April Newsletter Part 2: Let's Take Advantage of Panic Selling to Get 2X Capital Gains and Get MORE 20%+ ANNUAL Yields like USAC!
Dear Subscriber,
One of investing heroes and mentors is billionaire distressed debt investor Howard Marks always says (as he did today in a note to his investors today) "I always buy distressed debt and equities buy where there is unambiguous compelling value--why wait on a fat pitch down the middle?"
That's the opportunity we have in the mortgage REIT space right now (OK it was better this morning but we are not mREIT CEO mind readers and our PFFA PFFR units soared 20% and they have mREIT preferred in their portfolios).
LIke Mr. Marks says, with blown-up residential mortgage REIT equities and preferreds we have UNAMBIGOUS 50-100% upside valuations when we get to the "other side" aka the post-COVID 19 economy next year. Better yet, we are getting paid 20-40% to wait for a real vaccine for the COVID 19 virus in a year or later.
These mREITS and their preferred stock are a fat pitch because:
1) The FED is buying mortgage-backed securities (MBS) at $80 billion a week with an unlimited capability to buy as much as they feel they need to ensure book values and liquidity
2) We just got the book values from our mREIT research boutique provider and the panic selling took our favorites 50% or more below new book value (mREITS in a calm world sell at a slight premium to their book value because of their hedge ultra-high yields) and
2) The FHA came in today and said they will become the servicer of record for the mREITS that own mortgage servicing rights (SRs) that they are still liable to pay bondholders if mortgages they are servicing are in temporary forbearance (PS--forbearance is not forgiveness of payments--they get tacked onto the existing mortgage note or added to a mortgage note paid off at property sale)
The announcements we've heard so far for recent book value are quite varied. The smallest losses were in the 25% to 30% range. The largest losses were in the 55% to 60% range. For reference, here's a quick table for REITs that provided information recently (3/25/2020 or later). Here are the Q4 valuations:
| Ticker | Approx Book Value (BV) Stated Change |
|---|---|
| AGNC | Down about 25% (based on tangible BV) |
| ANH | Down about 40% for common |
| ARR | Down about 45% (based on "above $11") |
| ORC | Down 27% to 28% |
| TWO | Down 55% |
| WMC | Down 55% to 60% |
| NYMT | Down about 33% |
| NRZ | Down about 25%to 30% |
These estimates are coming from management, so we can be extremely confident that they are reasonable (fiduciary laws and liability) Investors who think these companies are dead must not be hearing management.
Then we got this from the mREIT industry leader Annaly Mortgage--where I have many inside sources who have corroborated this letter (from my 23 years in Maryland).
Dear Fellow Shareholders,
Following the end of the quarter, we wanted to provide an update to investors and key stakeholders of the firm reaffirming our confidence in the strength and resilience of our business during this period of dislocation in mortgage and credit markets.
Annaly is an industry leader with a differentiated platform. We have a more than twenty-year track record managing Agency MBS, interest rate, short-term financing and credit risk over many cycles. The size of our capital base and deep financing relationships, along with our measured decisions with respect to managing the composition of our portfolio and risk profile, have been critical to our ability to successfully navigate through environments like the one we face today. While the operating environment has been challenging and the situation is dynamic, Annaly continues to benefit from its robust balance sheet, prudent risk management, and strong liquidity, which has been further fortified over recent weeks.
In the spirit of continued transparency during this time of uncertainty, below are preliminary updates on our business and financial performance, which demonstrate our ability to successfully weather these uncertain times:
Portfolio composition. Our portfolio is well-positioned with approximately 93% of our assets as of March 31, 2020 comprised of Agency MBS, which have seen both improved liquidity and valuations as a result of supportive actions taken by the Federal Reserve. Since the beginning of the year, including during the month of March, we have proactively reduced the size of the portfolio to manage our leverage profile. As of March 31, 2020, our total portfolio1 was approximately $99 billion, compared to $128.7 billion at December 31, 2019, and our repo balance was accordingly reduced to $72.6 billion from $101.7 billion at December 31, 2019.
Economic leverage. We estimate that on a preliminary basis our economic leverage ratio was reduced to between 6.8:1 and 6.9:1 at March 31, 2020, compared to 7.2:1 at December 31, 2019, representing modest leverage relative to our historical levels as well as peers.2
Liquidity position. We have maintained a strong liquidity position, with cash and unencumbered Agency MBS of $4.6 billion and total unencumbered assets of $7.2 billion, as of March 31, 2020. Additionally, our repo operations have been orderly with no collateral or margin issues (PS--thanks to the Fed's unlimited QE).
Book value per common share. We estimate that on a preliminary basis our book value per common share at March 31, 2020 was between $7.40 and $7.60 compared to $9.66 per common share at December 31, 2019.
GAAP Net income (loss) per average common share. We estimate that on a preliminary basis our net income (loss) per average common share for the quarter ended March 31, 2020 was estimated between $(2.40) and $(2.60), compared to $0.82 per average common share for the quarter ended December 31, 2019.
