBS ETRACS Monthly Pay 2X Leveraged Mortgage REIT ETN Series B (NYSEARCA: MRRL) traded 3,212 shares that day. While 100 shares was a particularly low volume day for REML, it was not that abnormal, since the 90-day average was just 1,233 shares.

There are some who see advantages is low volume securities. At times I have been able to execute very favorable trades utilizing limit orders with prices far away from the market in low volume securities. During periods of extreme market volatility it is possible to buy and/or sell low volume securities if you have limit orders in place at prices drastically better than previous levels. That said, REML is probably not for those who plan on trading in an out frequently. The very low volume means that liquidity is poor and thus there is usually a relatively large spread between the bid and ask. Limit orders should be used for now when trading REML. Market orders are definitely not advised. At the other extreme, those who plan to hold a 2X Leveraged ETN until maturity do not care about liquidity. They might be interested to know that REML matures on July 11, 2036. MORL matures on October 16, 2042. Waiting 19 years until REML redeems the shares at net asset value may be more attractive for those very long term investors than waiting 25 years for the maturity of MORL.

Those with accounts at Fidelity might consider REML since Fidelity does not allow new buy orders in MORL or any of the UBS ETRACS 2X Leveraged ETNs. As I described in: REML: Another Way To Get 20% Yield, Or A Warning? I have always thought that there may have been something other than just a desire to limit risks taken by their customers, which caused Fidelity to not allow any more new buy orders in the UBS 2X Leveraged ETNs such MORL. I found it interesting that Fidelity has no problem with me buying penny stocks in bankrupt oil companies selling for less than 10 cents per share see: Swift Energy And Sandridge Energy - Speculative Ways To Bet On Oil Prices, in my IRA account, but will not let me buy more MORL in that account. In any case, whether because REML is below their radar, or the issue was one between Fidelity and UBS, Fidelity does allow buy orders in REML, for now.

Other than trading considerations, there are other reasons that one might consider REML rather than MORL or vice versa. As I discussed in: How Does REM Pay That 15% Dividend? the index upon which REM and thus REML, is based contains more mREITs than the index upon which MORL and MRRL is based. REML now has a basket of 34 mREITs while MORL has only 25. Thus, REML provides more diversification than MORL. As I explained in the article 30% Yielding MORL, MORT And The mREITs: A Real World Application And Test Of Modern Portfolio Theory, diversification can allow for higher expected returns without commensurate increases in risk. Just adding REML to a portfolio that previously only held MORL would make it slightly more efficient. A security or a portfolio of securities is more efficient than another asset if it has a higher expected return than the other asset but no more risk, or has the same expected return but less risk.

Additional diversification considerations are that MORL is an obligation of UBS Group (NYSE:UBS) while REML is an obligation of Credit Suisse (NYSE: CS). It is highly unlikely that either UBS or CS will default in the foreseeable future. However, to the extent one has any concern over those major banks' future solvency, holding MORL and REML can provide some diversification in that regard. Some have expressed concern regarding the call provisions in ETNs such as MORL. MORL can be redeemed at net indicative (asset) value by UBS if the value falls to low or too quickly. That is not really economic call risk. Since, unlike a call on a bond where the issuer has the right to buy back the bond at a specified price below the market value the bond would have without the call, the ability to redeem at net asset value has no intrinsic option value.

REML can be called or redeemed at net indicative (asset) value by CS at any time. This is also the case with almost all mutual funds where the sponsor can close the fund and return the net asset value to the shareholders. Normally, the only time a fund or an ETN would be closed if it was not economic to do remain open. This could occur if it became too small. With leveraged ETNs the sponsor would close it if the value of each share was so low that it posed a margin-type risk. This is the same reason a brokerage firm would liquidate a margin account if the equity relative to the amount borrowed by the account fell to low. In that respect, REML trading at a price close to double that of MORL has less of a prospect of being redeemed because the price per share falls to much. However, in terms of likely to be called because the entire size of the ETN is too low, there is a greater chance of early redemption with REML. In any case, early redemption is more of an annoyance than a risk. One can always use the proceeds from an early redemption to buy securities with similar risk/return profiles. With REML and MORL they would serve as good substitutes for each other in the event of an early redemption.

