Although Merrill Ross thought an offering at $17.70 would be nearly BV neutral (ie, it wouldn’t add or subtract shareholder equity from current holders), I had a call from a major investor yesterday that thought differently.
A word first on the actual price – that $17.60 I used was from a Bloomberg bare bones pre-market news piece, but it was not confirmed by the company. According to some retail message board posters, the company’s Investor Relations person was evasive when asked directly what the price was.
I have no idea how to interpret the company’s failure to confirm the offering price, but it makes my call with that big investor even more interesting. He was guessing that the book value of the company was more like $18 a share prior to the offering, which would make this sale dilutive to current holders on more than quarterly earnings per share.
I have to say that I think book values, especially for HTS, NLY and AGNC, could be quite a bit higher today than we might think, because spreads are just so darn tight.
Offsetting that is the fact that tight spreads, by definition, mean less spread is being captured in earnings, so the effect is a wash, and then only if the management invests the extra capital it gets from price appreciation (increases leverage). If they don’t buy more MBS when the price increases, they’ll show more shareholder equity, but lower ROCE. The balloon-poking problem all over again.
Make no mistake. Spreads are tight. This article by Jody Shenn from the day of the secondary puts them at the second-tightest level ever. I got a market snapshot from one the Primary Dealers today that shows them even tighter now, sitting at just 61 basis points over ten-years. In case I have to remind anyone, ten-year Treasury Notes are hovering around 3% these days, translating to a whopping 3.60% or so for fixed-rate MBS investors.
The rates for borrowers are also setting record lows. Today’s release of the Freddie Mac weekly survey shows those 30-yr fixed rate MBS that yield 3.60% are based on borrowers paying an average 4.57% with 0.7 percent origination “points.”
ARMs give no place to hide your money, either. This week’s average 1-year ARMs rate (to the home buyer) is just 3.74%. That puts the ARM MBS yield into that unheard-of neighborhood of 3%.
All of which leads to the question my friend and I were asking ourselves:
What opportunity did Annaly see to invest new capital?
The market is so rich that I’d be worrying about the money I had to reinvest due to regular principal paydown coming in off that monster ($55 billion+) portfolio.
Why in the world would I want to create the problem of finding value with another $8 billion?
Buying at the “tights” is the bond market equivalent of buying stock at the highs. Unlike stocks, though, a bond setting new records for tight spreads absolutely cannot simultaneously set records for earnings afterwards.
Just the opposite.
I should note that Merrill Ross reiterated her price target of $20 a share in yesterday’s brief note on the secondary. Maybe so.
At least these stocks aren’t trading at book-and-a-half or two times. If they were, though, I would be buying with both hands when a secondary knocked the stuffing out of the price, because investor-pleasing per-share earnings increases would almost certainly follow. In this situation, not so much.
Annaly has a history of surprising, even paying a level dividend a few years back in a quarter when they lost money and did a secondary. The market rewarded them with a nice price bump, so my dislike for paying out money they weren’t earning was just my own problem, apparently.