Anworth Mortgage Asset ANH
August 17, 2007 - 9:23am EST by
john771
2007 2008
Price: 4.06 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 187 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Each share of Anworth Mortgage is backed by $6.51 of baby and $0-$2.75 of bathwater. The baby is the parent company’s mortgage REIT portfolio of 98% agency MBS and 2% AAA MBS.  The bathwater is Belvedere Trust, a non-guaranteed subsidiary that has not met margin calls on its repo-financed portfolio of mostly A and BBB RMBS.  Anworth stopped supporting Belvedere last week and the repo counterparties sent notices of default.
 
The investment thesis is that Anworth is highly likely to abandon Belvedere as a total loss.  Anworth will remain in business as an agency RMBS investor comparable to Capstead, Annaly, and MFA.
 

Financial Statements

 
This pro-forma financial statement breaks out the main assets, and liabilities between Anworth and Belvedere.  For simplicity I left all miscellaneous assets and liabilities with the parent.  An exact allocation would not affect the net equity at each level.
 
Anworth Mortgage  Asset Corporation
 
 
 
 
 
Numbers in $000s as of 6/30/07
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anworth Estimated
 
Belvedere Estimated
Combined As Reported
 
 
Comments
 
 
 
Agency MBS
4907022
0
4907022
 
 
 
 
Non-Agency MBS
111827
0
111827
AA or better
 
 
Other MBS
0
200736
200736
$42mm A, $145mm BBB, $6mm lower
 
 
 
 
 
 
 
 
Loans
 
1355935
1355935
2004+2005 vintage
 
 
 
 
 
 
 
 
 
 
Other Assets
58076
0
58076
Cash & Receivables
 
 
Intercompany Loan
-42800
42800
0
8/16 PR
 
 
 
 
 
 
 
 
 
 
 
Total Assets
5034125
1599471
6633596
 
 
 
 
 
 
 
 
 
 
 
 
Repo agreements
4548277
288358
4836635
 
 
 
 
 
 
 
 
 
 
 
 
Other Liabilities
70000
 
70000
Payables & Expenses
 
 
Junior Notes
37380
 
37380
 
 
 
 
MBS Issued
 
1190552
1190552
$165mm net equity
 
 
Preferred B
28750
 
28750
Liquidation Preference
 
 
Preferred A
46888
 
46888
Liquidation Preference
 
 
Minority Interest
91
 
91
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity
340300
83000
423300
 
 
 
 
Intercompany Loan
-42800
42800
0
8/16 PR
 
 
 
Net Common Equity
297500
125800
423300
 
 
 
 
 
 
 
 
 
 
 
 
Total Liabs & Equity
5028795
1604710
6633596
 
 
 
 
 
 
 
 
 
 
 
 
Share O/S
45670
45670
45670
 
 
 
 
Common Equity/Share
$6.51
$2.75
$9.27
 
 
 
 
Leverage
12.2
 
 
Assets/(Equity+Notes)
 
 
 
 
Key Points for Anworth:
 
-         98% agency portfolio.  My understanding is that companies are not having any trouble financing these securities, but haircuts have risen from 2-3% to 4-5%.
-         Anworth is well capitalized.  In addition to common equity, the company has $75mm of preferred and $37mm of junior notes.
-         Anworth reports that the market value of its agency securities has risen since June 30th
-         Anworth has been getting about $100mm per month in cash flow from prepayments.
-         Anworth’s exposure to Belvedere is limited to equity investment of $83mm and intercompany loan of $42.8mm
-         Anworth has no bank debt or any debt with covenants.
 