Analysis of the June 2017 REML Dividend Projection

Most of the REML components pay dividends quarterly. Only three of the REML components: American Capital Agency Corp (NASDAQ: AGNC), Orchid Island Capital Inc. (NYSE: ORC) and ARMOUR Residential REIT, Inc. (NYSE: ARR)) pay dividends monthly. The January, April, October and July "big month" MORL dividends are much larger than the "small month" dividends paid in the other months since most of the portfolio components pay quarterly, typically with ex-dates in the last month of the quarter and payment dates in the first month of the next quarter.

RAIT Financial Trust (NYSE:RAS) declared a quarterly dividend of $0.09 with an ex-date of May 24, 2017. The rest of the quarterly payers do not have May 2017 ex-dates. Istar Inc. (NYSE: STAR) does not currently pay dividends. RAS and and the three monthly payers, mean that four of the mREITs that comprise the index upon which REML is based, have ex-dates in May 2017, so only those four will be included in the June 2017 REML dividend.

My projection for the June 2017 dividend for REML is $0.0773. The projection for the dividend is calculated using the contribution by component method. REM is a fund that is based on the same index as REML. However, REM is a fund rather than a note and thus does not employ the 2X leverage that REML does. REM also pays dividends quarterly rather than monthly. As a fund, the dividend is discretionary by the fund management as long as distribute the required percentage of taxable income to maintain its' investment company status. Thus, it does not lend itself to dividend projections as a ETN like REML which must pay dividends pursuant to an indenture. The table below shows the ticker, name, weight, dividend, ex-date for each of the index components and the price and contribution to the dividend for those components that will contribute to the June 2017 dividend.

REML has risen 16.0% from its' initial price of $25 on July 12, 2016 to $29 on May 16, 2017. Over that same period MORL increased 16.2% from $14.61 to $16.98. When the $2.8725 dividends are included the total return for REML since July 12, 2016 was 27.5%. This does not include any reinvestment of dividends or any gains or losses on the reinvestment of dividends. It also does not include my projected June 2017 REML dividend of $0.0773.

Outlook For REML and the mREITs

It is safe to say that on an ongoing basis the returns on REML and MORL should be very similar. If anything the dividend yield for REML might be slightly higher since the highest yielding mREIT in any of the two is ORC, which is in REML but not in MORL.

The increase from the REML inception price of $25 to its' current level is eerily similar to what MORL did after its' inception price of $25. The all-time high for REML was $32.5047 on April 27, 2017. REML has since fallen to $29. After reaching its' all-time closing high of $32.05, MORL declined sharply during the taper tantrum in 2013. This suggest some caution after the run-up in mREITs since increases in the market to book value ratios were the driver in both MORL and REML cases.

A major reason for the large returns on REML and the mREITs has been the reduction in the discount to book value that mREITs have been trading at. The discounts had actually turned to a premium for a while, which caused me to be more cautious. Since the peak, the prices of the mREITs relative to book value have declined and are now back at a discount. A recent Seeking Alpha article: Quick and Dirty mREIT Discounts for May 9, 2017 indicates that for an average of 25 mREITs and related securities, most but not all of which, are included in the index upon which REML and REM is based, the average market to book value had risen from 78.19% on March 31, 2015 to 101.95 on April 27, 2017. It has since fallen back to 96.76% as of May 9, 2017. That is exactly where it was on April 2, 2017.

The 27.5% total return for REML since its' inception in July 2016 is somewhat surprising to those who were expecting higher interest rates by now. The conventional wisdom is that interest rates will be rising soon. That has been the case for at least 6 years. The decline in the unemployment rate to 4.4% has bolstered the views of those calling for higher interest rates. However, I feel that increase in the market to book value for the mREITs reflected and could also be attributed to a shift in market participants' perceptions regarding necessity and advisability of the Federal Reserve significantly increasing interest rates.

