As you know these calculations are theoretical based on simultaneous moves in both assets and liabilities - not sure they're a very good gauge of what would really happen in the real world.
The issue with "perfect" hedging is what economic force is left thereafter - merely evening out book value fluctuations doesn't establish an investment thesis - a few things like ROE and total economic return are missing.
I'd tend to put my money with managements I trusted and had confidence in rather than theoretical models that probably don't work.
I'm not sure if it's immaterial or not.
For all I know the share repurchase is an anti-dilutive vis-a-vis share compensation or whatever that adds value to the convert by disarming concerns that the strike price could be undermined.
Obviously it has something to do with the apparently very favorable terms on the convert since it was a linked transaction to the private placement.
Hardly a waste of cash if it enabled this quite favorable debt raise - and effectively lower pay rate, raised strike price or whatever.
The novelty of the linked buyback suggests it is neither immaterial nor a waste of cash.
Did you read the press release?
The Company also indicated that it intends to repurchase up to 1.7 million shares of its common stock with cash on hand concurrent with the offering of the notes in privately negotiated transactions with purchasers of the notes
I'm not promoting WMC in preference to anyone. It's just that their management has a point of view about the economy that they implement via their security selection, leverage and hedging policies. In any given environment they'll do better or worse than someone else situated differently.
They'll fare worse in an upward rate spiral than other hedged companies for sure -
I'm not saying they're worth the risk, the volatility or anything else (or that they're not) - I'm just pointing out that their higher core earnings offset to some degree the BV loss, a phenomenon completely captured in the economic return metric.
I think it's fine for WMC, AGNC/MTGE, CYS, TWO to have different macro views that lead to different postures in the market. I'm fine with most guys being more defensive than WMC. However, WMC's 700-800 bps yield differential buys it an offset to 1.5 - 2% bv impairment per month.
I don't think these guys position for spikey daily moves.
You and iwb have good points - mine was just that bv isn't the only metric that matters and these names aren't pure interest rate/bond plays - they have an active management element and aren't supposed to be all alike.
It's nuts for you to take the position that earnings don't matter - as they replenish what MTM portfolio moves take away.
A company with no BV volatility and no earnings isn't worth much.
They have much higher core earnings to offset BV loss - that's really the reason to monitor economic return rather than just BV impact.
NOI is a little complicated for ACAS given all the moving parts and not necessarily super smooth on a quarterly basis. Yearly may give a better view ...
Also, from the CC transcript, from an analyst's question:
Well, appreciate that. I guess, maybe rephrasing the question another way, it would seem that the market, if it were just valuing you on an NOI basis is neglecting the fact that there is a significant equity component that also makes money, but is it perhaps a little more opaque in terms of how it would actually add value coming through the form of fair value and perhaps what you're doing now changes that somewhat, so that investors can see the amount of equity or, call it, the amount of actual value you're creating by bringing those dividends into income. Would that be fair?
"Lack of progress toward that potential" sounds more like a share price valuation lament than an operating one. The disparity between BV and share price may be well founded, or it may be the result of confusion, complexity, misunderstanding - or whatever, but it does give rise to the essence of the an investable thesis - that the market is not currently valuing the company properly and that will change over time.
No guarantee of that for sure, but a lot of fundamental progress in liquidity, leverage, cost of funds, fair value, Europe, etc. etc. supports an argument that it's the market that has it wrong, not the company.
I hope you're doing well....
I'm a bit longer in the tooth as are the horses.....
About to head to our farm in VA for the winter...
There's an awful lot of focus on book value in the mReit space, deserved or not, and there are some very high yielding names trading below book.
So - I suspect many take a cursory look at NRF's stated P/B and bail, short, flee or whatever. A 1.6 p/b is vertiginous for some.
I also think all the "transparency" confusion, consolidating, etc. is likely befogging some.
I'm not suggesting such reactions are informed investment conclusions, but I suspect they play into the share price action.
The company's done a great job managing the balance sheet. It's awash in cash - the operating cash flow isn't really consequential at this point.
The stock isn't dropping - it's up 50+% this year.
It just isn't the kind of stock to have daily catalysts - it's like farming - you plant stuff and could grow crazy trying to watch it grow - but wait the right amount of time for your crop and you'll be harvesting.
As more non earning assets are put to use and long term investments begin to reveal value creation not recorded in GAAP numbers the operating statement should get progressively better and more consistent.
iStar has historically reaped large cap gains from time to in its harvests - and those are obviously lumpy - but I'll suspect some of that will start to liven up the income statement too, when the time is right.
So - don't get disconsolate over a year when there's been a lot of fundamental wood chopping and the shares are up 50%.
Obviously book value and dividend distributions don't exist in a vacuum. There seems to be a lot of excitement about comparing one company's performance to another - and then of course there's the issue of stock price - a variable sometimes seemingly animated by many issues outside company performance.
Here's my scorecard for economic performance - book value change + dividend - for Q3 for this bunch, as reported by the companies except for CYS:
CYS 2.35% (my calculation - .24 on 10.20 book)
So for all the excitement not that much difference, though there are disparate risk factors involved in the achievement of said return.
Risk assessments of possible performance in up and down scenarios might paint another picture..
Not sure why you're so unhappy. Basically the quarter was dominated by a writedown on ACAM based on revisions to expected management fees.
That revision was partially based on an expectation that the reits would buy back stock and shrink the net capital upon which management fees are based.
Good news for Europe.
Good forecast for Q4.
The share repurchases did occur - a brilliant and ongoing strategy by the company - so no point worrying about what NAV would have done in their absence.