Key Points for Belvedere
 
-         Assets aren’t bad, but can’t be funded with repos in the current market
-         Anworth is not a party to Belvedere’s repo facilities.  Anworth has not provided any guarantees to Belvedere counterparties.
-         Belvedere has been generating about $5mm of cash flow per month from net interest + prepayments.
-         Belvedere is likely to be worthless because it cannot finance its assets in the current market
 

Default Status

 
On August 6th Anworth filed an 8-k explaining that Belvedere had received margin calls from repo counterparties and that Anworth would not provide any additional cash from the parent company.    On August 13th Anworth filed another 8-k disclosing that Belvedere has received additional default notices.  My understanding is that the counterparties have not yet liquidated the collateral and there has been some discussion with Anworth about what’s going to happen next.  On August 16th Anworth issued a press release stating:
 
The amount of intercompany loans totaling $42.8 million that Anworth had provided to Belvedere Trust has not increased and Anworth does not intend to increase this amount. Anworth has not provided any guarantee with respect to Belvedere Trust's repurchase agreement borrowings. While Belvedere Trust continues to pursue all of its options to satisfy its borrowing obligations to its Master Repurchase Agreement lenders, the Company's current expectation is that any recovery above the repurchase agreement liabilities would be minimal if any.
 

Comparable Valuations

 
Agency MBS investment REITs generally trade around book value.  When spreads are favorable, current income and dividends increase and shares move to a premium valuation.  When spreads are unfavorable, income and dividends decrease and valuations move to a  discount.
 
Agency MBS Investment REITs
 
 
 
numbers in $mm at 6/30/07
 
 
 
 
 
 
 
 
 
 
 
 
Pro-forma
Company
Capstead
Annaly
MFA
Anworth
Ticker
CMO
NLY
MFA
ANH
 
 
 
 
 
Agency MBS
5441
38603
6085
4907
Non Agency MBS
49
0
911
112
Agency %
99%
100%
87%
98%
 
 
 
 
 
Other Assets
96
584
1038
15
 
 
 
 
 
Repurchase Agreements
5115
35094
6379
4548
Debt
103
0
0
37
Other Liabilities
23
972
39
70
Preferred
183
288
96
76
 
 
 
 
 
Common Equity
161
2833
608
298
 
 
 
 
 
Shares O/S
19
269
83
45.7
 
 
 
 
 
Common Equity/Share
$8.47
$10.53
$7.33
$6.52
Market Price (8/16/07)
$8.69
$14.03
$6.47
$4.10
Premium/(Discount)
2.6%
33.2%
-11.7%
-37.1%
Leverage
12.5
12.6
11.4
12.2
Common Equity Leverage
34.7
13.8
13.2
16.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Catalyst

1. Collapse of non-guaranteed subsidiary
    sort by   Expand   New

    Description

    Each share of Anworth Mortgage is backed by $6.51 of baby and $0-$2.75 of bathwater. The baby is the parent company’s mortgage REIT portfolio of 98% agency MBS and 2% AAA MBS.  The bathwater is Belvedere Trust, a non-guaranteed subsidiary that has not met margin calls on its repo-financed portfolio of mostly A and BBB RMBS.  Anworth stopped supporting Belvedere last week and the repo counterparties sent notices of default.
     
    The investment thesis is that Anworth is highly likely to abandon Belvedere as a total loss.  Anworth will remain in business as an agency RMBS investor comparable to Capstead, Annaly, and MFA.
     

    Financial Statements

     
    This pro-forma financial statement breaks out the main assets, and liabilities between Anworth and Belvedere.  For simplicity I left all miscellaneous assets and liabilities with the parent.  An exact allocation would not affect the net equity at each level.
     