Core earnings (excluding PAA) per average common share. We estimate that on a preliminary basis our core earnings (excluding the premium amortization adjustment, or PAA) were estimated between $0.20 and 0.21 per average common share for the quarter ended March 31, 2020, compared to $0.26 per average common share for the quarter ended December 31, 2019.
Cash dividend. As previously announced on March 16, 2020, we declared the first quarter 2020 common stock cash dividend of $0.25 per common share. This dividend is payable April 30, 2020, to common shareholders of record on March 31, 2020.
Repurchase program. Annaly has a $1.5 billion share repurchase program, which was authorized by our Board of Directors in June 2019.
Per share amounts at March 31, 2020 are based on 1,430,424,398 common shares issued and outstanding as of such date.
We hope you remain safe and look forward to speaking with you on the Q1 2020 Earnings Call later this month.
Best,
David Finkelstein
Chief Executive Officer & Chief Investment Officer
April 7, 2020
Then the FHA Director sent this note this morning
Mortgage Servicing Bail Out
Federal Housing Finance Agency Director Mark Calabria said has plans to address concerns raised by the mortgage industry over servicers' ability to handle rising forbearance, but it's not a liquidity facility, reports HousingWire.
Instead, the government-sponsored enterprises Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) may transfer servicing away from companies that are struggling with handling advances.
The plan is similar to that of Ginnie Mae's program to help servicers that are faced with forbearance on loans backed by the Federal Housing Administration, Department of Agriculture, and the Department of Veteran Affairs.
The FHFA has been overseeing Fannie and Freddie since the government took control of them during the 2008 financial crisis.
"We continue to monitor Fannie and Freddie servicers," Calabria said. "We are, at this point, comfortable with our ability to deal with any servicers that may have distressed so that we can either turn them into sub-servicers or transfer their servicing to other parties."
What does this mean? It means that FHA would pay the forbearance payments!!
This Is Going To Be An Economic Gutcheck Q2-Q3 Without Question
Yes we are in full agreement with BofA's forecast for April May June Q2
The deepest recession on record': Bank of America slashes forecasts, now sees up to 20 million jobs lost, 15.6% unemployment, and a shrinking economy for 3 straight quarters
Bank of America now expects US gross domestic product to contract for three quarters, with a cumulative decline of 10.4%, it said in a Thursday note.
The bank also said as many as 20 million jobs could be lost because of the coronavirus crisis, sending the unemployment rate to a high of 15.6%.
"This will be the deepest recession on record, nearly five times more severe than the post-war average," the Bank of America economist Michelle Meyer wrote.
After assessing consumer and other data over the past two weeks, Bank of America said it now sees the first-quarter GDP sinking 7% and continuing that decline with a 30% drop in the second quarter. It will rebound slightly in the third quarter but still end up at -1-2%, according to the bank.
Here is the key statement:
"We think there is more to come," Meyer said. "Given the severity of the downturn, we think more fiscal stimulus will be needed." More tax rebates, further expansion of unemployment benefits, and more funding for small businesses are "potential possibilities if the depression-like slowdown persists through the summer," she said.
Yes, we agree with Bank of America that the total response from Washington + Fed will total $3 trillion to $5 trillion, or 15% to 25% of GDP, pushing the deficit to unprecedented levels. She continued: "Beyond that, other stimulative measures such as a payroll tax cut or a major infrastructure bill could be needed to resuscitate the economy."
Reality Check: But We Are Investing NOT FOR Today's Pandemic Economy. We are investing today for the POST-Pandemic World next year
Conclusion: The KEY bridge to the "other side" or what I now call the Post-Pandemic world is the Federal Reserve making sure that
1) The $15.8 TRILLION mortgage market stays functional and liquid and
2) The $5 trillion too-big-to-fail energy-transportation infrastructure stays in business BEFORE we get to the Post-Pandemic economy.
It's time to take MORE ADVANTAGE of generational low values in systemically important companies at incredibly low valuations. Look--we Just KILLED IT by bravely going into USAC under $5 with $2.10 guaranteed dividend--our preferred PFFL PFFA PFFR plays are killing it too
USAC: Buy Under $8 with $15 target and 30% yields
PFFA: Buy Under $15 with $25 target
PFFR: Buy Under $19 with $25 target
PFFL: Buy Under Under $16 with $25 Target
Actions to Take: BUY Mortgage Reits at Insane Valuations and Yields 18-30%
Buy 2X mREIT REML Under 3$ with $6 target The easiest way to play the mREIT comeback is this ETN.
BUY Annaly Mortgage (NLY) Under $6 with $9 target
Buy New Residential (NRZ) Under $6 with $12 target
BUY Two Harbors TWO Under $5 with $7.50 target
Buy NYMT under $2.25 target $4
NYMTO Preferred: Buy Under $15 Target $25
Chimera (CHMI) Buy Under $6.50 with $10 target
Assuming 30% dividend haircuts, these are all STILL yielding 18-28% yields locked in because they are REITS that have to pay out 90% of their income.
Be Howard Marks--be smart while others cower and hit the fat pitch! And oh yea--have the Fed and the FHA covering your backside. !
WHAT a week!
Martini is served!