The decline in REML from the April 27, 2017 peak can be attributed to both the elevated market to book value that the mREITs had reached and weakness in the REIT sector due to concerns about vulnerabilities relating to the shift from brick and mortar retail sales to online sales. This raised the issue of vulnerabilities to shopping malls from that trend. Equity REITs have invested in shopping malls. The decline in the mREITs and thus REML due to the elevated market to book values was quite reasonable. When mREITs are trading at premiums to book value, issuance of new shares usually follows. Indeed some mREITs such as ARR announced sales of additional shares near the peak.

It looks like at least some of the decline in the mREITs and thus REML was due to concern over the problems with brick and mortar retail losing to online retailers. This may have been misplaced. Online shopping could hurt equity REITs that own commercial real estate like shopping malls. Some of this concern may be misguided with regard to mREITs who have little exposure to shopping malls. However, equity REITs and mREITs are correlated as some portfolios try to keep target percentages in each. Thus, weakness in the equity REITs could spill over into the mREITs. However, that should be seen as more of a buying opportunity for the mREITs and MORL.

REML and the mREITs can be considered to be somewhat like high-grade fixed income securities in terms of their returns relative to interest rates. However, mREITs can also be seen as businesses that generate income from the spread between long-term rates on mortgage-backed securities and the short-term rates at which they borrow to finance their holdings of mortgage-backed securities.

Higher long-term rates are a two-edged sword for leveraged mREITs like Annaly Capital Management Inc (NYSE: NLY) and AGNC. Higher long-term rates reduce the value of their mortgage portfolio and thus the book value of the shares. The other side of the two-edged sword is that higher long-term rates and lower prices of mortgage securities provides an opportunity for mREITs to reinvest the monthly principal payments they receive in higher yielding mortgage securities. A highly leveraged mREIT with say 9 to 1 leverage and CPR of 11% would be generating new cash available for reinvestment from prepayments of principle each year approximately equal to the entire equity of the mREIT.

While rising long-term rates may be a two-edged sword for leveraged mREITs, rising short-term rates are a dagger to the heart. The real risk to a highly leveraged mREIT is that short-term rates will rise. Higher short-term rates generally mean smaller spreads between what a leveraged mREIT earns from its portfolio and the interest it pays to finance the securities bought with borrowed funds. When short-term rates get high enough the yield curve can actually become inverted. That is why most of the hedging done by leveraged m REITs involves swaps, swaptions and Eurodollar futures positions which attempt to mitigate the effects of a possible increase in short-term interest rates. Rising short-term rates are even worse for leverage-on-leverage ETNs like REML that borrow money to buy a portfolio of mREITs.

Rising short-term rates are even worse for leverage-on-leverage ETNs like REML that implicitly borrow money to buy a portfolio of mREITs. The relevant rate for leveraged mREITs is the repo rate that mREITs pay. Repos or repurchase agreements are essentially loans against securities with negligible credit risk such as agency mortgage securities where the legal title changes as the borrower sells the securities to the lender with an agreement to repurchase the securities at a specified date plus interest. That makes them virtually risk-free. Thus, while holders of Lehman Brothers commercial paper took huge losses. Counterparties with Lehman Brothers in repo transactions had no problems, since an inability of Lehman to buy back the securities allowed the lender to sell the collateral even during the bankruptcy proceedings. For REML the relevant short-term rate is three-month LIBOR which is closely correlated to repo rates. It might be noted that for REML the implicit financing rate is three-month LIBOR + .80%. For MORL the implicit financing rate is three-month LIBOR + .40%.

Most market participants pay much attention to the cyclical/political factors. These include economic variables such as unemployment and inflation. Political factors include policy variables such a government spending and deficits as well as monetary policy. Much less attention is paid to the savings and investment/ supply and demand of loan-able funds factors. However, I think they can be very important. Those who focused only on the unemployment rate would have been surprised that the decline in the unemployment rate from 10.0% in October 2009 to 4.4% now would have been accompanied by a decline in the interest rate on the benchmark 10-year treasury note from 3.60% in October 2009 to 2.24% now. However, the savings and investment/supply and demand of loan-able funds factors would have suggested such a decline in interest rates. See: MORL Still Attractive With 21.6% Dividend Yield, However, Uncertainty Is Increasing.

