Update on Anworth (ANH)

Their earnings announcement and conference call was after the bell today, and they proved again that they are the most conservative of the bunch.  Leverage declined to only 5:1 (others run 6:1 or even close to 7:1).

They did announce the increase in book value I expected, with the September 30 at $7.58 per share.  Backing out the 28 cents of dividend paid in October, we have $7.30, which is still above where the stock traded after hours, from a regular session close at $7.04, and virtually all day trading under $7 a share.

Of all the amREITs, Anworth seems to be taking the eventual exit of the Fed from the new-issue Agency MBS market most seriously.  When you consider that the Fed has been buying virtually all the new production, and in some weeks twice as much as the lenders produced, that’s more than an 800-lb. gorilla in the market.  It truly is the market.

We know the eventual level of Fed investment in MBS is targeted at $1.25 trillion, and that they plan to stop buying by March.  They may even have something to say about removing their crack pipe from the MBS market in their statement tomorrow.

The good news about this whole situation is that the Fed doesn’t actually have to sell their MBS to unwind the position.  That’s distinctly different from the situation when the Hong Kong Monetary Authority bought up stocks on the Hang Seng and screwed the hedgies.  Eventually they had to sell.  Mortgages, and especially Mortgage-Backed Securities, will retire themselves.

In fact, they do it relatively quickly, typically taking five to seven years to be mostly paid off.  If the Fed was smart enough to issue plenty of 5 and 10 year Notes to fund its MBS purchases, they can actually be a very profitable hedge fund themselves, holding 4.5% mortgage yields and paying 2.5% on average to fund them.  On a trillion dollars, that’s $20 billion a year in positive carry.  But let’s not tell anyone, or they might think we can actually pay for this foolishness.

However, the one thing we know is that when the Fed stops buying every MBS the banks can make, prices are likely to drop, and yields go up.  Whoever has the least leverage and the most cash to put to work will be the best off.

Anworth seems determined not to get caught in the rush to exit.

PS: Even being the most conservative among the peer group, their current $1.40 a year dividend level looks like it can continue or only drop a few pennies a quarter, making their yield at the adjusted book value price ($7.20 per share) a solid mid-teens.

If they keep their powder dry, they may even get fatter spreads next March and April when the gorilla goes home, and give their shareholders a pleasant surprise while we are all reading horror stories about MBS investors that didn’t get out of Bernanke’s way when he decided to leave.



2 Responses to Update on Anworth (ANH)

  1. Tom Drake says:

    From a retail yield investor/speculator view point, many if not most of the high-yield vehicles like MLPs, CEFs, oil & gas trusts, mortgage REITs, and king-of-the-pack junk bonds tend to trade with and exaggerate equity moves more so than yield moves. Their inherent or implied leverage and credit scores play a role. Last year, of course, except for near dollar cash and Treasurys, everything tracked everything.

    Since you appear to expect some considerable discounting of selected mortgage REITs beyond near book value levels, what is your rationale for that expectation? Is it FED exit (from zero Funds) fears and realities or an equity pounding in the current environmemt or something else, or all of these?

    On a related topic, Capstead has this security: Capstead Mortgage Corp., $1.26 Cumul Convertible Preferred Stock, Series B Ticker Symbol: CMO-B CUSIP: 14067E308 Exchange: NYSE. Unlike most preferreds this one pays monthly at a current rate at market of nearly 10%.


    • hhill51 says:

      I really like that Capstead Pref B. I think they are the most technically capable management team in the group when it comes to hedging. ANH really sticks to its knitting, and protects carry spread only with their hedging, letting lowest leverage in the group be their defense against principal risk.

      As of yesterday, fixed-rate Agency MBS were trading at Option-Adjusted Spread of LIBOR minus 30. In other words, the borrower’s option to repay the mortgage early is worth more than the “raw” spread over funding costs. NO ONE can afford to own these things and actually hedge out all the risk.

      Here’s a good article on housingwire.com that explains the issue, including the amazing fact that the Fed bought more MBS than were available from April through July.

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