Bill Gross has been warning of poor bond market liquidity due to the banks having to scale back thanks to new regulations. Given the potential blowup possibilities (Puerto Rico, China, Greece) I'm thinking I should probably have a better handle on how a bond/derivative liquidity or counter-party issue could affect mREITs. My motive is to figure out where STWD/LADR fit in the list.
I'll put forth a most to least list of mREIT styles and hope that those smarter than myself can improve on it.
MORL - double everything...
High levered commercial
Low levered commercial?
If liquidity dries up, won't the hedges put in place to protect against interest rate moves be impacted? My understanding is that agency backed paper is second in liquidity to treasuries. How does one balance that against companies that use less hedging (CMO/NRZ shorter duration so less hedging needed) or less leverage (STWD/LADR have business lines that require no hedging or are indexed to LIBOR). Have been reading about how government paper probably has no liquidity premium built in. So it may be free from default risk but could still see values go down when everyone rushes to the exits. Maybe high quality commercial paper already incorporates a liquidity premium?
I'm thinking that companies that don't have to sell into a liquidity event will be safer even if they have greater default risk than treasuries. Does it make sense to think that though they would of course be hit, companies like STWD can also step in to take advantage of price dislocations? Highly levered companies would possibly have no choice but to sell?
I hope I've gotten across the gist of what is going through my brain...
There was nothing to talk about, it was solid as a rock. But now that you've started talking it has tanked. CMO bounces back a lot better than most mREITs. Looks like the prepayments will go down helping margins. Just wish I had the divvy to reinvest today.
No, no new article. But if you read the comments section you find that with help Bronfman eventually finds the mistake. About 30% into the large # of comments. Now projecting 77-88 cents depending on what closing date is chosen. Perhaps he will come out with a new article.
I'm a MORL sufferer here but know the deal about holding long term for income. The shares were bought with money from selling AGNC.
I read your comments on one of the mREITs recently. I appreciated the comments you made. Oh, maybe it was on the downgrade news. Very informative. I have to say, it sometimes seems like up is down and down is up. That would explain why analysts can say things are looking so bad when they may not be. I am no expert and so try to learn from others.
I think investors are looking at recent earnings growth and deciding there is no compelling reason to invest in STWD now.
However, could it be that the company is just biding their time, waiting for higher rates or a special opportunity to lever up/expand? Like Buffett, maybe they are waiting for a fat pitch. In the meantime, they stick to their bread-and-butter businesses that give a nice return. So one can either stay in it now while being handsomely compensated or wait until some event/announcement happens that signals a return to earnings growth. Barring a market meltdown, this seems like it has about hit bottom.
I like MORL as well but the dividend will be shrinking some. AGNC and CYS cut, NLY will inevitably cut. I've been selling AGNC to buy MORL, they seem to move about the same.
I guess we theoretically see a bit of a run up to the July dividend?
How true. Goes down when rates go up but doesnt bounce back when rates drift back down. I've got a mix of mREITs, the only holding up well is CMO (agency ARM). I'm hunkering down, not lucky enough to sell and get in lower. Reinvesting the dividends.
There is no logic on wall st. I watched Alcoa soar over the years wondering what great thing happened. Well, nothing, just the powers that be decided to bid it up. Now I see it has come back down. Big money is put down on expectations. The banks have (probably) already had most of there uptick from higher rates.
The point? These mREITs were driven down before on much bigger moves in LT rates. The actual damage done to book value was far less. It is happening again. Except this time they were ready. Duration shortened, hedges boosted, leverage lowered. What Klumps sees as doomed lower dividends was mREITs getting ready for higher rates. Once rates have gone up they can sell the hedges to buy higher yielding paper, increase leverage, and increase duration. The path is painful. The smarter/luckier ones will get a better entry point. But I'm not in that category so I hold these for the income down the road.
Wow, where to begin. I don't even want to ask where you got those projections.
Cash is risk free (from default). Trying to apply an equity premium to it?
The 3-5 year treasuries are longer duration than an mREIT portfolio.
Either big or stupid money is taking these down with no understanding of how they work. Just shake out the weak hands.
I have a large number of shares and am holding. Reinvesting the dividends. Painful to watch it go down but I keep reminding myself that I am buying more shares, I feel comfortable with this because:
- discount to BV 15%
- leverage is down
- big picture, rates will go up but not by a huge amount
- I'm terrible at market timing
- no credit risk
- historically low duration portfolio
- spread is getting better now
- can't say that stocks and bonds have discounted interest rate increases
My goal is to increase the long term income stream. I see AGNC being weak due to rates finally being raised but in the long run the portfolio earns it back (duration). It will probably sell at a discount to BV for quite a while. Eventually sometime over the cycle the gap will close. I won't be reinvesting then.
Anyhow, I'll possibly be in a world of hurt but think the math is on my side in the long run.
I like the big debt repayment as well.
FFO could have been worse when you consider all the extra one-time costs. And Cole is still going, that should only get better.
Part of the lower FFO could have resulted from less income due to some asset sales.
Well, on the flip side I don't think they have anything to say that will result in a pop. I'm worried that the legal and consultant costs will make things look really bad. Still holding, things should get better in the next six months. Though it looks like they will be fighting the downturn in REIT prices.
That was a good joke, I couldn't believe I saw your name associated with a dividend announcement.
I want to see rates go up, LT faster than ST, to get a better yield spread. Lower LT rates now will keep the pressure on mREITs. Still, I hold them. There is a whole bunch of other stuff that needs to come down big time to approach the defensive characteristics of agency mREITs.
You certainly implied it. "You can expect a catchup..." Anyhow, you've turned nasty, I've nothing further to say.