Mortage REITS; An Investment Opportunity of a Lifetime?
Am I going insane?? Has anyone been watching the agency mortage REIT's (e.g. NLY, AGNC, TWO..)? These stocks offer a very high dividend in the mid teens and their stocks has been hit hard because of the rising rates and taper talk. For a stock like Annaly Capital Mgmt. (NLY) the stock price is near the 2005 and 2000 lows. It is trading at 20% discount to book value, which are pools of agency MBS's that are marked-to-market and very liquid (hence, efficiently priced). What I am confused about the most is why are investors reducing their expectations for future dividend payments going forward? MBS's yields are up again therefore any new MBS purchases by these REITs will yield a higher book yield on the investment portfolio and cause the dividends to rise in the future. The rise in rates has already impaired the value of their book value and they had to take massive losses on their income statements, but now that much of the impairments have been priced in to their balance sheet (there could be more due to further rate rise but for now lets assume they stay flat), shouldn't investors be discounting high dividend cash flows because of the higher interest bearing MBS that these mREIT's will roll into in the near future? Short terms rates are going to stay were they are now for the next 2 years or so (based on the FED's guidance). These mREITS core interest income spread should rise if not stay the same, since their interest expenses are tied to the short term repo market. What am I missing? If interest rates rise today, shouldn't that increase their dividends going forward? Taking into account the distinction between rate rises and asset purchase taper, if the Fed does reduce their purchases of agency MBS's, wouldn't that only increase the supply of potential credits available for the remaining mREIT's to buy, not to mention at a lower price because the FED isn't there to compete with them anymore?
Colored line is Annaly's stock price/Black line in the picture is 10 US treasury futures (price not yield)
I reply with a thought especially for less sophisticated investors who will be drawn by this excellent title-line. Aside from respective dangers and opportunities of MBSs I only highlight the value of diversifying income sources. The public is often and easily drawn into approaches that work well for financial firms but less effectively for the public. If one explores "Life Income Mandates" you can also fit sillymonkey's discussion into this LIM stream. And it can reduce potential risks and drive increasing income along the way too. Briefly, "Life Income Mandates" is a foundational concept with global dividends, real estate &/or mortgage securities, global infrastructure (and in necessary circumstances also fixed-income & annuities). Some of the world's strongest and most successful pension funds align significantly this way and with reasonable risk & proven success over time.
Long TWO- best of the bunch. Other attractive opportunities with similar yields- all depends on the underlying MBS exposure. Just wait til those spreads move
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