The Fed now promises low rates well into the future. After the 24/25 Jan FOMC meeting Bernanke added more than a year to their previous “low rate” pledge. Ostensibly this is good news for everyone (unless you happen to hate gambling and would rather get some nice interest on some bonds, a CD, or perhaps your bank savings), but I'd wager that this is mostly another attempt to resurrect the atrocious US housing market, and provide the right conditions for government to address the negative equity trap - the post 2008 “root of all evil”.
Every week I'm getting offers to buy houses in the Atlanta, Georgia area (single family units with a garage, a lawn and so forth) for around $50,000 – this is cheap by all standards and certainly cheap compared to the pre-foreclosure prices of the properties (which were typically $100,000 to $200,000). The fact is, before foreclosure owners pay what they can in the hope of getting out of the trap, and after foreclosure they're denied credit. I'd like to credit Bernanke with some basic human compassion and a sincere desire to ease the pain of those caught in the trap; from an economic perspective the global economy needs the return of its number one consumer and if the Fed can be instrumental in turning the US housing market around it would be a major victory.
If it was easy to administer and trade a portfolio of Atlanta houses I'd make an allocation and take a gamble on a return to a period of “safe as houses” (aided by low interest rates courtesy of the Fed), but the complications and costs involved in transfers, tenancies and various filings makes this an unreasonable proposition. Looking at alternatives brings me to the mortgage REIT companies. The MREITs profit from low interest rates and provide some participation in the potential comeback story. There are complications, in fact there are quite a few potential problems on the horizon for these companies, to highlight a few: Freddie and Ginnie are under review and any changes to these participants will impact everyone; the Fed's buying and financing the purchase of mortgages – effectively competing for business and driving down the yield for mortgage investors, while low interest rates encourage refinancings (also decreasing the value of MREIT portfolios); and there are regulatory concerns which may result in MREITs being treated as investment companies and not simply another way to invest in property. All these issues warrant attention, but provided the MREITs continue to be able to finance their operations and maintain their leverage it's tough to ignore their double digit dividend payouts.
Just in case this round of Fed “easing” is effective at getting to the root of it all – how about picking up some Annaly (NYSE:NLY) at around $15.80... or if it never gets there (towards the close today it's trading around $16.80) write an appropriate March put option and get in line for a dividend – provided dividends aren't cut that should equate to about a 14% annual payout - or simply collect the premium.
All for now, have a good weekend!
I had thought about NLY a couple of years ago, but my concern then was that interest rates were sure to rise. How wrong I was about that.
ReplyDeleteLots of risks associated with these MREITs, and, in the course of normal business, changing interest rates is the biggest risk. Even when interest rates move lower the MREITs lose as borrowers refinance at the new lower rates. In the recent tight credit environment it's been hard for people to take advantage of the new lower rates, so the MREITs have probably suffered less than they otherwise would. It's worth noting that NLY have decreased the amount of leverage they use, which is a cautionary sign, and, as less leverage amounts to lower earnings this should translate to lower dividends. Now, the outstanding question is: will the market give a higher P/E valuation (accept a lower dividend payout) to a less highly geared company? The answer ought to be "yes", but if it's "no" then the shares will take a hit too. If the current crop of NLY investors all "need" 14%+ dividends then I think they're about to be disappointed.
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