REM, REML And The mREITs Going Forward

Apr. 24, 2020 12:03 AM ETMORL, MORT, MRRL, RITM, AGNC, ORC, REM, REML252 Comments
Lance Brofman profile picture
Lance Brofman


  • Very low short-term interest rates make carry-type investing very attractive, particularly for those seeking to maximize current income.
  • Historically, whenever mREITs are trading at significant discounts to book value, they have been a good buy.
  • COVID-19 could upset many relationships concerning unemployment, inflation and the relative position of various countries in the world.
  • The value of agency mREITs will be relatively more stable, as compared to non-agency mREITs in the near future.
  • For those seeking to maximize current income, REML may still be attractive.

The World Turned Upside Down

Economists and financial markets have seen things previously thought not to be possible. These are negative interest rates and then negative oil prices, most recently. Macroeconomics could be further discombobulated, by a severe labor shortage that causes an inflationary wage-price cost spiral, all while unemployment rates remain at double-digits. This could result from the COVID-19 pandemic and its aftermath.

A.W. Phillips would not be around to witness such a violation of the Phillip’s curve relationships. However, the Federal Reserve would still have to deal with such an extreme stagflation situation. Double-digit unemployment would preclude any increases in short-term interest rates by the Federal Reserve. Higher inflation and massive Federal government borrowing could increase long-term interest rates. The result would be a steepening of the yield curve.

A steeper yield curve generates greater income from carry-type trades where long-dated assets are financed with short-term borrowing. The Federal Reserve and others have at times indicated that they are uncomfortable when the utilization of such carry trades proliferates, and possibly has inflationary implications. However, double-digit unemployment rates could give the Federal Reserve little choice in that situation.

For investors, a major beneficiary of a steeper yield curve is the mREITs. Agency mREITs, which do not have any credit risks, could do particularly well in a steeper yield curve and weak economy situation. More so than most types of securities, the value of an mREIT is a function of its book value. Historically, whenever mREITs are trading at significant discounts to book value, they have been a good buy. The steep discounts that mREITs are now trading at would normally make them a compelling buy. However, the dramatic increase in risk premiums resulting from the COVID-19 pandemic, requires that the mREITs must now be considered in the context of world events and other investment alternatives.

There have been complaints by some regarding the inclusion of topics not strictly pertaining to investments on Seeking Alpha. Politics in particular seems to cause the most offense. Had there been an equivalent to Seeking Alpha in the 1939-1945 period, there would likely have been some complaints about inclusion of topics not strictly pertaining to investments, such as military and geopolitical events. However, the American victory in the June 1942 Battle of Midway was the major turning point in the stock market.

Today, any investment thesis must include some reference to topics related to the COVID-19 pandemic that includes the mREITs. I would agree that speculation on whether a President Hillary Clinton would have disbanded the Global Health Security and Biodefense unit, which was responsible for pandemic preparedness, is not particularly useful now. The unit was established in 2015 by Barack Obama’s National Security Advisor, Susan Rice. The unit resided under the National Security Council. In May 2018, the unit was disbanded.

Whether, in a less authoritarian China, the medical professionals might not have deferred to local officials who, over a political aversion to sharing bad news, withheld information about novel coronavirus cases from the national reporting system, may or may not be a question that is also not particularly useful now. However, what is happening in China now could be very relevant to the securities markets.

All investment recommendations made today, must take the COVID-19 pandemic into consideration. From an investing perspective, COVID-19 pandemic has some aspects of the Great Depression of the 1930s, some aspects of the September 11, 2001, terrorist attacks and some aspects of the World Wars. There is nothing in modern history that provides a very good model for a post COVID-19 world. However, the aftermath of World War II may provide some insight as to what to expect.

A big difference between the post-World War II world and the post-pandemic world may be the status of the United States. The five major victorious World War II countries - China, France, Russia, the United Kingdom, and the United States - comprised the original permanent members of the UN Security council. However, in economic terms America stood astride the rest of the war-ravaged world. The USA was, to a large extent, able to exert considerable influence over the economic structures of those countries that were referred to as the “first world” and now form most of the OECD. Only the USA was in a position to finance the reconstruction of Europe via the Marshall Plan, and implement the Bretton Woods global monetary system, which replaced the gold standard with the U.S. dollar as the global currency.

