Hatteras Financial (HTS)

canslim

looking for a pullback here.

Fed should hold interest rates low for most of next year allowing HTS to enjoy a good spread between borrowing costs and investment income. This is based on belief that we will be in a deflationary or non-growth environment thru 2010 and continue in a long term bear market. HTS will lose market value but not as much as the S&P.

Hatteras Financial is an interesting REIT that was founded in 2007. This would seem to be the peak of the bubble, but Hatteras doesn't seem to be affected. Although they deal in residential mortgages they are in the form of pass-through securities guaranteed or issued by a United States Government agency or sponsored agency. They are at a 52 week high. The dividend is holding at an impressive 13%. ON Caps you only credited a portion of the dividends, so overall you can come up short on CAPS playing pure dividend stocks. In this case Hatteras is also appreciating in price while paying the dividends. It seems hard to believe that we can have a successful REIT in this climate or count on dividends holding, but so far Hatteras is showing the money. Margins are hard to calculate on REIT's, but even if skewwed, the 88% margins, 113% quarterly earning growth look tempting. The debt is rising, but no doubt securing additional mortgages. Looks like an interesting play.

div

WILL OUT PERFORM DUE TO MTG. DILEMMA

high divy, high growth

market outperformer in the last few weeks - expect to continue

Fat dividend and speculating that the worst is behind us.

See 00100 pitch.

Big dividend yield, bonds backed by the government.

Government-backed mortgages!!!!!!!

Huge dividend yield that should be considered to be very safe now that the Feds are now conservators over Fannie and Freddie.

The 17 November 2008 issue of Barron’s reprinted their Daily Stock Alert titled “When Mortgages Are Loveable” by Fleming Meeks. Mr. Meeks gives Hatteras Financial (HTS) a favorable write-up and I decided to do a little research. I wasn’t able to find the article online; apparently it was only in Barron’s print edition.

HTS is a mortgage REIT. HTS has been operating since September, 2007 and went public on April 30, 2008. The HTS website describes the REIT, “Hatteras Financial is an externally-managed mortgage REIT formed in 2007 to invest in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities issued or guaranteed by U.S Government agencies or U.S. Government-sponsored entities, such as Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA).” HTS leverages up by borrowing via repurchase agreements. All of the assets are Level II under FASB 157, meaning they’re based on market data, but not on data for identical securities. From the 10-Q, “The estimated fair values of MBS are generally determined by management by obtaining valuations for its MBS from three separate and independent sources and averaging these valuations.” Seems like a fair approach.

The 10-Q for the quarter ended 30 September shows assets of $5.1 billion. Nearly all of the assets are mortgage backed securities (MBS). There are $4.6 billion of liabilities, nearly all repurchase agreements.

Over the quarter ended 30 Sep, the average cost of funds was 2.9%. The vast majority of the repurchase agreements have a term of less than 30-days and at end of quarter the average rate was a little over 3%. To limit the risk of financing longer term, ARM backed securities at short term rates, the company purchases interest rate swap agreements. They only buy interest rate swaps to cover a portion of the repurchase agreement financing. On 30 Sep, HTS had swaps covering $1.4 billion, so nearly one-third of their borrowing was covered. The manager has the flexibility to determine what level of interest rate hedging is prudent.

The primary reason for owning a REIT is dividend income and HTS really shines here. The company has only been public long enough to pay two dividends. Annualizing those two payouts gives a 14% yield based on the 28 Nov close. Annualizing just the last quarterly dividend gives a yield of over 16%.

As most Fool’s know, yields this high don’t come without some risk.

The income producing assets are all US Government backed securities, so default risk is near zero. There is a pre-payment risk; as the underlying mortgages get paid off either by refinancing or selling the home, the principal associated with the mortgage gets returned to the security holder. I’m not sure what happens in the event of foreclosure, I assume principal is returned with the government guarantee covering any shortfall from selling the property. Other than that, about the only asset risk would be if the government was to change its policy on backing Fannie and Freddie securities.

On the liability side, the risk is much clearer. Since HTS borrows using short-term repurchase agreements and buys longer term assets, a rapid rise in short term rates would hurt earnings. That risk is partially mitigated by the use of interest rate swaps and by the fact that the MBS are adjustable rate. But, the liabilities are only partly covered by swaps and the MBS rate adjustments have much longer terms than the repurchase agreements the company uses.
Another similar risk would be if the market narrowed the spreads between the MBS and short-term repo agreements. If this business model is solid, it’s reasonable to expect more players to compete in the market which would narrow the spreads.

As long as the government continues to back Fannie and Freddie paper and the Fed continues to keep short term rates low, HTS should continue to deliver high dividend income.

Disclosure: At time of posting, I have no position in HTS.

Continuation Wedge: target $16

Playing the mortgage game. Adept or crapshoot? Speculation...

Doug Kass just put this on his buy list as a long. Always interests me when a short seller begins finding better opportunities on the long side.

I believe India is the up and coming place to be invested. This stock pays almost 20% dividends

safe investments, with a chance to score cheap properties in the near term, and a higher stock price that follows the mkt.