Thursday, September 16, 2021

Convexity Maven: “The REIT Money Machine”

We are not especially fond of REITs but Mr. Bassman has forgotten more about fixed income than I will ever know so here's his pitch. The Convexity Maven via Simplify Asset Management September 14:

A Mortgage REIT (mREIT) is different from the more common Equity REIT. mREITs do not own real estate assets (offices, hotels, shopping centers, apartments, etc.), but rather mortgages supported by residential property.

Since they usually own safer assets at the top of capital structure, they enhance their yield by using leverage (borrowed money), instead of taking credit risk. As such, the main risks they face are: 1) The ability and the cost to borrow (short-term rates); and 2) asset market (long-term rates) Volatility. More important than knowing what you know, is to know what you do not know. Valuing the growth potential of a hotel/office is not in my skill set; but Volatility and Liquidity risk is in my wheelhouse, so presently I will take a double portion.

Both risks exploded in March 2020 as fears of an uncontrollable pandemic caused lenders to reduce their available credit lines and increase the cost to borrow.

The coup de grace was vicious Volatility that forced margin call liquidations. Could this occur again, of course; but with a cashflow yield of nearly 9% and a somnambulant FED, I prefer leveraging highly-rated assets instead of owning bottom of the capital structure -persimmon line- Junk bonds at less than 4.0%.....

....MUCH MORE (9 page PDF)  I get bored reformatting PDFs so, having got you started, that's it for now, maybe a mortgage REIT disaster story later on. Maybe not though, the inverse relationship between gold and other metals and the dollar is getting interesting.