It seems everybody is a specialist these days; from doctors to sneaker manufacturers to traders. Niche is in. And in a sense, to "know more and more about less and less" can be a real benefit to an investor.
At this time of great uncertainty in the economy and markets, investors like Bob Haber are taking precise bets within a small and ignored corner of the REIT universe. "My take is a very specialized part of the REIT play, the agency mortgage REITs," says the CEO and CIO of Haber Trilix Advisors.
Unlike more traditional REITs that own and operate all types of properties, mortgage REITs - or more specifically Agency Mortgage REITs - manage portfolios of debt. "They own Fannie Mae and Ginnie Mae paper" that is government-backed and AAA-rated, thus "have no credit risk and essentially they ride the yield curve," Haber says. "They borrow short and lend long to the government agencies and lever it up," he explains.
And now the good part. Agency REIT Annaly Capital (NLY) -which Haber owns- pays a 14% dividend yield. Sound too good to be true? Habers says "the dividends have been consistent. I understand how they get there and I understand what will be the end of the trade as well, but for now it's the best risk-off trade out there."
So what will be the end of the Annaly trade?
When the Fed starts raising rates, at least a couple times and not just talking about it, but actually doing it. Haber says he has "an eye on the exit and I have Ben Bernanke to read every 6 weeks to tell me if he's going to take the punch bowl away." REITs "borrow at the short end of the curve. That (rate hikes) would compress margins, so you gotta get outta there," he adds.
If it all seems kind of strange for a guy whose other job is part-owner of the Boston Celtics, Haber explains his agency REIT strategy this way: "What I like is the yield curve" adding that he takes Ben Bernanke at his word that rates will remain low for the foreseeable future and that the agency REITs are the best way he knows to play that.
Furthermore, he has no interest in other REITs now because he doesn't want to take credit risk on the real estate cycle. "The yields are spectacular, they scare people off," Haber admits. But he's cashed those dividend checks for the past 2-3 years and as the world exists now, sees owning them for at least the next 6 months.
Annaly Capital is the largest agency REIT, but not the only one. Others include American Capital Agency Corp (AGNC), Capstead Mortgage (CMO) and current Haber holding Cyprus Sharpridge Investments (CYS).
Agency REITs are certainly not for everyone and beside rate hike risk, all carry credit rating risk since their portfolios rely on Uncle Sam maintaining a AAA rating. The other caveat Haber raises is to buy REITs only after they have paid a dividend and look oversold, because when they trade up and their yields decline, these "serial issuers of capital" will issue more equity.
Is it too good to be true or has Haber struck gold again?
Let us know below or via email at Breakoutcrew@yahoo.com
- dividend yield
- credit rating
- credit risk
- Ginnie Mae paper
- Fannie Mae
- Ben Bernanke