The company is less leveraged, more liquid, more focused, etc. - all seems reasonable to me.
Probably analysts aren't themselves great alpha creators...
I don't think Kain would disagree with the concept, but alpha doesn't emerge quarterly on cue. Kain kept referencing over and over the idiosyncratic nature of this investing environment and the benefit of keeping opportunistically dry powder. I think those are reasonable observations.
Probably if everyone hadn't been drooling for a knockout quarter of some sort the results would have been better appreciated, as the KBW guy noted.
Well, as everyone knows net income is a GAAP accounting fiction, depending on Section election, particularly for a Reit, equity or mortgage, and even more particularly for a developer of long term projects.
As previously mentioned cash flow is much better, but realistically IRR is the dominant concern once operating needs are satisfied, not net income.
iStar isn't for everyone, is often misunderstood, doesn't fit metric shoeboxes very well, and is playing a deep game - the outcome for which will be revealed in due course but certainly not quarterly in regular meter.
It's "virtually promised" because you have to draw inferences from what was said on the cc, but given the snippets below, the comments about buying shares being a good value, it's not hard to infer than retention of the ROC part of the dividend in order to purchase stock is on their radar. They can't feasibly pass out capital to shareholders as ersatz dividends while shrinking their capital base via buybacks.
Just one last comment on the dividend, before I turn it over to questions. In Q3, we earned $0.36 per share in core earnings per plus drop income, but the board declared $0.34, which is very similar to Q2. We see the ROE on the business continuing at around the current levels, as I've mentioned the spread environment is very good, but the board could chose to retain more given the volatility in the markets.
... So you should really look for this year, where we're based on our distribution to date, that our characterization will probably come in around of the 70% toward income and maybe about 30% return on capital. That's obviously without any insight into the Q4 dividend at this time.
I'm not sure what troubles you - there are many good reasons to sell, usually one good reason to buy.
CYS virtually promised a divy cut in their CC when they indicated that their shares stacked up very well versus other capital deployments and indicated that 2013 dividend attribute looked to be about 30% ROC.
I read the article and obviously it didn't plow any new ground. The "game seems to have changed" translates to interest rates are rising and not falling which while a change from the last few years really isn't a new phenomenon.
A couple of points:
1. It seems to me one has to evaluate total return. When a company like WMC is paying 22% one must expect bv/share price loss, so the mere fact of the occurrance of the later isn't some sort of fatal disease.
2. In my case I'm aiming for 15% total return - the components of such return will vary over time.
3. I like the tax efficiency of the Reit model;
4. A dividend "cut" is tantamount (mostly) to reduced earnings. So what? The fantasy that a company can smooth earnings magically over time isn't important to me, but tax efficient return over time is.
5. One has to believe that an actively managed leveraged and hedged bond trading desk can make sense to believe that mReits can succeed through different environments.
So it seems to me that a "prudent investor", retired or not, would consider buying these stocks "now", at a 34% discount to their prices a few months back, because that prudent investor believed, correctly or incorrectly, that the companies can navigate the management challenges of their leveraged bonds portfolio to an acceptable total return, possibly supplemented by the thought that current prices overly discount the challenges in the space and provide attractive entry prices.
I think it will be interesting to see what Q3 brings for the various names and what differentiation emerges in the disparate management styles.
Rus - I'm not sure how it's "silly" to reload the authorization to enable the company to buy shares if/when it makes sense. It's not like they're hellbent to spend it all immediately as $16MM remained on the old authorization, and they may in fact not spend a penny. - so it that sense it could in fact be "window dressing" - but probably not the silly type.
bob - I think you're really addressing two separate issues - stock based compensation and the buyback - which have different elements.
As to the compensation size and type there are many differing opinions. To the extent that share awards are in excess of what might have been paid in cash - free money, as it were - I think there's a tenable argument against that method. However - if stock compensation differs only in kind and not in quantity from cash compensation then I don't think there's a problem.
As to the buyback generally - I think it's been a terrific tool for iStar. Over the last few years they've retired a significant percentage of the share float at huge discounts to BV - thus enabling them to moderate the impact of operating losses and writedowns on per share book. It's clear that Jay regards the acquisition of shares to be an investment decision which competes with alternative asset allocation but about which iStar has greater underwriting insight - perfect knowledge as it were - than outside investments.
In the current case I think it's prudent to reload the authorization in case opportunity presents itself.
As to dividend - I'm prepared to wait a few more years as I think iStar has tremendous reinvestment options within its book.
Just my two cents.
alf, I'm not sure your analysis quite captures the circumstances.
First of all - a lot of the bv decline has to do with basis widening - i.e. MBS performing worst than treasuries - and if you listened to a bunch of cc's you'd know that is almost impossible to hedge.
Secondly - you hedge your view of the market - and the volatility in the bond sector was not exactly obvious to most at the beginning of the year.
Third - no hedge is perfect or free. A "delta" neutral portfolio would be almost impossible to achieve since hedges are dependent on models which themselves are unpredictable (e.g LTCM). It wouldn't really a business model as much as a bunker model or a fnaciful "risk free" trade.
Fourth - what's the time frame? Q2 and Q3 weren't so hot but recovery is possible. Again - many managements suggest that the time frame for evaluating performance is "an entire interest rate cycle" - not the most volatile quarter or two within a cycle.
Next - what's the starting point? Share price in excess of BV swinging to below BV is really outside the pale of management.
Next - companies like TWO with negative duration have gotten slammed too.
I agree that the jury is out on how these guys will have performed when all is said and done, but I do believe that a tax efficient leveraged managed bond portfolio has its appeal.