In the continuing search for new ideas, I've stumbled onto an industry-wide insider buying of mortgage REITs (AGNC, TWO, WMC, AMTG). These companies, which borrow short term to buy long term mortgage-backed securities, are in effect leveraged mortgage lenders/banks. They are an implicit bet on the steepness of the yield curve, namely that short term rates (<1 yr) remain (much) lower than long term (mortgage) rates (5 yr+).
Such companies have existed since 2009 or earlier and more have since spun-off and/or gone public in recent years. They have fantastic yields (in 2010, AGNC was yielding 20%+, 16%). In the search for yield, they are near the top in outright securities that retail investors can buy. This is of course not without danger, as seen near last year's rise and fall with the announcement of QE3:
The prevalent fear is that QE3+ will crowd out private investors and reduce the spread above (and therefore dividend). The subsequent fall, however, has given way to mass insider buying.
Perhaps with QE 3+ already announced, the maximum effective of the fed has already been discounted and it only leaves the spread to remain wide? Indeed, wouldn't any Fed unwind start with QE reduction, allowing long term rates to rise before short term?
Of course, the implied leverage, funding requirements are just a few of the risks that can weaken this investment. What do you guys think?
Disclosure: long AGNC, TWO, WMC, AMTG
*Icon from http://blogs.terrapinn.com/total-real-estate/2012/09/20/malaysian-real-…
I've been accumulating a very large position in AGNC and NRF since late 2011. They have been by FAR my best performers, and the dividends have been icing on the cake.
I bought in to NLY about 18 months ago..it has really taken a beating recently, so I'm barely positive (if at all), despite collecting 15% dividends on it for a while now
I was long NLY both common and preferred and eventually sold sometime last fall because of my room mates incessant going on about how NLY's business model was like "picking up pennies in front of a bulldozer." That yield is sweet though.
The MBSes are guaranteed and the spread is probably going to continue to exist. Short term credit crunches can really cause them headaches, but it's not as if the mREITS are unaware of this fact.
Hmm, thanks for pointing this out. I will keep an eye on it.
You're missing like multiple Mortgage REITs.
Who are the insiders doing the buying? REIT management? REIT Mgmt Co Management (woah, meta)?
Also, aren't we supposed to like not just buy something because we think people who are better able to make good decisions are themselves buying it? Isn't that like.. the definition of being a sheep/lemming/whatever?
TWOs business model is quite different than the others you list. It is run by a bunch of hedge fund guys inside a hedge fund company (pine river) and can invest in non-agency paper where there's more upside (and risk) but less leverage needed. They also have another mREIT called silver bay (sby) where the dole strategy is buy-to-rent...which I think is extremely timely and their portfolio of properties is excellent (nearly impossible to replicate today). That's why I think TWO is head and shoulders above the others, more upside with less risk/leverage and expert, top-quality hedge fund trading and risk systems. (Full disclosure TWO is by far my largest holding for past 2+ years)
Also check out NRF and NCT (run by fortress) ...
All have rallied a ton, still good values but would def look to load up on any weakness or broad market sell off
Leveraging up on mortgage backed securities? Sounds foolproof!
I'd rather go with a reit that owns property / buildings. The ones I have had the pleasure of looking through have been getting hammered and management has been selling shares so who knows. I'm no real estate expert but given the current economic climate in the states it seems like commercial real estate demand is soft. I think it was Sony who just sold their 750mm nyc office. Every time a company lays off a portion of their staff the $/sq ft becomes more and more inefficient with each axing.
Residential is weak imho as well. No one is sure where their next meal is coming from, how long they will have their job for etc. Americans spent the past few years paying off debt incurred during the boom while seeing a decrease in their take home pay and a healthy amount of inflation. Those are the lucky ones who didn't have their 401(k) plans wiped out. Plenty of statistics on gen Y not settling down with one another - giving rise to the need to buy a mcmansion in the burbs.
I personally wouldn't touch real estate but what do I know. Just my opinion, I'm not an expert.
/rant
Shares were trading at deep discounts to book. Case closed.
discount yes, but for example agnc book is 11.2B, market value is 10.8B (insiders bought around the 31.7 level) so not exactly deep. That may indeed of a margin of safety for those guys though, so fair enough.
two does have nonagency, but from fact sheet on investor relations site we see 2B non agency vs 12.8B agency, so agency still is driver. all of the reits are managed by xyz capital management - pine river's mortgage hedge funds were tops in 2012, though, so perhaps there is an argument to better management.
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