In the post-pandemic world, the USA may play a role similar to that played by the United Kingdom after World War II. That of a declining world power. The position of the USA relative to the rest of the world, after World War II, may be a mirror image of the position of the USA relative to the rest of the world, in the Post-Pandemic era. Whereas the rest of the world suffered much more damage and devastation than America as a consequence of World War II, the positions may be reversed for COVID-19. It may be that the USA is impacted relatively more by COVID-19, than the rest of the developed world.

Britain incurred enormous debts during WWII. Additional debts were incurred after the Labor Party victory in the Summer of 1945, when Conservative Party leader Winston Churchill, was defeated by Labour Party leader Clement Atlee. The election was the first ever, in which Labour won a majority, and allowed Attlee to begin implementing the party's left-wing agenda. That included a national socialized medicine program. To a much greater extent, than the USA, the UK used inflation to deal with their huge postwar debt. From 1946 to 2018 the British pound lost 97.5% of its purchasing power. That figure is based on the price of typical consumer commodities, which indicates that a basket of commodities that a consumer could buy for £100 in 1946 cost £4,074 in 2018.

At the end of World War II, Americans owned many assets world-wide that were previously owned by nationals of other nations. Assets of the Axis Powers, Germany, Japan and their allies, located in the USA, were seized as enemy assets during the war. Additionally, many of the overseas assets of the other victorious World War II allies, such as the UK and France, were sold to American interests during the 1939-1941 period when the USA was neutral and selling large quantities of goods to the warring nations.

The events and ultimate consequences of COVID-19 are still unfolding and to be determined. However, already there are some ominous data points. As of April 22, 2020, the USA with about 5% of the world population, is experiencing about 33% of the new daily COVID-19 deaths. Countries such as South Korea, Germany and New Zealand seem to have been much better prepared for COVID-19. Other countries may be able to resume full production sooner than the USA. There even might be a time where travel within and/or to and from the USA is restricted far more, than in the rest of the developed world.

There are some issues with the COVID-19 data. This is especially important when comparing the damage done across countries. However, the normal experience of infectious diseases impacting the USA much less than other countries, as was the case with SARS, MERS and Ebola, seems to be not the case with COVID-19.

Data on the number of COVID-19 cases clearly is impacted by the amount of testing conducted. A jurisdiction that only tests those who require hospitalizations could report less cases per capita than a jurisdiction that tests a much wider sample of the population. However, COVID-19 deaths are a much more accurate statistic. The first cases of COVID-19 appeared about simultaneously in the United States and South Korea. As of April 21, 2020, there were a total of 237 COVID-19 deaths in South Korea as compared to 43,200 in the USA. On a per capita basis, South Korea with a population of 51,269,185 had 0.00000462 COVID-19 deaths. For the United States with a population of 331,002,651 the per capita deaths are 0.001305. Thus, the per capita COVID-19 death rate in the United States is 282 times that of South Korea.

China with its much greater population has reported fewer COVID-19 deaths than the United States. President Trump and others assert that the number of COVID-19 deaths in China is much higher than they are reporting. This may or may not be true. However, Chinese authorities may have learned their lesson regarding the dangers of concealing unpleasant facts.

After SARS, China created an infectious disease reporting system that officials said was world-class. In free open societies, when reacting to the appearance of clusters of a novel infectious disease, medical professionals would never consider first seeking the consent of local officials before alerting the appropriate national entities. A prompt national government response would generally enable those patients infected to be identified and isolated. That type of immediate notification should have allowed China to contain or at least drastically slow down the spread of the novel coronavirus.

In China’s authoritarian environment, the medical professionals deferred to local officials who, over a political aversion to sharing bad news, withheld information about cases from the national reporting system. As part of their attempt to conceal the news about the outbreak, local officials arrested Dr. Li Wenliang and seven other whistleblowers. The doctor died from the virus. In an authoritarian society, where a free press may be considered an enemy of the state, arresting a doctor who raises an alarm might seem reasonable. If China had a free press, they might never have arrested the doctor.