My view is that the persistence of low rates despite the enormous decline in unemployment can be explained by the savings and investment/ supply and demand of loan-able funds factors. There is considerable uncertainty regarding cyclical/political factors. From the late 1970s until arguably 2007, with the exception of the late 1990s, the Federal Reserve used monetary policy to dissuade politicians from profligate fiscal policy. The term "bond market vigilantes" referred to financial market participants who voted with their money against the inflationary impacts of government policy. Leon Cooperman, then at Goldman Sachs (NYSE:GS) referred to bonds as "certificates of confiscation". However, it was the Federal Reserve that took on the main role of punishing politicians by raising interest rates when it considered fiscal policy too inflationary.

The present composition of the Federal Reserve Open Market Committee is probably disinclined to engage in any punishment unless there is actually significantly above target inflation and it is clear that such inflation can be directly attributed to actions of politicians. However, it is becoming increasing clear that the Republicans are probably abandoning any idea of revenue neutral tax reform and will focus on large tax cuts for the wealthy and either accept the increases in the Federal deficits that will result or rely on the false assertion that these tax cuts for the rich will pay for themselves with higher growth.

Until recently I do not remember any serious concern that the concerns regarding the issue of the Federal budget deficit might be addressed by simply using false information and/or employing unrealistic economic projections. That sadly is not true now. It is now widely conceded that Greece essentially hid the extent of its debt problems prior to the events that led to Greece requiring a bailout. America can print its currency and almost all federal debt is denominated in dollars. Thus, there is no danger of default. However, there is a risk that the that the inconsistency between Trump administration desires for addition spending and tax cuts could be resolved, at least temporarily, with the use of deception.

The bond markets could be expected to react adversely to any use of false numbers or unrealistic assumptions. I do not think that any claim by the Trump administration that reports in the media of discrepancies between the real deficit and debt figures what the Trump administration are asserting are fake news, would impress the financial markets, even if many in the public believed the Trump administration. The use of economic assumptions that defy logic could also put the Federal Reserve into vigilante mode.

The most effective and politically possible way to reduce taxes on the wealthy is via corporate income taxes. The corporate income tax has been criticized as too high by members of both political parties. The biggest falsehood in today's discussion of taxes is that corporations do not pay income taxes, but rather their customers and employees do. Corporations pay the income tax, more importantly the impact of the corporate income tax falls solely on the owners of the corporations. To the extent that poor and middle class people are owners of the corporations, the incidence falls on them too. However, the reduction in corporate income tax receipts as a percentage of GDP has been the primary cause of the shift of the tax burden to the middle class from the rich. Corporate income tax receipts were 4% of GDP in 1969 and were 1.77% in 2016. During that same period, payroll tax rates as a percent of GDP have increased dramatically from 3.27% in 1966 to 5.95% in 2016.

Today the top 3% of households pay 50% of Federal income taxes and the rest of the 97% pay the other 50%. In 1969 the top 3% of households paid 75% of Federal income taxes and the rest of the 97% paid only the other 25%. In computing those figure the government correctly attributes the corporate income tax payments to the households who own shares in the corporation. By eliminating the estate tax, the Obamacare taxes on high-income households and reducing business taxes, the share of taxes paid by the top 3% of households could be reduced to only 25%. Thus, leaving the other 97% of households to pay 75%.

If the economy was far from full employment as was the case in 2009 when the unemployment rate was above 10%, lowering taxes on anyone would increase expenditures and thus real economic growth. However, we are much closer to full employment with the unemployment rate at 4.4% Now, lowering corporate tax rates would not result in any significant additional hiring or growth in wages or output. The entire incidence of a corporate income tax falls on the owners of the corporation, to the extent they are pension funds or other institutions the incidence falls on them. If a corporate income tax is a percentage of pre-tax income, none of the corporate income tax can ever be passed on to employees or customers. That is because any hiring, wage or price decision that maximizes pre-tax profits would also maximize after-tax profits.

