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02-11-2014, 06:47 PM
(This post was last modified: 02-11-2014, 06:47 PM by hendi_alex.)
Why is NLY usually considered the best of the breed of mREITs? First, over the years, the company has tended to be fairly nimble, decreasing leverage in a timely way and going into semi hibernation when spreads collapsed or inverted. Secondly, the company only deals in agency paper, loans with implied government guarantee. During the financial crisis, when Alt-A and sub prime became almost totally illiquid, driving the mark to market down to pennies on the dollar. Many or most companies holding those kinds of mortgage paper either went broke or very nearly went broke. The market for agency paper remained vigorous, and that allowed NLY to navigate the crisis quite well. They still took a terrible hit, but business continued with cash flow and dividends continuing without interruption. More importantly, mark to market held up, so there was no breach loan covenants. Still, NLY remains a spread play, and one only has to look at the last year's price action to see what the market anticipates for when short term rates move up and NLY's margins get compressed. IMO, this is no time to be holding such securities. That said, we could have a prolonged period of years where the Fed's hands are tied wrt rate increases. In that case, NLY should be able to continue generating a substantial amount of cash flow. But keep in mind, that low short term rates are not what NLY is about. It is about the spread. With loan rates at historic lows, NLY and other mREITs have been seriously squeezed over the past year or two. That is why NLY's distributions have been cut by over 50% during the period. I'm not saying to avoid NLY, but am saying that if you choose to buy shares, do so very cautiously and always keep the trigger finger close to the sell button.
Alex
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Excellent info Alex, thanks for the posts.
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Yes, Alex, excellent. I'm not sure BDCs nor mREITS are for me. Too much to watch and depending on too many factors for me to feel confident.
I have a question on REITs but I'll save that for another time whilst I do more research.
Thanks.
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My current REIT allocation is 1.13%. I'd like this percentage to be higher eventually, maybe up to 5%, but only if they were in a tax advantaged account.
I don't know enough about REITS to go out and pick my own so instead I own them through index funds. The problem with this is that the index funds have a much lower dividend yield.
I also do not like the fact that most REITS pay a portion of their distributions via ROC but the index funds, at least the few I own, do not do this.
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Roc is not necessarily a bad thing. If ROC is used because of a shortfall of earnings, IMO,that is 'bad' ROC in that it is a return of the investor's own money. But ROC often results, especially in REITs and MLPs, because depreciation affects GAAP net income. The thing is that while depreciation subtracts from net income, it doesn't't affect cash flow. This is usually an example of 'good' ROC, as the distribution was, in fact, actually earned. 'Good' ROC can also arise from the profitable sale of assets. For many investors who are affected by the AMT, such ROC can be a very good thing. For the rest of us it is still a good thing.
Alex
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(02-16-2014, 08:23 PM)hendi_alex Wrote: Roc is not necessarily a bad thing. If ROC is used because of a shortfall of earnings, IMO,that is 'bad' ROC in that it is a return of the investor's own money. But ROC often results, especially in REITs and MLPs, because depreciation affects GAAP net income. The thing is that while depreciation subtracts from net income, it doesn't't affect cash flow. This is usually an example of 'good' ROC, as the distribution was, in fact, actually earned. 'Good' ROC can also arise from the profitable sale of assets. For many investors who are affected by the AMT, such ROC can be a very good thing. For the rest of us it is still a good thing.
Wow I didn't know this.
Regardless though, ROC reduces your cost basis, albeit slowly, so it's still bad in that sense. Would you agree?
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Not at all. It is more like you can pay me now or you can pay me later. But it is really better than that. Since REITs pay ordinary dividends, they are taxed at your marginal tax rate. But the taxes due on ROC both get deferred and get taxed at the favorable capital gains rate of 15% if held for a year or longer.
Alex
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(02-16-2014, 08:41 PM)hendi_alex Wrote: Not at all. It is more like you can pay me now or you can pay me later. But it is really better than that. Since REITs pay ordinary dividends, they are taxed at your marginal tax rate. But the taxes due on ROC both get deferred and get taxed at the favorable capital gains rate of 15% if held for a year or longer.
Very interesting! Thanks a lot for the reply 
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