Dr. Li Wenliang is now considered a hero and a martyr in China. The government has pledged not to conceal the truth about the pandemic in the future. If indeed it turns out that the United States has handled the response to COVID-19 in a very inept manner, relative to the rest of the developed world, that could have serious political and economic ramifications. It would be particularly significant if it turns out that COVID-19 deaths in China were actually much less than in the United States. Conversely, it might also be possible that the somewhat haphazard relaxations of the COVID-19 shut-downs by the various states in America turn out to have been the best approach.

Agency vs. other mREITs

Assuming that every position and security held by every REIT is correctly marked at its fair value price (That is determined by what a willing buyer would pay and what a willing seller would sell it for) today. There is now still great variance in what can be expected between agency mREITs, non-agency mREITs and equity REITs. The agency MBS held by mREITs should not fluctuate that much in the near term. Agency MBS trading at a premium can only fall to 100 from prepayment risk. Hedges based on short-term interest rates will not move much unless the Federal Reserve takes rates negative.

A non-agency mortgage or MBS may be fairly priced today, based on today's market perception of the impact of COVID-19 on real estate. However, a significant change could occur in the near term regarding expectations what will be the future market perception of the impact of COVID-19 on real estate prices. This is even a greater factor in equity REITs.

As I said in mREITs After The COVID-19 Apex

...Regarding the non-agency mREITs or hybrids of agency and non-agency, they should be evaluated like any other stock in terms of how the COVID-19 pandemic will impact them. Many stocks now are vulnerable to the impact of the COVID-19 shutdowns on their customers, creditors, operations, lenders, supply chains or some combination of all of these. To a greater or lesser extent, that is true for all of the REITs and non-agency mREITs. However, the pure agency mREITs would not seem to be vulnerable to any direct impacts of the COVID-19 pandemic regarding customers, creditors, operations, lenders, supply chains or commodity prices…

It is true that pure agency mREITs are safer, in terms of book-value fluctuation, than non-agency mREITs or hybrids of agency and non-agency. However, that does not necessarily make them better investments on a risk-adjusted basis. The market is generally pricing agency mREITs at less of a discount to book value than non-agency mREITs or hybrids of agency and non-agency. Thus, it all comes down to an estimate of what is already in the market. That in turn is the question of how efficient the market is.

For investors, liquidity and solvency concerns are paramount today. The COVID-19 shut-downs along with the crash in oil prices is expected to result in a surge in bankruptcies. Both agency and other mREITs tend to resist filing for bankruptcy relative to other publicly held companies. Even before the COVID-19 shut-downs or the crash in oil prices, filing for bankruptcy seemed to become a more popular option for the managements of some non-REIT publicly-held companies.

As I said in: mREIT-Based ETNs Now Have A Larger Role In The 15%+ Current Yield Constrained Portfolio

....There has always been bankruptcy risk associated with very high yield bonds. Of course, in many cases bankruptcy is unavoidable. However, in some cases corporate management seeks bankruptcy because that is what is best for them personally. In some industries managements have been more inclined to seek bankruptcy than others. Some managements of airlines and steel companies treat chapter 11 as a “spa” where they can rid themselves of pesky union contracts, common shareholders, creditors and leases while senior management basks in retention bonuses while plotting to maximize their take in new stock when the company emerges from chapter 11 or their personal rewards when the bankrupt company sells assets to vulture investors at unfair prices. (See Polaroid and Bethlehem Steel for egregious examples.) In some companies in some industries, bankruptcy could be considered as part of their business plan.

I am not trying to pile-on Donald Trump. However, he can be partially blamed the recent spate of bad faith corporate bankruptcies, and it has nothing to do with any of his economic policies. Not only did everyone who ever bought any stock in any public Trump entity end up with nothing. But most unusually, all of the public buyers of mortgage bonds on any of the Trump casinos also eventually ended up with zero recovery. That is almost unheard-of. In almost all other casino bankruptcies, publicly held mortgage bondholders had significant recoveries. The general public did not pay much attention when then candidate Trump bragged about how much he personally made from the casino bankruptcies (well after the statute of limitations for bankruptcy fraud had expired). However, you can be sure that managements of every distressed public company paid rapt attention. A flood of bad faith bankruptcy filings has ensued.