If a profit-maximizing rational corporation is charging $10 for an item, that is because it is more profitable to charge $10 than $9.99 or $10.01 taking into account market demand and competitive pressures. Thus, $10 is the price at which pre-tax profits are maximized. If a corporate income tax is levied as a percent of pre-tax profits, $10 is still the price that maximizes both pre-tax and after-tax profits. Thus, the tax change can not cause any change in the price and is not passed on to consumers. The same applies to a corporation that is paying a wage that maximized its pretax profits, which is also the wage that maximizes its after-tax profits. Likewise, the number of employees that maximizes pretax profits is also the number of employees that maximize after-tax profits.

The shift of the tax burden in the United States from the rich to the middle class has been a major factor is creating the glut of savings which has supported higher prices for financial assets. This has been a world-wide phenomenon. There were minor moves during the Obama administration to shift the burden back to the wealthy. These included reinstatement of the estate tax and some increase in the tax rates for higher incomes including as part of the Affordable Care Act. As these are reversed and the tax burden will be further shifted away from the rich the glut of savings will grow. Thus, savings and investment/ supply and demand of loan-able funds factors will become increasing more powerful drivers of higher prices for financial assets.

The prospect of the savings glut driving securities prices higher is somewhat offset by the risk of protectionism. So far President Trump's bark in that regard has been much worse than his bite. With regard to politically driven economic policy. NAFTA remains intact so far. However, renegotiation talks on NAFTA are scheduled to begin soon. The "adults" seem to have been gaining the upper hand in the Trump Administration. By "adults", I mean, for example, those who know that China has not engaged in any activity that could possibly be construed as improper currency manipulation for a number of years, as opposed to those with protectionist and populist leanings.

There is still a real but somewhat diminished, possibility that a Border Adjustment Tax could be included in coming tax legislation that the Republicans are working on. Many market participants seem complacent about the possible impact of protectionism in terms of disruption of global supply chains and other negative effects. Senator Reed Smoot and Representative Willis C. Hawley probably did many things in their careers, but history only remembers them for the Smoot-Hawley tariff of 1930 which remains today as the prime example of the damage that protectionism can do. Protectionism is the progressivism of fools.

As was discussed in The Border Adjustment Tax A Protectionist Wolf in Tax Reform Clothing, the World Trade Organization permits border adjustments for indirect levies such as sales taxes and value added taxes, but not for income taxes. A sales tax or value added taxes tax consumption by the residents of the country which imposes it, but not the residents of other countries. So a Border Adjustment Tax disallowing the cost of imports for tax purposes would violate WTO rules as well as most other free trade agreements signed by the United States. Adopting the Border Adjustment Tax could bring about massive retaliation, trade wars and/or the withdrawal of the USA from the World Trade Organization, any of which could disrupt international supply chains and cause severe reductions in standards of living world-wide.

Regarding the savings and investment/supply and demand of loan-able funds factors, Republican control of all branches of government should increase the private savings glut on balance. This should put upward pressure on the prices of financial assets. As the supply of loan-able funds increases faster than the demand from borrowers, interest rates will be pushed down. The equity market will also initially benefit from lower interest rates as the growing pool of savings seeks securities to invest in. In a longer run the excess of savings might enable new businesses to start that otherwise might not have been able to obtain financing. These new businesses could create additional competition for existing companies which could eventually reduce profit margins and stock prices. To the extent that small business and potential entrepreneurs are now stifled by over-regulation and red tape, a Trump administration that reduces those impediments to new start-ups could also eventually curtail profits for existing firms.

There is a real but diminishing possibility that bad policy choices such as protectionism could cause a severe recession or worse. There is also a possibility that economic growth and/or standards of living could increase if beneficial policy was adopted. Examples of beneficial policy could be a value added tax could replace a significant portion of the income tax, or deregulation removing impediments to growth. This suggests large fat-tail risks in the equity market. See: Value Added Tax: A Way Out Of The Trade War Train Wreck?

