mREIT Q2 2010 Preview

A friend forwarded one of the bulge bracket dealer reviews of the quarter just completed.  It was fairly upbeat, with a couple of earnings estimates increased (NLY and IVR).

Perhaps most interesting to me was the big divergence from other analysts’ estimates of quarter-end book values.

In my conversation with the institutional fund manager friend, we both thought the recent Annaly capital raise was dilutive to book value, and this analyst agrees.  In fact, he estimates their Q2 end-of-quarter book value at $18.87, a definite good news / bad news situation.

As you may know, another analyst opined that the $17.46 sale price for the recent secondary issue was accretive, which means his estimate of book value was a couple of dollars a share lower than the report I’m looking at now.


The rest of the group was a mixed bag, with a book value decline estimated for Two Harbors (dilutive secondary and GAAP earnings lower than dividend), IVR and MFA thought to be flat (they earned their dividends), and slight increases for CIM and ANH.

If this analyst from Credit Suisse has modeled the portfolios correctly, then all six of the companies (for which he publishes book value estimates) are now trading at or above their book values, once you take into account NLY’s recent secondary.

This has to be the most unusual sector rally I’ve ever seen.  After all,  current conditions are nearly perfect for the sector.  There is a  huge “natural” profit from the carry trade, and very little incentive for most borrowers to exercise their call.  The dividend yield that falls out of those conditions blows away virtually any alternative, yet all these companies’ stocks had to struggle to trade as high as their liquidation values.

My next internal assignment is to forget what I paid for these stocks.  I need to think of them based on the alternative investments, not where they’ve recently traded.



2 Responses to mREIT Q2 2010 Preview

  1. Patrick1980SC says:

    Do you think the 1.4% sequential growth in Hatteras’s book value is a good proxy for the remaining amREITs?

    • hhill51 says:

      We really can’t take any as a proxy. HTS happens to have an all-ARM book, so it might be a decent model for ANH, but fixed rate MBS were substantially different in performance last quarter, which is what led to the CSFB estimate of up 12% for NLY, just under 4% (increase) for ANH, but a couple of points decline for TWO.

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