Annaly Capital Management Inc. (NLY)

Has been somewhat cautious on this in the last 3 years. They borrow shorter-term debt and lend money on the long end of the curve. They make money on the spread in between, except that they lever up their borrowing versus their lending at a ratio of about 6 to 1. This means they are very sensitive to changes in the yield curve. It is his expectation that over time, the yield curve will flatten. Doesn’t think you will see an erosion in NAV at this time. Usually want to buy these when they are trading at about $.85 on the dollar, which is where they are right now. Very risky.

Hasn’t owned any US mortgage REITs.

Part of a group of US mortgage REITs. They buy up mortgages and put debt on those mortgages. This is a very dangerous situation and he doesn’t like any of these. Wouldn’t sell it right now because it is so far down but, if you get a lift, then you should Sell.

Mortgage REITs have got hit very hard. With these, you are buying longer duration mortgages and borrowing short term to fund them. You are collecting the yield difference between the longer-term bonds and the way you are funding them. When that spread compresses, you start to see earnings press as well. Also, book values come down because the value of the bonds you have purchased have come down as well. Mortgage REITs are probably trading at a 10%-15% discount to their actual BV. Dividends look sustainable but there will be a fair bit of volatility.

(Market Call Minute) Mortgage backed security lender and fed backing out is hurting them.

US Mortgage REIT with yield at 15% at times. He got out last year. If it recovered a little. He would get out.

This is affected by 2 things. 1) Short rates. They borrow Short and buy mortgages on the longer end of the curve and they lever that out, which is why they can pay out the huge dividend yield. 2) They were buying bonds effectively at premium and paying 105. As a bond gets closer to maturity, the 105 becomes Par because they pay you back at the price you bought it at which creates a reduction in BV. Part of the $85 billion that the Fed has been buying is also mortgages, which is one issue. This will do worse if short rates go up.

Recently, US REITs such as Annaly (NLY-N) and American Capital Agency (AGNC-Q) have dropped like a stone. Why? Investors are panicking because of rising rates. Worried that the bond market is going to come back and make REITs less attractive because REITs would have to pay a higher dividend. He has a hard time thinking that REITs are going to rise a lot. He would buy these and hold them for the dividends especially because of the Cdn$ versus the US$.

Largest US mortgage REIT. Historically has been pretty much the index so that when people have been taking money out of mortgage REITs, it has generally come out of this one. Trading below Book so it is cheap. Book has been deteriorating over the last 12 months but has stabilized recently. Prefers others at this point.

If you own, you might want to take the money and run. They are obviously using the spread game to leverage up the mortgage backed security portfolio. Getting a little long in the tooth so you should watch it very carefully because, when the rate scenario changes, you have to change your positioning on this stock. 12.4% dividend. You could also consider the iShares Mortgage Plus ETF (REM-N) for diversification.

Like other major mortgage REITs, this is a structure where you lever up mortgage paper using short-term debt which can run to 6-7 times leverage. In periods where short-term rates are rising relative to long-term rates, there is a lot of pressure on this type of a structure. Recently been weak because of refinancing going on in mortgages. Available spread post QE3, has been reduced due to the Federal Reserve getting in to the mortgage market and buying back mortgage bonds, forcing down yields and enabling people to roll over mortgages at cheaper rates.

Great little company that pays a fantastic yield. Has fallen off in the last little while. This is an asset management company so they borrow Short and buy mortgage backed securities and they lever these positions. What you have to worry about is Short rates going up, which he doesn’t think is an issue. The other issue is that they bought mortgages at higher prices, so if there is a refinancing they get paid back and have to reinvest the money at lower rates. Very smart management. When they go X dividend the stock falls and that is the time to buy.

A mortgage REIT. This is more exposed to the various refinancing programs that are being rolled out in the US.