    Anworth Mortgage  Asset Corporation
     
     
     
     
     
    Numbers in $000s as of 6/30/07
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
    Anworth Estimated
     
    Belvedere Estimated
    Combined As Reported
     
     
    Comments
     
     
     
    Agency MBS
    4907022
    0
    4907022
     
     
     
     
    Non-Agency MBS
    111827
    0
    111827
    AA or better
     
     
    Other MBS
    0
    200736
    200736
    $42mm A, $145mm BBB, $6mm lower
     
     
     
     
     
     
     
     
    Loans
     
    1355935
    1355935
    2004+2005 vintage
     
     
     
     
     
     
     
     
     
     
    Other Assets
    58076
    0
    58076
    Cash & Receivables
     
     
    Intercompany Loan
    -42800
    42800
    0
    8/16 PR
     
     
     
     
     
     
     
     
     
     
     
    Total Assets
    5034125
    1599471
    6633596
     
     
     
     
     
     
     
     
     
     
     
     
    Repo agreements
    4548277
    288358
    4836635
     
     
     
     
     
     
     
     
     
     
     
     
    Other Liabilities
    70000
     
    70000
    Payables & Expenses
     
     
    Junior Notes
    37380
     
    37380
     
     
     
     
    MBS Issued
     
    1190552
    1190552
    $165mm net equity
     
     
    Preferred B
    28750
     
    28750
    Liquidation Preference
     
     
    Preferred A
    46888
     
    46888
    Liquidation Preference
     
     
    Minority Interest
    91
     
    91
     
     
     
     
     
     
     
     
     
     
     
     
    Common Equity
    340300
    83000
    423300
     
     
     
     
    Intercompany Loan
    -42800
    42800
    0
    8/16 PR
     
     
     
    Net Common Equity
    297500
    125800
    423300
     
     
     
     
     
     
     
     
     
     
     
     
    Total Liabs & Equity
    5028795
    1604710
    6633596
     
     
     
     
     
     
     
     
     
     
     
     
    Share O/S
    45670
    45670
    45670
     
     
     
     
    Common Equity/Share
    $6.51
    $2.75
    $9.27
     
     
     
     
    Leverage
    12.2
     
     
    Assets/(Equity+Notes)
     
     
     
     
    Key Points for Anworth:
     
    -         98% agency portfolio.  My understanding is that companies are not having any trouble financing these securities, but haircuts have risen from 2-3% to 4-5%.
    -         Anworth is well capitalized.  In addition to common equity, the company has $75mm of preferred and $37mm of junior notes.
    -         Anworth reports that the market value of its agency securities has risen since June 30th
    -         Anworth has been getting about $100mm per month in cash flow from prepayments.
    -         Anworth’s exposure to Belvedere is limited to equity investment of $83mm and intercompany loan of $42.8mm
    -         Anworth has no bank debt or any debt with covenants.
     
    Key Points for Belvedere
     
    -         Assets aren’t bad, but can’t be funded with repos in the current market
    -         Anworth is not a party to Belvedere’s repo facilities.  Anworth has not provided any guarantees to Belvedere counterparties.
    -         Belvedere has been generating about $5mm of cash flow per month from net interest + prepayments.
    -         Belvedere is likely to be worthless because it cannot finance its assets in the current market
     

    Default Status

     
    On August 6th Anworth filed an 8-k explaining that Belvedere had received margin calls from repo counterparties and that Anworth would not provide any additional cash from the parent company.    On August 13th Anworth filed another 8-k disclosing that Belvedere has received additional default notices.  My understanding is that the counterparties have not yet liquidated the collateral and there has been some discussion with Anworth about what’s going to happen next.  On August 16th Anworth issued a press release stating:
     
    The amount of intercompany loans totaling $42.8 million that Anworth had provided to Belvedere Trust has not increased and Anworth does not intend to increase this amount. Anworth has not provided any guarantee with respect to Belvedere Trust's repurchase agreement borrowings. While Belvedere Trust continues to pursue all of its options to satisfy its borrowing obligations to its Master Repurchase Agreement lenders, the Company's current expectation is that any recovery above the repurchase agreement liabilities would be minimal if any.
     

    Comparable Valuations

     
    Agency MBS investment REITs generally trade around book value.  When spreads are favorable, current income and dividends increase and shares move to a premium valuation.  When spreads are unfavorable, income and dividends decrease and valuations move to a  discount.
     
