Public Service Announcement

I thought about calling this “PSA” but I thought that might just appeal to potential customers for Dendreon’s customized vaccine, Provenge.

No, this is about mREITs.

First, I have seen a number of “scare” articles and comments about dividend taxation that lump mREITs in with other dividend paying stocks, suggesting that the stock prices are going down because the tax rate on the dividends may be going up.  This is patently ridiculous, and every REIT holder should know this by now.  Since the beginning of time (1960 in REIT world), REITs dividends have been taxed as ordinary income, not as dividends per se.

That’s how they avoid paying tax at the corporate level, since they pass through at least 90% of their income in each calendar year to shareholders.  Income investors love that, in part because the REIT (and BDC) management doesn’t hold onto the money and potentially do something stupid with it.

The bottom line is that if you’re in the 35% tax bracket, you’re already paying a 35% rate on your dividends from REITs and BDCs, unless you hold them in retirement accounts.  Duh.

The other reason I’m putting out this special announcement is that

Merrill Ross at Wunderlich is out with a rare mid-week comment on the sector, pointing out the buybacks which have already begun.

She’s also shifting her emphasis from her normal book-value related recommendation to a “get it while you can” approach. She recommends the highest yielders for now.

Here’s the “money” paragraph from Merrill’s note, with recommendations based on last night’s closing prices:

Top picks. Under current market conditions, we would only purchase small positions and scale in over time, because volatility is all to the downside. Moreover, at this point, we would focus on maximizing yield, rather than price to book, which is our normal focus for top picks. Even though dividends are unlikely to be sustainable over a one-year horizon, we believe that the Buy-rated companies are better positioned to defend both book value and returns, and thus the Buy-rated names with the highest yield are the most oversold. Specifically, our top picks are Western Asset Mortgage (WMC-$17.54, Buy, yielding 19.4%), American Capital Agency (AGNC-$28.68, Buy, yielding 17.4%) and American Capital Mortgage (MTGE-$22.44, Buy, yielding 16.0%).

Be careful out there.



2 Responses to Public Service Announcement

  1. George Maniere says:

    You gotta help me out with this one. She picked two that are GSE MBS reits. Ok MTGE is a hybrid but how do you square her picks when Benny is buying all of the GSE MBS?

  2. hhill51 says:

    Hey, George….

    Both of the amREITs she recommends make a point of buying specified pools (eg low-balance, or HARP pools where the borrower has already gone to the well and can’t refinance a second time under that program)… The Fed is buying new production and TBA premium bonds in the secondary, so they are not directly competing. That said, pushing on the balloon anywhere makes the pressure increase everywhere.

    We also need to stop the chicken little approach to the Fed’s action by remembering the size of the market — over $5 trillion. Even at $40 billion a month, the Fed is buying less than 10% of the market per year. It creates real pressure at the margin, but it isn’t as if they are cornering the market.

    The biggest force in the MBS market has always been, and continues to be, the banks that hold them in portfolio rather than lending to companies and individuals. Every bank basically has a mortgage REIT embedded inside it, and they use far more leverage than the REITs.

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