From some management’s perspective, a bad-faith bankruptcy that wipes out the common shareholders and leaves management with a bigger percentage stake than they held before the filing, in an entity with much less debt, is the preferred solution. That is unfortunately, sometimes the case, even if there are many ways to avoid bankruptcy in that distressed corporation's situation. After Trump’s bragging about how much he took out of his bankruptcies, bankruptcy appears to be now more of the first resort than the last resort for some distressed companies...

Bankruptcy is much less an attractive option to those running REITs and especially so for mREITs, relative to other publicly held companies. For mREITs, management generally has an incentive to hold off bankruptcy until the bitter end. However, that does not mean that mREITs never go bankrupt.

Since March 18, 2020, some of the non-agency mREITs have entered into forbearance agreements, as they were unable to meet margin calls. The outlook for them is generally bleak. A sardonic analogy is that the prospects for an mREIT that has entered into a forbearance agreement ultimately surviving are roughly the same as a COVID-19 patient on a ventilator. That said, some of the non-agency mREITs are probably bargains at present discounts to book value.

The key determinant of the book value of the non-agency mREITs, in the COVID-19 environment, is the value of the real estate that underlies the mortgages they hold. In some cases, the seniority or lack thereof in the capital structure, the mortgage or MBS held by the mREIT becomes crucial. In some cases, the credit quality of the tenants is a factor. In the short run, the prospect of rents and mortgage payments not being made has depressed most of the non-agency mREITs. A possible offsetting factor could be the lower cap rates that could result from lower interest rates might increase real estate values.

Clearly, in the COVID-19 environment, some types of real estate are more vulnerable. Hospitality and tourism related properties are obviously at risk. Additionally, all properties in local areas that are heavily dependent on tourism or oil now could decline in value. For non-agency mREITs, determining winners and losers would require detailed analysis of their portfolios.

ETFs and ETNs

The complexity of the mREITs suggests that individuals may want to consider diversification either by holding many mREITs or using ETFs or ETNs that are based on indices of mREITs. For income maximizing investors, mREITs may still be very attractive despite the current uncertainty and risks.

Unlike many other publicly held companies, the agency mREITs and most of the surviving non-agency mREITs or hybrids of agency and non-agency mREITs are likely to continue to pay dividends, despite incurring massive losses in the first half of 2020. Even at reduced levels, these dividends will produce double-digit yields in many cases, based on the current depressed prices of the mREITs. For those wishing to obtain these yields and are willing to accept the risks inherent in the mREITs, there are some ETFs and ETNs to consider.

Credit Suisse X-Links Monthly Pay 2x Leveraged Mortgage REIT ETN (REML) is based on FTSE NAREIT All Mortgage Capped Index of mREITs index. It uses leverage to boost its current yield. REML implicitly borrows at LIBOR+0.85% to finance a portfolio that emulates the index. For those that want to avoid the risk of such leverage, iShares Mortgage Real Estate Capped ETF (REM) is a fund that is based on the same index as REML. The VanEck Vectors Mortgage REIT Income ETF (MORT) is another unleveraged ETF and is based on the MVIS US Mortgage REITs Index. Normally, REML would move up or down twice as much as REM or MORT.

For investors seeking leverage and who can borrow at a rate lower than 3-month LIBOR+0.85%, buying REM or MORT on margin would be better than buying REML. Today 3-month LIBOR is 1.03%. Thus, if your margin loan rate is lower than 1.88%, owning REM or MORT on margin is better than REML. Most retail brokerage firms charge more than 1.88%. For example, Fidelity charges a rate based on the amount borrowed. On amounts less than $25,000, today’s interest rate is 8.325%. The rate goes down to 4.00% for amounts above $1,000,000. The current margin rate at Charles Schwab (SCHW) is also 8.325% on amounts less than $25,000. For amounts above $2,500,000, the rate is 4.5%.

ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN (SMHB), which has some mREITs along with other small-cap high dividend stocks, is another leveraged way to play mREITs. One concern with REML and SMHB is the possibility of mandatory redemption at an unfavorable price. In the March 2020 crash, most of my 2x leveraged High-Yield ETNs were subject to acceleration once their net indicative (asset) values fell below $5. Holders of the UBS ETRACS Monthly Pay 2X Leveraged Mortgage REIT ETN (MORL) and its twin, the ETRACS Monthly Pay 2X Leveraged Mortgage REIT ETN Series B (MRRL), including me received only $0.21.

REML and SMHB still only exist today because they have “Leverage Reset Events” and "Loss Rebalancing Event" provisions, respectively. These have the effect of reducing the leverage in response to an extreme decline in net indicative (asset) value. In the context of the 2x Leveraged ETN emulating a margin account that held an unleveraged ETF, or a portfolio of securities with the same components as the unleveraged ETF, on 50% margin, the “Leverage Reset Events” and "Loss Rebalancing Event" provisions have the result of transactions in the hypothetical margin account to reduce the leverage.

The analogous transaction in the hypothetical margin account would be to sell the amount of securities required to reduce the leverage back to 50% margin. That is a common way to meet a margin call and/or reduce volatility.

As described with more detail in Opportunities In The Remaining High-Yield 2x Leveraged ETNs, the "Loss Rebalancing Event" provisions spell out when and under what conditions the deleveraging occurs. However, the important aspect can be seen in the excerpt from the SMHB Prospectus Supplement which reads:

...A Loss Rebalancing Event will have the effect of deleveraging your Securities with the aim of resetting the then-current leverage to approximately 2.0. This means that after a Loss Rebalancing Event, a constant percentage increase in the Index Closing Level will have less of a positive effect on the value of your Securities relative to before the occurrence of the Loss Rebalancing Event..."

Holders of REML and SMHB are still not out of the woods and still face the possibility of further catastrophic losses. Even with the “Leverage Reset Events” provision, REML only exists now because Credit Suisse AG (CS) did the right thing for the REML holders. The indenture gave Credit Suisse AG an option, but not a requirement, to wipe out REML once its net indicative (asset) value touched zero. CS suspended the application of the requirement that the intraday indicative value remain at zero, when on March 18, 2020, the intraday indicative value of REML fell to zero.

Likewise, even with the “Loss Rebalancing Event” provision, SMHB only exists now because UBS (UBS) announced:

…UBS Elects Not to Exercise its Acceleration Option for ETRACS 2xMonthly Pay Leveraged US Small Cap High Dividend ETN Series B due November 10, 2048

New York, March 25, 2020 – UBS Investment Bank today announced that, following the occurrence of an Indicative Value Optional Acceleration Trigger, as a result of the indicative value of the 2xMonthly Pay Leveraged US Small Cap High Dividend ETN Series B due November 10, 2048 [Ticker: SMHB] (the “Securities“) falling below $2.00 on March 18, 2020, UBS elected not to exercise its Acceleration Option. As disclosed in more detail in the prospectus supplement relating to the Securities, upon the occurrence of an Indicative Value Optional Acceleration Trigger, UBS has the option (but is not required) to accelerate and redeem the Securities. UBS did not exercise the Acceleration Option and accordingly the Securities will remain outstanding in accordance with their terms. This announcement does not affect the terms of the Securities, including the right of noteholders to redeem their Securities on the terms and at the redemption price set forth in the prospectus supplement..

Unfortunately, UBS had no choice with regard to accelerating its other 2x Leveraged ETNs that did not have "Loss Rebalancing Event" provisions once the price thresholds were breached. Both CS and UBS might still have to ultimately eliminate REML and SMHB due to further, catastrophic market declines.

Analysis of the May 2020 REML Dividend Projection

Most of the REML components have paid dividends quarterly, typically with ex-dates in the last month of the quarter and payment dates in the first month of the next quarter. The January, April, October, and July "big month" REML dividends were much larger than the "small month" dividends paid in the other months since very few of the quarterly payers have ex-dividend dates that contribute to the dividends in the "small months." Thus, the May 2020 REML dividend will be a small month dividend. While typically called dividends, the monthly payments from REML and the other 2X-leveraged ETNs are technically distributions of interest payments on the ETN note based on the dividends paid by the underlying closed-end funds that comprise the index, pursuant to the terms of the indenture.