    Agency MBS Investment REITs
     
     
     
    numbers in $mm at 6/30/07
     
     
     
     
     
     
     
     
     
     
     
     
    Pro-forma
    Company
    Capstead
    Annaly
    MFA
    Anworth
    Ticker
    CMO
    NLY
    MFA
    ANH
     
     
     
     
     
    Agency MBS
    5441
    38603
    6085
    4907
    Non Agency MBS
    49
    0
    911
    112
    Agency %
    99%
    100%
    87%
    98%
     
     
     
     
     
    Other Assets
    96
    584
    1038
    15
     
     
     
     
     
    Repurchase Agreements
    5115
    35094
    6379
    4548
    Debt
    103
    0
    0
    37
    Other Liabilities
    23
    972
    39
    70
    Preferred
    183
    288
    96
    76
     
     
     
     
     
    Common Equity
    161
    2833
    608
    298
     
     
     
     
     
    Shares O/S
    19
    269
    83
    45.7
     
     
     
     
     
    Common Equity/Share
    $8.47
    $10.53
    $7.33
    $6.52
    Market Price (8/16/07)
    $8.69
    $14.03
    $6.47
    $4.10
    Premium/(Discount)
    2.6%
    33.2%
    -11.7%
    -37.1%
    Leverage
    12.5
    12.6
    11.4
    12.2
    Common Equity Leverage
    34.7
    13.8
    13.2
    16.9
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     

    Catalyst

    1. Collapse of non-guaranteed subsidiary

    Messages


    Subjectquestions
    Entry08/17/2007 11:27 AM
    Memberskyhawk887
    Interesting idea,

    In general I dislike mortgage REITs, but perhaps that is because everytime I hear Mike Farrell of NLY speak, my skin crawls--while he has so far proven correct in his prediction about the broad housing market (hey, someone had to be), he was definitely lying in the past two years about his own company's performance--but it worked long enough and he managed to do accretive secondary offerings before his stock declined to something below book. Why the hell were investors valuing a company like NLY at a premium to book when its dividend yield was so low that it justified something more like 80-90% of book?

    Sorry to get off the track. Depsite my thoughts on NLY, it is seen as best-in-class. What is ANH seen as? I doubt very much that it will trade up to book--but even if it only gets to 80 or 90% of book there is still good upside.

    Even though ANH said it does not intend to increase the amount of its intra-company loan to ANH, can you explain why they loaned any money at all subsequent to June 30th? Did they think they could save it? Were the required to? Thanks.

    SubjectMortgage REIT comments and pri
    Entry08/17/2007 01:05 PM
    Memberjohn771
    skyhawk: "In general I dislike mortgage REITs"

    Me too! In particular I think the agency MBS investors don't really add any value to their portfolios. However they generally don't subtract value either. If I can purchase the shares at susbtantial discount to a marked-to-market NAV then I think the risk/reward is favorable. The book value or NAV is essentially the liquidation value. The only liquidation expenses would be severance/contract termination and possible limitations on call/redemption of outstanding debt/preferred.

    ANH loaned money to Belvedere to meet the initial margin calls because it seemed like a good idea at the time even though Anworth had no contractual obligation to support Belvedere. Belvedere's portfolio is Alt-A credits. Loans have an average FICO of 728 and LTV of 72%. Most were originated in 2004, some in 2005. 1.8% were 60+ days delinquent at 6/30/07. Belvedere's securities are backed by loans with an average FICO of 711 and LTV of 74%.

    I put together some historical price/book numbers for ANH and I'll summarize them in case the formatting looks odd. In the past 5 years ANH has traded at an average premium of 4.8%. The premium was large when spreads/income/yield were high in 2002 and 2003. ANH traded at a discount when spreads/income/yield were low in 2006. I think this similar to the comps.