Conclusions and Recommendations

I was originally drawn to MORL as a vehicle to take advantage of my macroeconomic outlook that interest rates would stay much lower for much lower than many market participants believed. In A Depression With Benefits: The Macro Case For mREITs, I explained my view that interest rates were not likely to rise in the intermediate future and the mREITs were a good way to benefit, if my outlook proves correct. Furthermore, MORL would provide a very high yield, in excess of 20%, because of its 2X leverage which involved implicitly borrowing at the 3-month LIBOR rate. This would generate a large positive carry. The same factors still make me a buyer of REML.

As I explained in the article 30% Yielding MORL, MORT And The mREITs: A Real World Application And Test Of Modern Portfolio Theory, a security or a portfolio of securities is more efficient than another asset if it has a higher expected return than the other asset but no more risk, or has the same expected return but less risk.

After UBS came out with The UBS ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (NYSEARCA: CEFL), a 2x Leveraged High-Yield ETN, I pointed out in 17.8%-Yielding CEFL - Diversification On Top Of Diversification, Or Fees On Top Of Fees? that those investors who have significant portions of their portfolios in mREITs and in particular a leveraged baskets of mREITs such as MORL could particularly benefit from diversifying into an instrument that was highly correlated to the S&P 500 (NYSEARCA: SPY), as mREITs were not very correlated to SPY.

In my article BDCL: The Third Leg Of The High-Yielding Leveraged ETN Stool, I said that the UBS ETRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (NYSEARCA: BDCL) is highly correlated to the overall market, but may be a very good diversifier for investors seeking high income who are now heavily invested in interest rate sensitive instruments. All leveraged ETNs have interest-rate risk since their dividends fluctuate inversely with the borrowing costs implicit in their leveraged structure. However, REML and MORL have much greater exposure to interest rates than CEFL, and CEFL has more interest rate risk than BDCL. In the continuum from mostly interest-rate risk to mostly equity market risk, REML and MORL are the most interest-rate sensitive and BDCL is the most equity market sensitive. For many of the Fargo Business Development Companies in the index upon which BDCL is based, the bulk of their portfolio debt holding are adjustable rate loans. CEFL is between the two and has some interest-rate risk and some equity market risk.

The reason for the difference in relative sensitivity to interest rate and equity market risk amount the three 2x Leveraged High-Yield ETNs is due to the composition of the indexes upon which they are based. REML and MORL are based on an index of interest sensitive mREITs. This would lead investors in CEFL or BDCL, who feel that they must have a portion of their portfolios in high-yielding 2x leveraged ETNs like CEFL, to consider adding REML and/or MORL to hedge against the risk of much weaker economic growth and BDCL to get the potential gain from much stronger economic growth. This would enable them to maintain the income in the high teens that CEFL now delivers. Likewise REML and MORL investors might want to consider adding CEFL or BDCL in order to hedge the against a high real growth scenario.

When choosing between CEFL, BDCL REML and MORL, as I discussed in MORL 20.3% Dividend Yield Still Makes It A Buy, the average discount to book value for the mREITs in the index upon which REML and MORL is based on has recently declined so much that it has almost disappeared. A major reason for the large returns on REML, MORL and the mREITs up until the end of April 2017 has been the change to a premium from the previous discount to book value that mREITs have been trading at. The Seeking Alpha article from Colorado Wealth Management Fund: Quick And Dirty mREIT Discounts For April 27th, 2017 indicated that for an average of 25 mREITs and related securities, most but not all of which, are included in MORL, MRRL and REML, the average market to book value has risen from 78.19% on March 31, 2015 to 101.91% on April 27, 2017. This increase in the market to book value has been a major factor in the outsized returns from MORL, REML and the mREITs. It has since fallen back to 96.76% as of May 9, 2017. That is exactly where it was on April 2, 2017. This decline in the market to book value, makes me less cautious on REML and the mREITs.

This increase in the market to book value accounts for much of the recent outperformance of MORL and REML relative to CEFL. In terms of relative value as measured by average discount to book value for the components in the index, CEFL looks better than MORL and REML. The discounts to book value are not available on a timely basis for BDCL. However, it can be safely assumed that much of the outperformance by BDCL relative to CEFL was due to increases in the market-to-book value ratio for the BDCL components.

