I am a new shareholder. Sold some CMO and CYS yesterday/today to buy shares. I have real money into it. Here is my take:
It is my opinion that mREITs should only be bought at a discount to BV. My initial purchases have lost value as the discount widened. But as proof of why a discount is needed, many saw some serious erosion in BV with Q2. With the way ORC is run I believe they are able to defer the impact of high interest rate volatility. It finally caught up in Q2. Suddenly investors realized that oh this is an mREIT like all the others. It is not a license to print money. So they sold it down past the current discount ~20% that most fixed rate agency mREITs have. They were burned, so it is natural for the discount to exceed its peers.
Some like to point to the abysmal performance of mREITs over specific time periods but usually those start with the stock price selling at a premium to BV. That is where ORC is now.
After reading Scott Kennedy's take I decided that the odds are in my favor with ORC. No reason it shouldn't drift back up to the ongoing peer discount. In the meantime other companies probably have some dividend cutting to do. One would think ORC is ahead of the curve. Over a longer time period it could close the discount gap if it performs well.
I always thought that mREITs were not a popular target for shorts due to the fat dividend. Especially one that pays monthly.
I listened to the conf call.there is a lag time with ARMs vs fixed on the re-financing.
Isn't a high CPR a negative metric? They stated that the jump in CPR was almost entirely responsible for the short fall in earnings.
CMO and NRZ both benefit from higher rates.
Check out CMO today. They have Agency ARMs. Got hit with prepays due to rate drop early in Q2. I think NRZ will be in the same boat. That will hurt but their expansion of business may overcome it for this earnings announcement. I may be ready to sell something else to buy some shares if they get hit. This will pass when rates go up eventually.
Rates were low in Q1, which resulted in higher prepays. Showed up in Q2, should be gone by September. That affected core income.
BV loss was affected by rates going considerably higher in the quarter. They had lightened up on adjustable MBS to pay for buybacks. Therefore duration was longer and leverage higher. They got burned, basically. This will happen to every fixed agency mREIT at some point. If rates don't move around a lot then as the portfolio matures BV goes back up.
I have my answer. Insiders file to sell 2.36M shares. I guess the market knew but I didn't. I imagine it will be the usual thing about insiders getting to sell after a lockup period but this is certainly no vote of confidence in the prospects of the company when it is selling near a 52 week low.
I'd like to know. Both mREITs hurt and helped by higher rates were down today. Short term profit takers on the bounce off the low?
No news from the company. I don't track insider selling. I'm guessing that the run up prior to this tanking was due to the belief that the economy was finally going to take off. With employment weaker than expected and Greece putting a damper on rates it seems there are many more months of weakness ahead before we get liftoff. I believe I'll funnel other mREIT dividends into this holding.
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.