    Period Equity Shares NAV StkHigh StkLow StkMid Pre/Disc
    6/30/2007 426 45.6 $9.34 $10.06 $8.91 $9.49 1.5%
    3/31/2007 448 45.6 $9.82 $9.77 $8.17 $8.97 -8.7%
    12/31/2006 446 45.6 $9.78 $9.82 $8.20 $9.01 -7.9%
    9/30/2006 444 45.4 $9.78 $8.49 $7.64 $8.07 -17.5%
    6/30/2006 415 45.4 $9.14 $8.40 $7.28 $7.84 -14.2%
    3/31/2006 426 45.4 $9.38 $8.45 $7.25 $7.85 -16.3%
    12/31/2005 436.1 45.4 $9.61 $8.38 $6.89 $7.64 -20.5%
    9/30/2005 459.3 46.8 $9.81 $9.90 $8.11 $9.01 -8.2%
    6/30/2005 498.1 48 $10.38 $10.18 $9.14 $9.66 -6.9%
    3/31/2005 483 47.2 $10.23 $10.63 $9.35 $9.99 -2.4%
    12/31/2004 479.5 46.5 $10.31 $11.52 $10.19 $10.86 5.3%
    9/30/2004 496 46.2 $10.74 $12.15 $10.01 $11.08 3.2%
    6/30/2004 486 45.6 $10.66 $14.05 $10.06 $12.06 13.1%
    3/31/2004 511 44.3 $11.53 $14.28 $13.35 $13.82 19.8%
    12/31/2003 457 42.7 $10.70 $15.22 $12.65 $13.94 30.2%
    9/30/2003 422 38.3 $11.02 $16.65 $13.20 $14.93 35.5%
    6/30/2003 367 32.9 $11.16 $15.85 $12.91 $14.38 28.9%
    3/31/2003 292 26.6 $10.98 $13.23 $11.10 $12.17 10.8%
    12/31/2002 265 25.4 $10.43 $13.60 $10.08 $11.84 13.5%
    9/30/2002 249 24.1 $10.33 $14.00 $8.71 $11.36 9.9%
    6/30/2002 225 22.9 $9.83 $14.50 $9.60 $12.05 22.6%
    3/31/2002 95 11.9 $7.98 $10.12 $8.10 $9.11 14.1%

    Average Premium/Discount 4.8%

    SubjectHistorical Price/book data
    Entry08/17/2007 01:15 PM
    Memberjohn771
    I'm going to present this in a different form for anybody who's interested. You could copy each column into a spreadsheet to see it cleanly.

    Period ends

    6/30/2007
    3/31/2007
    12/31/2006
    9/30/2006
    6/30/2006
    3/31/2006
    12/31/2005
    9/30/2005
    6/30/2005
    3/31/2005
    12/31/2004
    9/30/2004
    6/30/2004
    3/31/2004
    12/31/2003
    9/30/2003
    6/30/2003
    3/31/2003
    12/31/2002
    9/30/2002
    6/30/2002
    3/31/2002

    Common Equity $mm
    426
    448
    446
    444
    415
    426
    436.1
    459.3
    498.1
    483
    479.5
    496
    486
    511
    457
    422
    367
    292
    265
    249
    225
    95

    Common Shares
    45.6
    45.6
    45.6
    45.4
    45.4
    45.4
    45.4
    46.8
    48
    47.2
    46.5
    46.2
    45.6
    44.3
    42.7
    38.3
    32.9
    26.6
    25.4
    24.1
    22.9
    11.9

    NAV
    $9.34
    $9.82
    $9.78
    $9.78
    $9.14
    $9.38
    $9.61
    $9.81
    $10.38
    $10.23
    $10.31
    $10.74
    $10.66
    $11.53
    $10.70
    $11.02
    $11.16
    $10.98
    $10.43
    $10.33
    $9.83
    $7.98

    Stock High
    $10.06
    $9.77
    $9.82
    $8.49
    $8.40
    $8.45
    $8.38
    $9.90
    $10.18
    $10.63
    $11.52
    $12.15
    $14.05
    $14.28
    $15.22
    $16.65
    $15.85
    $13.23
    $13.60
    $14.00
    $14.50
    $10.12