Of the 36 components in the index, 8 have declared dividends with ex-dates in April 2020 and thus should contribute to the May 2020 REML dividend. Most of the components, typically do not pay dividends with ex-dates in April. Some of the components, have declared new dividends after the COVID-19 collapse. Two Harbors Investment Corp. (TWO) reduced its quarterly dividend to $0.05 from the previous $0.40. New Residential Investment Corp. (NRZ) reduced its quarterly dividend to $0.05 from the previous $0.50. The ex-dates for the NRZ and TWO dividends are in April 2020. Thus, they will contribute to the May REML dividend, Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) maintained its dividend, and also has an April 2020 ex-date, and thus, will contribute to the May REML dividend. PennyMac Mortgage Investment Trust (PMT) also has an April 2020 ex-date. Arbor Realty Trust, Inc. (ABR) and iStar Inc. (STAR) had already declared their normal dividends with ex-dates in February 2020, so they will not contribute to the April 2020 REML dividend.

Some of the components have explicitly suspended their dividends, or have not made any dividend declaration for the first quarter of 2020. Some components have delayed their dividends. The table below shows the ticker, name, weight, dividend, and ex-date for all of the components. Additionally, the table includes the contribution to the dividend for the 8 REML components that will contribute to the May 2020 dividend. Some of the components that show a first quarter 2020 dividend are unlikely to pay the same dividend in the second quarter of 2020, or may not pay any dividend in the second quarter of 2020.

My projection for the May 2020 REML dividend is $0.0208. This reflects both the sharply lower net indicative (asset) value relative to pre-COVID-19 levels and the impact of some mREITs not paying, lowering or delaying dividends. The weights of the components change as the relative market prices of the components change. As the mREITs that still pay dividends will comprise a larger weight in the index, that should increase future dividends, relative to those calculated using the beginning of March and April 2020 weights in the table.

The composition of the FTSE NAREIT All Mortgage Capped Index of mREITs index, upon which REML is based, should also change, as a result of quarterly reviews. The relevant portion of The FTSE Nareit US Real Estate Index Series Methodology Overview states that the index is Reviewed quarterly in March, June, September and December with changes implemented on the third Friday of the month. Also, the Series Methodology Overview states:

..Removal. If a constituent is delisted, or ceases to have a firm quotation, or is subject to a takeover offer which has been declared wholly unconditional, it will be removed from the Index. The removal is effective before the start of the index calculation on the second business day following the announcement of the event justifying removal. Announcements made after the close of the index calculation are normally deemed to be made on the following business day. A company deleted following a takeover, with a remaining free float of 15% or less, will not be reconsidered for index inclusion until completion of a one year trading record. In the event that a company included in the Index is split, where a split results in the inclusion of an ineligible security, the ineligible security will remain in the index for two trading days and then be deleted at market price or if no market price is available, at zero value. Where the market price of an eligible company resulting from the split is unavailable and the trading date remains unknown after 20 business days it will be deleted at zero value. Merger. In the case of a merger, if an existing Index Constituent...

Conclusions And Recommendations

The mREITs are trading at very deep discounts to their book value. This situation cannot persist indefinitely. However, it's always good to remember, as Keynes famously said: "The market can stay irrational longer than you can stay solvent." For various reasons, agency mREITs at deep discounts to their book value are compelling. It is theoretically possible that those book values are inaccurate. Many industrial, retail and transportation stocks will likely cut or eliminate their dividends for COVID-19 pandemic reasons. Thus, agency mREITs' yields, even with somewhat reduced dividends, will look more and more attractive. At some point the larger market participants will look to buy agency mREITs at deep discounts to their book values, for arbitrage purposes. This could include acquiring control of them with the intent of liquidating them at book value and distributing the proceeds to shareholders.

