I established a basket of amreits starting about a year ago right before the FED stopped buying mortgages and the GSEs started buying back the most delinquent loans. It was a time of fear.
Have continued adding during the last year.
It seems to me, psychologically, that the recent past sets the mental framework for future expectations. In our case, it's the profound fear of the credit crisis. But, the future rarely repeats the recent past as the past invokes actions of repair. I have the thesis that the nature of the repair is going to take years which will produce years of low rates and then slow increases in rates so as not to damage the recovery.
In such a world these amreits could give us great return from yield only for quite awhile. By that, I mean years. And then, we might just do okay in a slow upcycle. These amreits could be multi-year holds.
While others are living in fear, we are quietly receiving our dividends.
I like lower expenses. It's good thing in ETF's and mutual funds and it's good here.
I don't care how many shares outstanding there are and don't mind secondaries and their ephemeral price impacts if they make sense.
In addition to expense ratio there are indubitably some benefits from reater scale.
I may be nuts but I think CYS is somewhat undervalued because it is misunderstood due to it's forward strategy. We'll see.
From a paper valuation standpoint an increase in market rates will devalue the present portfolio. That is an unrealized non cash loss.
The important item to consider with CYS that is different from the more established MREITs is that they don't have high rate/cost repurchase agreements attached to their present portfolio of MBS. So their spread bewteen interest earned and interest paid is much wider than the rest of the MREIT's. CYS has funded a substantial amount MBS at extremely low historic funding rates just in the past 4 quarters. I will be including CYS in an analysis with 6 other MREITS when all the 10-K's are in.
The main fundamental to zero in on will be growth in revenue over the next 12 months. I believe Zacks just put out a flyer on several reits that you may want consider. CYS is gonna outpace AGNC, HTC, NLY in revenue growth and will have a much fatter Net interst rate spread than those three.
The fatter the spread the better the cash flow and cash flow determines the dividend with this company.
It's being avoided mainly because of the negative 1.56 eps generated from paper valuation losses not cash gains from reit operations.
When you see these mis-takes by the larger market it means opportunity to get in at bargain prices.
Soon as they announce the next dividend the market should wake up here. Till then pepper down on your average cost and enjoy a good dividend return if you decide to hold.
I'm under the impression that the devaluation of existing mortgage bonds isn't a significant issue since mREITs generally are prepared to hold them more or less indefinitely. Is that true?
If NLY is any guide, then when the yield curve shrinks CYS could drop about 45%
Starting mid '04 short yields shot up drastically over the following 20 months while long rates stayed stable. The spread from which NLY makes it's income shrank to nothing. Their hedges held up for 2 quarters before they had to drop the dividend. At that point in early '05 NLY dropped from 20 to 11.
The fascinating aspect of this is that the yield curve shrank by half before NLY plunged.
See chart: http://dl.dropbox.com/u/8229375/NLY-out.jpg
The left side of the chart shows the best yield curve graphic I've ever seen, compare that to the right, NLY's share price since inception.
Management isn't a bowl of Jello. They're paid to manage interest rate risk.
It isn't rocket science, though some do it better than others.
They can manage the economics of the business with some degree of efficacy, and they can influence the company's earnings and thus its dividend, but who can manage the mania of shareholders or predict share price deriving therefrom?
Lovely to see you here with your inexaustable clarity and insight into company dynamics..I have them at 18% of the IB portfolio but this looks like a buying opportunity..I see nothing but good forecasts with this beast..unfortunately I bought half of my holding before the announcement of dillution then the other half post..I was thinking about adding another chunk..any ponderings on why I shouldn't..?
I hear you are getting to a point of digging out up there..inlaws were under 4' still a week or so ago...I on the otherhand, being the fair weathered fowl that I am just returned from driving Universals profits up by visiting Harry Potter World for a couple of days...
<when rates jump to 7% where will this stock price be ?>
What rates are you talking about??? "Long" rates like the 10yr which affect the MBS they invest in (their primary source of income) or "Short" rates like the Fed Funds rate which affect their cost of funds. I see people talk about "rates" all the time without being clear. Please clarify what you mean by "rates".
What is important, long term, is the spread. In the short term: long rates are going down due to ME wars. That does reduce spread but, in the short term it increases BV because existing MTG's go up in value. If long rates go to 7% and short rates stay put (very unlikely) the spread increases a lot and Mreits earn much more on new paper they purchase (expect more SO's), but BV suffers in the short term. Rates not likely to go that high anytime soon. Also not likely to go much lower. Short rates will stay low till the home mkt. and economy gets much better; probably late this year.