Any ideas how to calculate the tax effect of this transaction? Will it be taking the FMV of KMI shares + cash received and subtracting your cost basis (adjusted for K-1 items over the years)? If so this will be a huge tax bill as I've owned KMP since 2008 and my cost basis is close to zero.
When interest rates rise, my basic understanding is that the value of the underlying mortgage securities will decrease. It also seems that the current PPS of mReits trade partially on the BV. Thus people have been implying that when QE starts to taper off the BV will get hit and there will be a sell off. To counter this, the net interest spread should widen and hopefully the dividends would increase.
But, it seems that before all of the QE’s the PPS of the mREITS were higher. So, my question is how were these valued before QE? How could the PPS be higher if the BV was lower (for example NLY was between $16 and $18 from 2002 – 2005)? Does this imply there would be some short term pain as people don’t understand that the mReits are in better shape without QE?
The same thing happened in my Merrill Edge account. The reason is that while the press release said the conversion ratio is .049:1 the actual conversion is .048825853. So they originally gave you 49 based on the .049 and adjusted it based on the actual conversion ratio. I hope that helps.
Based on that it seems that history tells us that there won't be an SPO this close to ex-date. I wonder if there comes a point that the price is so high they just have to take advantage and do an SPO no matter how close to ex-date. I think at today's price of $7.58 the stock is about 17% above book value. Other than TWO, I can't think of any other mREITs that high and most are trading right around book value.
In just under a month this stock has run from about $6.85 - $7.60. That is highly unusual for this stock and it obviously makes everyone think about if there is an upcoming SPO. So to begin that debate here are some reasons why doing one right now wouldn't make sense:
1. Per the last earnings release they said that the last SPO was taking longer to invest. So to do another one right now wouldn't provide much value.
2. Ex-dividend is only a couple weeks away so why do a SPO right now and be forced to pay a dividend on the new shares with no corresponding income from putting the proceeds to work. The ideal time to do the SPO would be just after Ex-Dividend.
Reasons to do an SPO:
1. The price is above net book value and would be accretive.
2. The yield has slightly expanded since the beginning of the year and it would be good to take advantage.
So let the guessing begin and thoughts would be appreciated.
Doc...sorry to say I am someone who lurks the board and rarely posts and I don't know who Hgft101/hxh is?? But I am familiar with your strategy and was just trying to look for other ways to try and protect myself without putting out much money. The stampede out of these stocks can be sudden and I don't want to caught with my pants down. But I hate paying so much for those Puts....especially when like you said 85% of them exipre in a loss position.
Or I'm just trying to understand if my current way of thinking is correct. For example it seems from other posters that the big risk is how fast these rates increase. So how would one define a fast increase? What "tells" should we look for and follow to try and stay ahead of the crowd?
Just 1 word of caution....you can't always buy it back at the lower price equal to the dividend. I have tried this strategy and many times I have seen the price open on ex-dividend at a difference less than the dividend and then over the next couple of days make back 100% of the dividend and I never had a chance to get back in.
With the latest labor reports and signs that the economy is recovering there has been a lot more media focus on the fact that the Fed will scale back or stop its quantitative easing sooner, ex. late this year, rather than later, ex. late next year. So I wanted to open the discussion regarding the good and the bad of interest rates going up, the effect on the prices of mREITS and the potential strategies to protecting ourselves.
The good (as I currently see it):
There is a chance of increase in spreads
There will be less prepayments
The bad (as I currently see it):
Book value decreases
The yields increase too fast and the mREITS can’t take advantage
Investors will sell mREITS and move to more stable income producing alternatives that benefit from the increasing yields
The possible effect on prices:
I would suspect to be some sort of panic or herd mentality selling as rates rise so a short term sell off would be in order. But over the longer term if the mREITS can take advantage and increase the dividend then that should stabilize and potentially increase the price over the longer term
Strategies to protecting ourselves:
Purchasing long term puts, probably a year or so out
I’m interested in hearing people’s opinions and possible strategies.
I understand the tax treatment of the distinction between ordinary income and return of capital. The question I have for the discussion board is what causes the distinction between ordinary and return of capital. In Q3 and Q4 more and more is being treated as return of capital. Does this mean that NYMT is having a hard time maintaining the same dividend payout based on earnings alone so they are returning capital to make up the difference?
Mark and B&W,
Thanks for the discussion. I guess the one part that is still confusing me (and I think Mark you addressed it in your response regarding the mechanics of the lines of credit) is when B&W says:
"And IMHO there is more value at today's price because they have sold additional unitss and received $214 M cash in preporation of the next opportunity.
