REIT Wrecks » AGNC http://gdmig-reitwrecks.com High Yield REITs And Commercial Real Estate Thu, 28 Apr 2016 02:18:47 +0000 en-US hourly 1 https://wordpress.org/?v=4.2.30 Agency Mortgage REIT Dividends Get Better & Better http://gdmig-reitwrecks.com/2009/06/agency-mortgage-reit-dividends-get.html http://gdmig-reitwrecks.com/2009/06/agency-mortgage-reit-dividends-get.html#comments Thu, 25 Jun 2009 16:30:00 +0000 http://reitwrecks.com/wordpress/?p=279

Shamefully, I haven’t done much with Agency Mortgage REITs here, but the times they are a changing. Agency REITs are killing it on net interest spreads, and that is causing higher net incomes and increased dividends. What else could an investor want, next to a portfolio of government-guaranteed mortgage debt? Not surpringly, many investors screech to a halt on mention of the latter, and that’s one of the reasons these REITs deliver high teens yields quarter after quarter.

But those who had been yawning at the mention of an Agency Mortgage REIT are probably taking a closer look now. (AGNC), which is a relatively new Agency REIT, surprised everybody on Tuesday when they announced a quarterly dividend of $1.50 per share, a whopping 76% higher than the previous quarter (the dividend is payable July 27th, and the ex-dividend date is June 30).

AGNC’s dividend increase follows dividend increases from Annaly Capital (NLY) last week and Capstead Mortgage (CMO) the week before.

What’s causing all this? The earnings driver is the so-called “steep yield curve”, as it’s known in industry speak. In this market, a steep yield curve basically means nobody wants to own anything with a maturity beyond next week, especially if it has a mortgage attached to it. This is resulting in a huge spread between short yields and long yields, and Agency Mortgage REITs are busy collecting the difference. The difference between these Mortgage REITs and others is that Agency REITs are doing it with portfolios of AAA-rated government paper, not a bunch of dodgy TRUPS and CDOs.

In AGNC’s case, the weighted average yield on its portfolio last quarter was 5.13%, but its average cost of funds was 2.11%, resulting in a margin of 3.02%. This is pretty good work if you can get it, and last quarter AGNC delivered a 24.1% return on equity for sitting in between.

AGNC is not alone. Annaly Capital Management increased its dividend last week – by 20% to $0.60 per share (payable July 29, ex-date is June 25). NLYs net interest margin went from 1.71% to 2.11%, and they rode the recovery in mortgage bonds with a $5 million gain on sale. Combined, this drove earnings to $0.63 per share, up 19% from the year-ago quarter.

CMO’s dividend increase was less spectacular, up 4% to $0.58 per share for the third quarter of 2009, but the story is the same: their net interest margin increased to 2.16%, and they have plenty of cash to invest after participating in the recent frenzy of REIT stock offerings.

Other cashed-up REITs investing in agencies, though not exclusively, include Redwood Trust (RWT) and Chimera (CIM). Incidentally, RWT sold its stock in two separate overnight offerings, the latter at a 10% discount to the previous day’s close.

Despite these rich dividends, Agency Mortgage REITs are not for widows and orphans. Concerns over the government losing its AAA rating (which Annaly management calls “gossip”), interest rate wories, news about Asians selling their dollar assets, inflation prospects, high leverage ratios and re-investment risk all amount to a big detour sign for a lot of investors. From my perspective, owning these things right now amounts to a front row seat for the greatest show on earth (at the very least), and it’s probably worth the risk.

REIT Investments
Disclosures: None at the time of publication





]]> http://gdmig-reitwrecks.com/2009/06/agency-mortgage-reit-dividends-get.html/feed 0 Mr Market trips on Mark to Market, Gives REITs Away http://gdmig-reitwrecks.com/2008/03/mark-to-market-gives-mr-market-acid.html http://gdmig-reitwrecks.com/2008/03/mark-to-market-gives-mr-market-acid.html#comments Wed, 05 Mar 2008 19:53:00 +0000 http://reitwrecks.com/wordpress/?p=3

In this bountiful era of REIT wreckage, with liquidity having virtually disappeared from the mortgage market, the auction rate securities market, and last week, even the municipal bond market, it is helpful to be reminded of the irrationality that can sometimes rule daily trading gyrations.

According to Warren Buffett, Ben Graham said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market. Without fail, Mr. Market appears daily and names a price at which he will either buy your stock or sell you his.

At times he feels euphoric. When in that mood, he sets a very high price for your stock because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead. On these occasions he will set a very low price for your stock, since he is terrified that you will try to unload your stocks on him, bringing him immediate losses.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. Consequently, Graham said, you must heed one warning: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful.

In my opinion, Mr. Market – always fallible and never perfect – is now being blind-sided by mark to market accounting. The non-cash charges resulting from these “mark to market” write downs are causing our servant Mr. Market to see nothing but trouble ahead for business and the world. Thus, he is setting a very low price for REITs and many other financial stocks, and that is creating opportunities.

In a different post, I will add more fascinating detail on the rigors of the Other Comprehensive Income account found on the balance sheet of most Mortgage REITs. For now however, suffice it to say, this is the magic “now you see it now, you don’t” account for charges not affecting the income statement, because these charges are non-cash and in many cases, NOT permanent.

Furthermore, in the absence of a market for the securities held by many Mortgage REITs, most portfolio managers must use the CMBX and ABX indices to mark their portfolios to the market. As Fitch Ratings pointed out last month, the CMBX is currently indicating a default rate that is four times anything ever seen in the history of the CMBS market. So, managers must mark their portfolios to values that do not correlate with anything even close to actual performance. Does that seem rational?

Unfortunately, for REITs that are highly leveraged, these marks can also lead to margin calls which cannot be ignored – hence the aerial somersaults being performed by the funding desk at Thornburg Mortgage this week (with a perfect triple twist).

While Thornburg may yet make it (Larry Goldstone is clearly very talented and well-regarded), there are a number of well run, much less risky Mortgage REITs in the REIT Wrecks universe that Mr. Market has put on sale.

Companies such as NRF have funded nearly all of their assets on a long-term, non-recourse basis and are not subject to margin calls. They have cash available to reinvest in a vastly improved (less competitive) lending environment. Mr. Market is literally giving these stocks away, offering yields in the high teens and low twenties. Other attractive REIT stocks include NLY and AGNC.

The catch? You must be able to ignore Mr. Market while you push the button and buy from him. Let him serve you, not guide you.

Click here for an updated Mortgage REIT list, including current yields

REIT dividends
Disclosure: REIT Wrecks owns NRF at the time of publication

Update: More detailed information on how the “Other Comprehensive Income” account works can be found in this post on REIT Accounting.

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