The only 2x mREIT Leveraged ETN remaining is now REML. There are some mREITs that we know are now trading at very steep discounts to book value. Some mREITs have still been silent regarding their current status. The markets may have assumed the worst in those cases. That is reasonable in the current market environment. The only thing that I can be relatively sure of is that the mREITs will not be indefinitely trading at very steep discounts to book value. Either the book values will be much lower than what has currently been published, or the market prices of the mREITs will be much higher than they are now. In the coming days, we should get much more information about the book values of the mREITs that have been silent so far, as their quarterly reports are made available.

I still believe that the macroeconomic conditions still favor mREITs and especially REML. Very low short-term interest rates make carry-type investing very attractive, particularly for those seeking to maximize current income. There is a question of whether some of the existing mREITs, who have not disclosed their current situation, will be the beneficiaries of these conditions, or that newly created mREITs be the beneficiaries of these conditions. I am still a tentative buyer and have still been buying REML and REM. I have also recently added to positions in agency mREITs: AGNC Investment Corp. (AGNC) and Orchid Island Capital, Inc. (ORC).

One concern is that recently REML has been trading above net indicative (asset) value. On April 22, 2020, REML closed at $2.72, which was a premium of 7.6% over the net indicative (asset) value of $2.5278. I am generally very reluctant to pay significantly above net indicative (asset) value for a 2X Leveraged ETN. However, paying $1.25 for REML, recently when the net indicative (asset) value was close to zero, has turned out alright, at least so far. I might be much more confident buying REML after the book values of all the mREITs in the index become known.

I am still a tentative buyer and have still been buying SMHB. It is trading very close to net indicative (asset) value. Again, I would be much more confident buying SMHB after all the book values of the many mREITs in the index upon which SMHB is based become known. I am also somewhat leery of the relatively weak non-mREIT stocks in the index upon which SMHB is based.

At some point in the future, the COVID-19 pandemic will be over. Exogenous events such as the Great Depression, World War II and the 2008 financial crisis all provided tremendous buying opportunities for some investors. However, one does not know when the bottom in the financial markets will be. Generally, stock market bottoms occur before when the economy or the crisis is at its worst. With the COVID-19 pandemic, uncertainty exists as to how much damage will be done by the virus and by the various measures taken by governments in response. This includes but is not limited to the $trillions in debt that will be incurred. If as I fear, the COVID-19 pandemic significantly reduces the position of the United States in the world, agency mREITs may be one of the few places to hide. That is until long-term treasury bond rates spike upwards.

Regarding the various measures taken by the Federal government, there may be some factors that could boost securities markets before the economy recovers from the COVID-19 pandemic. The speed at which money is being sent out in the recently enacted legislation means that many of those receiving money have not been negatively impacted financially by, or could actually benefit from, the COVID-19 pandemic. Employees working from home, and many others who are still receiving their paychecks, will get cash as long as their incomes are less than $100,000 for individuals and $200,000 for families. They are probably not spending as much as usual, on vacations, travel or restaurant meals and entertainment outside the home. Thus, they will have to do something with the extra money they have at the end of each month. Some will surely be invested in securities. Likewise, many collecting the enhanced unemployment compensation, that in some cases, exceeds their previous salaries, might also be buying securities. The small businesses, defined as less than 500 employees, can receive loans that are forgivable as long as they keep their employees on the payroll. Thus, small businesses that suffer losses in revenue can receive loans that are forgivable, if they keep their employees on the payroll, as can businesses that do not suffer losses in revenue, if they also keep their employees on the payroll. This is providing windfalls for small businesses that have not suffered any losses from COVID-19, but qualify for forgivable loans. That might supply some small business owners with funds to invest as well.

REML Components and Contributions to the Dividend












Annaly Capital Management Inc.






AGNC Investment Corp.










Starwood Property Trust Inc.






New Residential Investment Corp.










Blackstone Mortgage Trust Inc.






Hannon Armstrong Sustainable Infrastructure Capital Inc.










Chimera Investment Corp.






Apollo Commercial Real Estate Finance Inc.






Two Harbors Investment Corp.










PennyMac Mortgage Investment Trust.










