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rd80 (99.11)

Selling a Mortgage REIT

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October 27, 2011 – Comments (5)

Hatteras Financial (HTS) posted a pretty good earnings report earlier this week, but I've decided to sell my shares.  Narrowing interst rate spreads and an increase in prepayments are raising the risk level to a point where I'd rather cash out of a nice run.  I haven't read all the reports, but suspect the rest of the mortgage REITs are seeing similar pressures.

I may very well be selling too early.  Earnings are still good and the dividend yield should stay up above or near double-digits for quite a while.  But, I'd rather lock in a gain than take the risk of turning a winner into a loser.

I have to wait a couple days to make the sale due to the Fool's trading policy for writers, but plan on selling early next week.

What's the Foolish take?  Are the big yields of the mortgage REITs still worth the risk or are we near the end of a great run?

Fool on!

Russ

 

5 Comments – Post Your Own

#1) On October 27, 2011 at 7:15 PM, motleyanimal (97.81) wrote:

I have some CIM and am considering AGNC once it settles down. Mortgage REITs are risky, but good values are out there.

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#2) On October 27, 2011 at 10:20 PM, ikkyu2 (99.52) wrote:

Well, you probably know how I feel about this, Russ, but in case you don't: my opinion is not to be in these REITs.  Rates can only rise, the Fed's main goal is that you not know when that's going to happen, and when the REIT's stock prices go down, they go down fast.

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#3) On October 28, 2011 at 8:46 AM, rd80 (99.11) wrote:

Many thanks for the comments.

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#4) On November 01, 2011 at 10:19 PM, jwebbzor (< 20) wrote:

When interest rates do rise, can REITs even survive in an environment with high yields and a low spread?

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#5) On November 03, 2011 at 10:33 PM, rd80 (99.11) wrote:

@jwebbzor,

A hike in short-term interest rates would be very challenging for a mortgage REIT since they borrow at the short end of the yield curve.  Many hedge part of that interest rate risk, but it isn't practical to hedge all of it.

The impact of rising long-term rates is trickier to predict.  That scenario would result in higher yields on new mortgage paper.  But, the value of paper they hold would fall and that paper is typically pledged as collateral for the debt.  Too much of a fall and lenders could come knocking looking for more collateral.

Low spreads would be trouble regardless of how the yield curve gets flatter.  Could they survive?  Probably, but it would depend on how narrow the spreads get and the specifics of each REIT's balance sheet.  Would those fat yields get put on a strict diet?  Definitely.

In case anyone is still following this, I sold my Hatteras shares earlier this week and no longer have a position in any of the mortgage REITs.

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