I admit I know very, very little about REITs, and so there is no alterior motive in this question..just looking for info.
The dividend yield on ARR looks incredible. What's the catch (assuming there is one) on this one compared to other REITs? Can anyone point me in the right direction so I can start learning?
The best place to start is with the annual report from 10-K founds here http://abea-46g2gu.client.shareholder.com/sec.cfm?DocType=Annual&Year=&FormatFilter=
That will explain the business model and the risk factors.
The catches for ARR are their inability to earn enough to cover their dividend and their inability to grow book value. They haven't covered their dividend for the past five quarters and book value decreased for 4 of the past 5 quarters. Book value did increase in 1q11 but that was only due to their ability to price secondary share offerings high enough to offset the mark to market decline in their portfolio and hedge values. Their inability to earn their dividend or innately grow BV don't matter much in times like these when plenty of fresh capital is coming in in the form of secondary share offerings. In flush times like these the additional paid in capital prevents them from self liquidating even though they pay out more in dividends than they make. When it mattered was in times like 2010 when fresh capital wasn't as readily available to them and they resorted to selling shares below book value thereby diluting their existing shareholders rather than slowly self liquidating. Because their poor operating performance made more attractive choices unavailable, ARR had the dire choices in 2010 between:
1. Diluting existing shareholders
2. Reducing the dividend to a level below what they earned
3. Slowly self liquidating and thereby reducing their management fees
They chose option #1 in 2010. Option #3 would have been hard on the pocketbooks of both shareholders and management. What you should seek in an mREIT is one which consistently earns more than it pays out in dividends, one that consistently grows BV, one that always prices secondary share offerings above BV, and one whose skilled asset and hedge selection would grow BV even in the absence of secondary share offerings. An mREIT possessing the characteristics which I describe is much less likely to become a forced seller of assets in a margin call induced rapid deleveraging cycle if hard times and financial shocks come. Look at the chart for CIM in 2008, rapid deleveraging is ugly. Those hard times when fresh capital is either completely unavailable or painfully expensive are when differences between mREITS become painfully apparent. Ones like ARR may end up on the pink sheets doing reverse splits just like Bimini Capital the next time hard times come.
If you don't understand much of what I'm saying now that's fine, I suggest thoroughly reading the 10-K then try reading this post again and asking any questions you might have.
"They haven't covered their dividend for the past five quarters..."
Today's results make the tally 6 consecutive quarters of uncovered divvies. In 2q11 they earned $18.6M taxable and paid out $20.2M in divvies. Furthermore their $25.8M unrealized hedge m2m losses far exceeded their unrealized MBS m2m gains in 2q11. I don't know the expirations of the hedge contracts, but unless rates rally in 3q11 at least some of those unrealized 2q11 hedging losses will become realized 3q11 hedging losses as the contracts expire. Realizing those significant losses will be a drag in 3q11 taxable earnings, so I suggest examining the hedge contracts expiration dates carefully when the 10Q comes out.
I've been trying to figure out what ARR's major malfunction is for awhile now and I think poor hedging skills is probably one of the biggies. Their 48 cents/WASO unrealized hedge m2m losses in 2q11 are a big deal, dwarfing the MBS m2m gains. But their hedging history when rates backup isn't stellar, they only had 18 cents/share outstanding unrealized hedging m2m gains in 4q10 which wasn't earth shattering and it wasn't nearly enough to offset their MBS m2m losses that q. Perhaps they should hire someone who can hedge well? Perhaps they should buy the Blackrock Solutions portfolio risk modelling software and just use the default inputs? They need to change something in regards to hedging, it's a very weak point of their weak company.
The pps "pain" investors feel with a Secondary Offering is much like cutting off a dog's tail an inch at a time, and so the urge it to get it over with all at once with a massive offering is understandable. However, I can quickly think of several good reasons not to have one massive offering but rather have more frequent smaller offerings:
1. Management needs a place to put the proceeds to work as quickly as possible. With a massive offering this would be more difficult.
2. Management can use a "dollar cost averaging" approach to investing proceeds from a secondary.
3. It would be more difficult to sell a massive offering quickly unless it was priced at an extremely high discount which in turn would affect the amount that the secondary would add to BV. With smaller offerings, especially where each offering is made at a higher price than the previous one, the contribution to BV is increased.
4. Several offerings over time provides the company the opportunity to demonstrate its ability to use the proceeds to increase earnings and thereby increase the offering price of follow-on offerings.
5. When a offering will increase BV and when it can be invested effectively, then it is management's duty to proceed with it in order to maximize share holder value over time regardless of how many previous offerings have been made.
In summary, it really isn't as important how many offering have been made, what the frequency of offerings has been, or what what the size of the offerings. What is important is the use that is made with the funds that are raised and as long as ARR or any other REIT can continue to make SOs that add to BV and use the proceeds to add to earnings at a rate greater than the dilution that takes place as a result of the offering, then I am happy with SOs, especially when I can buy additional shares at "sale" prices.
What is difficult for me to understand is not why there are SO's but rather why people are so anxious to "dump" their shares at such discounted prices. However, I'm not complaining.
As always, this is just MHO.
May 2011: 16,000,000 shares
April 2011: 16 million
Feb. 2011: 8.9 million
Jan. 2011: 6.0 million
Dec. 2010: 6.3 million
Nov. 2010: 4.6 million
Jun. 2010: 5.1 million
Not every month, but almost every month!
"Yes, makes you wonder why they go the expense of monthly SPOs. Why not issue 100MM and be done with it?"
This is the 3rd offering in over a years time. I am sure they time the offerings so as to position for best possible REO.
Arr, payday every month, beats working at Walmart.
When you buy Mortgage REIT (or any other high div reit, etfs, income funds, etc..) watch out for "Managed Dividend Policy" (which means smoothing out dividend payments by returning principal investments). Make sure there is enough income/cash flow from ops to sustain the div payments.