    Stock Low
    $8.91
    $8.17
    $8.20
    $7.64
    $7.28
    $7.25
    $6.89
    $8.11
    $9.14
    $9.35
    $10.19
    $10.01
    $10.06
    $13.35
    $12.65
    $13.20
    $12.91
    $11.10
    $10.08
    $8.71
    $9.60
    $8.10

    Stock Midpoint
    $9.49
    $8.97
    $9.01
    $8.07
    $7.84
    $7.85
    $7.64
    $9.01
    $9.66
    $9.99
    $10.86
    $11.08
    $12.06
    $13.82
    $13.94
    $14.93
    $14.38
    $12.17
    $11.84
    $11.36
    $12.05
    $9.11

    Premium/Discount (stock midpoint/NAV)
    1.5%
    -8.7%
    -7.9%
    -17.5%
    -14.2%
    -16.3%
    -20.5%
    -8.2%
    -6.9%
    -2.4%
    5.3%
    3.2%
    13.1%
    19.8%
    30.2%
    35.5%
    28.9%
    10.8%
    13.5%
    9.9%
    22.6%
    14.1%

    SubjectDo you have any idea what the
    Entry08/17/2007 01:35 PM
    Memberskyhawk887
    Do you have any idea what the clean earnings/dividend run-rate will be? $0.05 as it has been? That equates to an 8.5% yield at the current price--interesting.

    How are the liabilities and assets structured? What's the effect of 25 or 50 basis point reduction on the Fed's part?

    I think ANH tops out at a max of 85-90% of book. Any higher than that and the reward for liquidation or to sell is small (particularly considering closing costs).

    Can ANH buy back its own stock?

    SubjectAnswers and comments
    Entry08/20/2007 08:25 AM
    Memberjohn771
    Those are all good questions. Briefly, my recommendation is not dependant on any particular interest rate forecast. My recommendation is based on the balance sheet value of highly liquid assets rather than the near-term income they will generate. I think the market’s focus on the current yield of mortgage REITs is myopic and I agree with skyhawk that these should be sold as they approach NAV. However that’s what I thought in 1999-2001 and every mortgage REIT I sold at NAV subsequently doubled so this time I’ll be more patient about the exit.

    Anworth’s agency investment strategy is to limit interest rate sensitivity through use of swaps and derivatives. For example, if a repurchase agreement is used to fund a hybrid security with an initial fixed rate for three years, then ANH can enter into a 3-year swap transaction that will fix the financing cost for the same period. But eliminating all risk also eliminates all return so the company accepts some timing gaps and unpredictability of prepayments. In general the variable rates paid on liabilities adjust faster than variable rates earned on assets. When short rates rise the NIM compresses and when rates fall the NIM expands.

    The duration of Anworth’s portfolio (not adjusted for hedges) at 6/30/07 broke down as follows:

    Fixed Rate: 18%
    Adjustable 3mo or less 11%
    Adjustable 3-12 mo 17%
    Adjustable 12-24 mo 10%
    Adjustable 24-36 mo 7%
    Adjustable 36-60 mo 37%

    The interest rate risk disclosure in the 10-Q illustrates the impact of hedging arrangements.

    Projected change in net interest income resulting from a 100bp decline in interest rates:

    With hedges: -2.6%
    Without hedges +59%

    Projected change in Portfolio Value resulting form a 100bp decline in interest rates:

    With hedges +0.9%
    Without hedges +1.2%

    The historical NIM on the agency portfolio including amortization expense and hedging has ranged from 204bp at 12/31/02 to –36bp at 6/30/06. Quarterly dividends ranged from $0.50 to $0.02. In comparison NAV has been quite stable, only varying from a high of $11.53 at 3/31/04 to a low of $9.14 at 6/30/06. I’m going to try pasting the historical data below. The first column will be the date, second is supposed to be the NAV, third is supposed to be the portfolio spread in bp on that date, and last will be the dividend paid that quarter.

