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Centerline Holding Co. Message Board

  • frank100_20012002 frank100_20012002 Jul 7, 2005 12:30 PM Flag

    Something to think about

    The following was taken from the Annaly Mortgage board. It's an excerpt from an interview in Barron's. It shows the pitfalls of borrowing short and lending long. I'm not sure to what extent it applies to CHC. My guess is not nearly as bad for CHC as it is for NLY.

    "So what else do you like or not like?
    We are short Annaly Mortgage, a mortgage REIT. The CEO is Mike Farrell. Farrell has done a truly outstanding job building this up and marketing it. But this is one of the plays on a flattening yield curve. The flattening yield curve hurts their margins. They use short-term financing to buy longer-term assets. About 88% of their liabilities reprice every 30 days, whereas only 17% of their assets are repriced in the same period. They've been fighting that by shortening their liabilities, which is kind of a dangerous game. To diversify, they've been building up an asset-management business. Now they are not only managing the REIT, they're managing unit trusts and private accounts. Fee income with no direct interest-rate risk is flowing to the bottom line and they've tried to make the case they deserve a higher multiple than other mortgage REITs because of this fee income, but unfortunately it is still pretty early in that process and the asset-management business is only about 5% or less of their net income. They are in harm's way as much as any company as the yield curve flattens and causes their longer-term mortgage assets to repay, forcing them to amortize the expense of buying those assets and buy lower-yielding securities. They just cut their dividend, but the stock is still much closer to its highs than lows, and we think they are going to have to continue to cut their dividends in the balance of the year if the Fed keeps raising short rates and long rates stay down.

    What about the valuation?
    Anytime you have the's Jim Cramer and Jim Grant of the Interest Rate Observer on the same page on an investment idea, it is safe to say, as they say in poker, the world is all in on that idea. The valuation reflects that. It is far and away the most expensive mortgage-portfolio REIT. We think the consensus has it wrong. The stock is still around 1.5 times book value of 11.80. With a falling dividend, we think the stock will end the year closer to book value, where most other mortgage REITs trade. If the Fed keeps raising rates -- we see another 50 to 75 basis points -- the stock will end up in the 13-14 range. If the yield curve inverts, it will be worse.

    Thanks, Sy.

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    • ALD and ACAS are similar. Morningstar rates ALD 3 stars. They are considered a narrow mote company and are also high risk, as any investment is on Morningstar's site that is tied to interest rates. ALD is rated C+ for growth and A+ for profitability and ACAS is rated A+ for growth and A for profitability from Morningstar. They think ACAS has more upside but with the returns that both offer, I wouldn't let that determine which if any I invested in. Happy investing!

    • If you are interested in ACAS, be sure to compare it with ALD. These are finance companies that give loans to businesses that do not qualify for regular bank loans. ALD specializes in mezzanine loans. I am more familiar with ALD. Have owned it for 10 years (Since before it merged with 2 other finance companies. In essence these two companies are venture capital firms. Part of the repayment of the loans is often done in company stock. If they guess right on which companies to support, they make a lot of money. So far so good with ALD. Don't know about ACAS. These kinds of companies require great managers.

    • Brief Description of ACAS: What Does This Company Do? Directly quoted from Morningstar but Yahoo finance has a nice description also.

      "American Capital Strategies arranges commercial loans for small- and medium-size businesses throughout the United States and has made equity investments in some of these businesses. American Capital Securities also structures and obtains funding for management and employee buyouts of subsidiaries, divisions, and product lines that are divested from larger companies".

      I am not promoting or discouraging ownership in this equity. I currently don't own any ACAS. I have sold and made my profit and will rebuy when the stock trades down. I do currently hold CHC. Morningstar rates ACAS with an A+ rating for growth, and an A rating for profitability. Morningstar rates CHC with an A+ for growth, and a B for profitability. Not that Morningstar knows all, but both are rated very high with respect to their tangible results. Neither one is covered by a contributing analyst associated with Morningstar. I like stocks like this because they are solid, you can make money holding them, and if you have the time and can follow them closely, you can make money occasionally trading them. Happy investing

    • I don't have a preference for either, I like to buy both of them when they trade down. Although they are both finance companies, the risk associated with both of them are entirely different other than interest rate exposure. Good luck with your investments.

    • Agreed.
      Actually I also considered that CHC might be grouped with Fannie Mae and Freddy Mac.
      I am not familiar with ACAS. I will have to check it out.
      Between CHC and ACAS, do you have a preference?

    • Do you consider CHC a REIT?