MFA Financial Inc




iStar Inc






New York Mortgage Trust Inc




Redwood Trust Inc




Invesco Mortgage Capital Inc




ARMOUR Residential REIT Inc




Ladder Capital Corp






Arbor Realty Trust Inc






KKR Real Estate Finance Trust Inc






Capstead Mortgage Corp






Jernigan Capital Inc






TPG RE Finance Trust Inc


6/12/2020 deferred




Dynex Capital Inc










Granite Point Mortgage Trust Inc




Ready Capital Corp



0.4 80% stock



Ellington Financial Inc










Ares Commercial Real Estate Corp






Orchid Island Capital Inc










Western Asset Mortgage Capital Corp




Anworth Mortgage Asset Corp




Great Ajax Corp




Cherry Hill Mortgage Investment Corp




q part in shares


AG Mortgage Investment Trust Inc




Arlington Asset Investment Corp




Exantas Capital Corp




Ellington Residential Mortgage REIT





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Lance Brofman profile picture
Note: In 1996 Fundamental Portfolio Advisors and myself were subject to civil litigation by the SEC which resulted in deregistration and a permanent bar from the securities industry. - Ph.D. economics and Finance MBA finance NYU) Colorado Technical University Professor – courses: Applied Managerial Finance (Graduate Level), Microeconomics, Macroeconomics., Previous: Globe Institute of Technology Professor – Economics and Finance, Head of Business Department International Finance European School Of Economics (New York) Professor – Economics (Graduate Level) Courses taught: Microeconomics Metropolitan College of New York Professor – Economics, Banking and Finance Courses taught: History of Economic Thought, Macroeconomics, Money and Financial Institutions World Gold Council Consultant Economist New York, NY • Constructed econometrics relating to gold's role as a portfolio diversifier primarily aimed at institutional investors. • Focused on the embedded optionality of gold in terms of its relation to other investment assets and economic fundamentals such as inflation and business conditions. Freenet, Inc. Founder Internet Startup company with investment advice websites. Fundamental Portfolio Advisors, Inc. Chief Portfolio Strategist – Founder • At the predecessor company I started the New York Muni Fund, the first single state triple tax-free municipal bond fund. • I took the fund from a one-employee start-up where I performed every function to a family of mutual funds which had five funds with total assets above $300 million and which did all of its distribution and transfer in-house. • I wrote the initial prospectus and was responsible for managing the portfolios of what eventually grew to be a family of 5 mutual funds. • Was chief economist for parent company’s brokerage firm. • Involved on the buy-side in the development and monitoring of various structured municipal finance products. Worked with major issuers such as New York City and major investment banks such as Merrill Lynch and Goldman Sachs. • Submitted a U.S. Patent for a portfolio management system for mutual funds involving derivatives. A. Gary Shilling & Co. Senior Economist – Economic consulting and forecasting. Both macro and micro. • Clients included: Emerson, Castle & Cooke, Cooper Industries I was the author of the 1979 study commissioned by the U.S. Government Interstate Commerce Commission, which calculated the expected economic impact of trucking deregulation. White, Weld & Co, Inc. Economic analyst • White, Weld was the sixth largest investment banking and brokerage firm when Merrill Lynch bought it. • Extensive work was done on the All-American Pipeline Proposal to tap the Alaskan Gas Reserves. • The economics department of White, Weld formed A. Gary Shilling & Co. at the time of the Merrill Lynch merger. American Stock Exchange Economic analyst Degrees: New York University June 1978 Ph.D. Economics/Finance • Ph.D. dual field, economics and finance. • Doctoral dissertation was in contingency claims (options) theory June 1973 MBA with concentration in economics and finance NYU Engineering School June 1971 Bachelor of Science - Nuclear Engineering Published works Analysis of the Embedded Inflation Optionality in Gold Prices. World Gold Council, 2000. New York, N.Y. The Economic Impact of Trucking Deregulation. Interstate Commerce Commission, 1979, Washington D.C. I was an author of the textbook: 'Global Financial Management' Words of Wisdom, Schaumburg, IL. Dec.2015 ISBN 978-1-934920-46-6,

Disclosure: I am/we are long REML, REM, ORC, AGNC, ARR, TWO, SMHB. 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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