There is no dilution if the money received is put to use wisely"
I thought they clearly said in the press release they were using the money to pay down debt. So that was why I was just looking at the cash flow between the money saved on interest and the new dividends required to be paid with the secondary. I will digest more of what you both have contributed and while I do understand how MLP's and REIT's work in terms of why they do secondaries I was just confused specifically when they said to pay down debt. Typically I see the use of fund for further acqusitions or investments (which when invested at higher ROI's is a winning model). I'm sure I will understand the nuances you are providing as I digest this further.
Thank you for your post. Let me say that I am long VNR and I'm a shareholder. But I wanted to continue the discussion and address the points you raise:
1. You say I'm not factoring in the acquisition, which will lead to growing distributions. That would have been the case even if they didn't do the offering.
2. You say nothing bad happened between 4pm yesterday and now to cause a price reduction. But in fact, something bad did happen...dilution, which doesn't seem to save the company money based on my simple cash flow calculation.
3. You are assuming the price will rise back up to yesterday's closing price. Nothing is a certainty but I do know if they didn't do the secondary then the price would not have dropped by $2.26 that you state.
So in my simple way of thinking the only thing this secondary did was to pay off debt, which is what the press release stated. If that payoff of debt doesn't save money then how is that helping? As ruswise stated it is to free up cash for acquisitions, which could be a possibility, but you can also do acquisitions via stock. Maybe the answer is that as a company you just don't want to be carrying a lot of debt, even at the expense of being worse off fron a cash flow perspective.
But acquisitions don't have to be done with cash. They can use stock to do an acquisition, which would be a more direct route, probably cheaper since you are not doing a secondary, and not freaking out investors who hate secondaries. Typically I've seen secondaries as a way to grow the business or if it is to pay down debt there is a net savings.
Some back of the envelope calculations on the offereing. If net proceeds are $214 million and that is used to pay down their debt that would save about $16,852,500 of interest ($214 million x 7.875% interest on senior notes per the Q3 10Q filing). But they have to pay dividends on the 8 million shares at $2.43 per share per year. That will be $19,440,000, which is more than paying the interest on the loans. So I'm trying to figure out if this is really a good thing??
Thoughts would be appreciated or corrections to my simple calculations.
Here is the link to the SEC filing on 1/14:
Jack....great post and it helps answer questions I've posed on other boards as to why an increase in interest rates hurt mReits. As a follow up to your post where do the hedges come into play? If the risk of a rapid increase in the rates is bad wouldn't that be what the hedge is used for?
Thanks in advance.
So then what would be the best case scenario for mReits? For example Operation Twist is bad because is compressed the spread. But it is also bad when short term rates go up. So would the ideal situation be a fixed spread between ST and LT rates, no matter which way the rates moved?
I'm not sure I understand how the hedge could work against ARR. The hedge would be either:
1. To protect against the tightening of the spread. This is probably more likely due to the economic environment and Fed actions. So if the spread widened then yes, ARR would lose on the hedge but wouldn't this be offset by a lower prepayment rate as well as deploying capital into higher yielding investments?
2. To protect against the widening of the spread. So if the spread widened then they would make money on their hedge as well as a lower prepayment rate and deploying capital into higher yielding investments.
So, under each scenario it seems that it is a win for ARR. So I'm still unclear how it hurts mReits if the spread widens. I also tried to look for the post you were referring to and could not find it.
I have heard that when spreads compress this is bad for mReits and I understand why. But I've also heard that it is also bad when interest rates rise quickly. Can people help me understand why? I would think this means that the mReits can leverage less and earn more on the spread...isn't that a good thing? If it is because they are already fully invested and have no cash to take advantage of the spread couldn't they just do another SPO like they do now?
If my understanding of mReits are correct then in simplified terms they make money on the interest rates in which they borrow money based on short term rates and leverage and purchase long term mortgages. The income they make on these long term mortgages covers the operations, and thus the dividend.
So my question is that as there are more and more mReits,like AGNC, NLY, ARR, TWO, etc, and as these companies do more and more SPO's, is there a point where there are no more long term mortgages to purchase? I mean there are only so many houses out there and a lot are in foreclosure with no mortgages. Thus, could there be a point where the money they raise on SPO's can't be invested and the dividend on the shares outstanding eventually can not be paid. Is this a bubble in a way?
Thanks for the input in advance.