My calculation projects a June 2017 REML dividend of $0.0733. The implied annualized dividends would be $5.7193, based on annualizing the most recent three month through June 2017. This is a 19.7% simple annualized yield with REML valued at $29. On a monthly compounded annualized basis it is 21.6%. As might be expected, this is very close to the 21.5% yield I project for MORL and MRRL using the same days prices and dividend ex-dates in Dividend Yield Of 21.5% And Recent Price Declines Make MORL Attractive.

Aside from the fact that with a yield around 20%, without any reinvestment of dividends, you get back your initial investment in about five years and still have your original investment shares intact. If someone thought that over the next five years markets and interest rates would remain relatively stable, and thus REML would continue to yield 21.6% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $265,931 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $21,600 initial annual rate to $57,454 annually.

REML Components and Contributions to the Dividend

Ticker

Name

weight

Price

ex-div

dividend

frequency

contribution

NLY

Annaly Capital Management Inc

18.04%

3/29/2017

0.3

q

AGNC

AGNC Investment Corp

10.41%

20.04

05/26/2017

0.18

m

0.0546

STWD

Starwood Property Trust Inc

8.66%

3/29/2017

0.48

q

NRZ

New Residential Investment Corp

7.62%

3/23/2017

0.48

q

TWO

Two Harbors Investment Corp

4.69%

3/29/2017

0.25

q

BXMT

Blackstone Mortgage Trust Inc

4.47%

3/29/2017

0.46

q

MFA

MFA Financial Inc

4.46%

3/27/2017

0.2

q

CIM

Chimera Investment Corp

4.15%

3/29/2017

0.5

q

IVR

Invesco Mortgage Capital Inc

3.75%

3/23/2017

0.4

q

ARI

Apollo Commercial Real Estate Finance Inc

3.54%

3/29/2017

0.46

q

CYS

CYS Investments Inc

2.65%

3/21/2017

0.25

q

RWT

Redwood Trust Inc

2.30%

3/14/2017

0.28

q

PMT

PennyMac Mortgage Investment Trust

2.28%

4/11/2017

0.47

q

HASI

Hannon Armstrong Sustainable Infrastructure Capital Inc

2.13%

4/3/2017

0.33

q

CMO

Capstead Mortgage Corp

2.12%

3/29/2017

0.21

q

ARR

ARMOUR Residential REIT Inc

1.98%

25.04

05/11/2017

0.19

m

0.0088

STAR

iStar Inc

1.84%

0.00

LADR

Ladder Capital Corp

1.79%

3/9/2017

0.3

q

MTGE

MTGE Investment Corp

1.74%

3/29/2017

0.45

q

RESI

Altisource Residential Corp

1.58%

3/29/2017

0.15

q

NYMT

New York Mortgage Trust Inc

1.44%

3/23/2017

0.2

q

ANH

Anworth Mortgage Asset Corp

1.13%

3/29/2017

0.15

q

MITT

AG Mortgage Investment Trust Inc

0.95%

03/17/2017

0.475

q

WMC

Western Asset Mortgage Capital Corp

0.86%

3/30/2017

0.31

q

ACRE

Ares Commercial Real Estate Corp

0.76%

3/29/2017

0.27

q

DX

Dynex Capital Inc

0.73%

4/3/2017

0.18

q

ORC

Orchid Island Capital Inc

0.72%

10.36

5/26/2017

14.00%

m

0.0057

SLD

Sutherland Asset Management Corp

0.69%

3/29/2017

0.37

q

RSO

Resource Capital Corp

0.61%

3/29/2017

0.05

q

AJX

Great Ajax Corp

0.46%

5/12/2017

0.28

q

CHMI

Cherry Hill Mortgage Investment Corp

0.44%

3/16/2017

0.49

q

JCAP

Jernigan Capital Inc

0.43%

3/30/2017

0.35

q

RAS

RAIT Financial Trust

0.36%

2.28

5/24/2017

0.09

q

0.0083

EARN

Ellington Residential Mortgage REIT

0.22%

3/29/2017

0.4

q

Disclosure: I am/we are long REML, MORL, MRRL, BDCL, CEFL, ARR, RAS, AGNC, ORC, REM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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