CARES Act and Consequences
I find the mREIT sector to be very interesting right now. But, I have one big question.
What are the consequences of the CARES Act?
This article, which I tweeted this morning, explains the issue perfectly. The number of people that aren’t going to pay their mortgage is going to be unprecedented. While the numbers talked about originally were maybe 10%, as the article points out that is now looking like it could be 30%+ for Fannie and Freddie and 60% for Ginnie.
If those homeowners don’t pay their mortgages, the mortgage servicers have to. That is a whole lot of money that has to be forwarded on by banks and non-banks like Mr. Cooper and New Residential.
The government seems to be not really sure how to deal with this. Or is at odds with how to.
A really smart guy I talk to said it best I think – to paraphrase, he said: I don’t know how this plays out, but it is a big risk to owning anything mortgage related until it gets settled.
If this does get settled or if you want to take the risk it is going to get settled, there are some interesting opportunities out there. There are agency mREITs that are way below their already reduced book values. There are originators that are seeing great margins on refi’s. There are whole loan mortgage owners which are really badly beaten up (but probably also very risky). And there are servicers that are in the middle of the tsunami, but again, are very beaten down. All could be very interesting in the right circumstances. I added a couple small positions in the agency mREITs. I’d like to make these much larger, and if there is some clarity on how these servicer advances play out, I probably will.
Reminiscences of a Stockblogger 
Not really sure why agency mreits should he beat up. Servicer advances aside, they still have the fannie Freddie guarantee so it’s not like default is a real issue.
Yeah the agency mREITs aren’t really exposed to servicing advances. They are the easiest bet here – gov’t is buying their assets, supporting their repo, so its pretty straightforward.
They have less upside though. NLY is great but its probably not going much higher than $7 just because it hardly ever goes above book.
The harder play but the really interesting one I think are the Fannie and Freddie servicers. So NRZ and COOP and TWO as well. They are up again today while the market gets trashed. I think the market is expecting some sort of facility to backstop servicing advances. I bet NRZ and COOP go up significantly if that happens.
I bought some AGNC preferred stock during the dump a few weeks ago and wish I had bought more. The preferreds seem to be the best bet for the long term. Sorry for the snark, but the best summary of what is going on for government policy is #NoHedgeFundLeftBehind. Let that be your guide.
It is looking more and more like we will get a bailout facility for the servicers
Check out Rattler midstream, connected to Diamondback, which is one of lowest cost Permian producers, needing $35 oil for EBIT break even. Yielding 20% now. CEO was buying $1.6 million at 3x higher prices. If one survives this (growing production too), it is probably Diamondback.
Also natural gas looks enticing, Peyto is one I am into. 1/3 of North America gas production comes from associated gas, and demand is probably much less affected. So you could see a 3-10% gas supply cut if oil shale production is hit hard. Blackstone Minerals is a nice one. about half income from gas, half from oil. Yielding 20%.
How deep are you in the tanker trade? It looks like demand for tankers will probably stay high? As a lot of on land storage is probably not where demand for oil is. So even if storage is emptied, tankers will be in high demand? Especially given that a lot of US oil production needs to be shipped to overseas refiners. And that oversupply will be here to stay for some months probably.
Thanks. I’m long AAV and SBOW right now, though I might be selling SBOW shortly, its been a good run and I really just bought it for the hedge book. AAV I think I’ll keep as long as ng forecast looks ok.
I own a few tankers, same names as always, not big positions <2% – I'm not 100% convinced that the market focuses on nearterm strength and not medium term weakness so I'm not willing to make a huge bet.
Also I bought some PNE as a third ng play.
I’m not sure about midstreams. Wont shut in volumes hurt their fees?
Yeah but at a 20% yield, the profit margins they have, who cares? If they are connected to the lowest cost players, I think they will do very well long term. So you get >10% dividends while you wait for that.
If Diamondback does not survive, who does? That is usually my logic with low cost producers when current financials don’t look all that good. Higher cost players will get taken out, and low cost players will take share. And they got a pretty large drilling inventory. And they are fee based, so you only have exposure to lower volumes, not to prices.
I got a larger stake in VNOM though, I think they are the safer bet. But that one is more long term.
Added benefit of owning the royalties is that FANG share shareholders getting wiped out or diluted does not really hurt VNOM share holders long term.
Or maybe I’m missing something, I don’t know. I had some good luck riding up CNXM and ETRN. Both connected to low cost gas producers as well.
Some additional points wrg to tankers, about 10% of crude tankers are over 20 years of age. 21% over 15 years. Generally older tankers are used for storage, and if they come out of it , they need to be dry docked (and older tankers are usually scrapped instead). Order book was at around 7% as of end 2019. With a tight market already. Then add in effects of IMO 2020.
Then when oil is stored all over the place, that is probably good for tanker demand?
Less US oil being exported is bad though, that would have a big impact on tanker demand if that stays.
What I don’t like is how everyone and their mother is talking about this trade. Yet tanker stocks still trading around book value.
https://www.freightwaves.com/news/iran-threat-looms-as-tanker-markets-boom
“I expect to start 2021 with a very low orderbook,” said Macleod. “It’s probably going to be historically low, at 2-3% of the world’s fleet, and we’re also going to have a world fleet where one out of four ships will be over 15 years old, so when we do enter the inventory draw, I expect we’ll go into a ship-recycling period, which could be massive.”