    Date NAV Spread Dividend
    6/30/2007 $9.34 2 $0.05
    3/31/2007 $9.82 -13 $0.05
    12/31/2006 $9.78 -30 $0.02
    9/30/2006 $9.78 -30 $0.02
    6/30/2006 $9.14 -36 $0.02
    3/31/2006 $9.38 1 $0.02
    12/31/2005 $9.61 3 $0.02
    9/30/2005 $9.81 17 $0.08
    6/30/2005 $10.38 47 $0.18
    3/31/2005 $10.23 97 $0.27
    12/31/2004 $10.31 106 $0.27
    9/30/2004 $10.74 102 $0.27
    6/30/2004 $10.66 104 $0.33
    3/31/2004 $11.53 177 $0.38
    12/31/2003 $10.70 162 $0.33
    9/30/2003 $11.02 122 $0.33
    6/30/2003 $11.16 174 $0.45
    3/31/2003 $10.98 198 $0.45
    12/31/2002 $10.43 204 $0.50

    Some other questions:

    Clean earnings? Over a full interest rate cycle I think this kind of business can earn a ROE of 10-12%. That would imply Anworth EPS of about $0.71 and a yield of about 15% on Friday’s closing price. Managements generally seem to think they can earn a ROE of 12-15%.

    Share repurchase? ANH repurchased 3.6mm shares at a discount to NAV in 2005 and 2006. It’s reasonable to expect ANH to buy back discounted shares in the future, however, in the short-term I think management is focused on preserving capital and trying to realize some value from the liquidation of Belvedere.

    Liquidation? There was a lot of corporate activity during 1998-2000 when mortgage REITs and specialty finance companies traded at a discount to NAV. Fortress investments was involved with several REITs including ICH and CMO.

    Prepayment risk? I can’t predict the net impact of lower interest rates, tighter credit, and a weak housing market. My thesis is that ANH is currently cheap under any realistic pre-payment scenario.

    Type of funding? I believe that ANH will continue to fund the agency portfolio with repurchase agreements. My understanding from several companies is that they have not had any difficulty rolling these agreements forward, although collateral requirements have risen from very low levels back to where they were a few years ago.

    Timing? As I edited this idea Friday morning I had no idea that the fed would “rescue” the market and create a stampede of buyers for the agency MBS REITs (ANH CMO NLY and MFA). At Friday’s close ANH was still trading at a 25% discount to its secure NAV and a large discount to the comps. Lower short-term interest rates would speed the recovery in NIM and dividend yield that the market loves so much. A more stable market might allow some recovery from the Belvedere portfolio.

    SubjectBalancing the Balance sheet
    Entry08/20/2007 10:39 AM
    Memberjohn771
    I was just reading my write-up and i realized the PF Anworth and Belvedere balance sheets don't balance. I apologize for the sloppiness but fortunately the error doesn't affect the bottom line valuation.

    The company does not break down miscellaneous working capital items by entity so for simplicity I assumed that all were held at the parent. Now I realize that $5.239mm of net working capital should be shifted from Anworth to Belvedere. Then everything balances neatly. The bottom line valuation is not affected because the correct working capital allocation is already reflected in the Anworth's bottom line disclosure of its equity and loan to Belvedere. I thought the separate entity balance sheets would help people to understand Anworth, but my real discount to NAV valuation thesis is simply:

    $423.3mm consolidated common equity at 6/30
    - $83mm equity investment in Belvedere
    - $42.8mm loan to Belvedere
    -----------------------------------------
    $297.5mm common equity post-Belvedere
    45.7mm shares
    -----------------------------------------
    $6.51/share NAV



    SubjectRe: REIT Status
    Entry08/22/2007 03:33 PM
    Memberjohn771
    I don't believe there's any risk to ANH's REIT status.

    The intent of the qualification rules is to prevent non-real estate income from being earned in the tax-free REIT structure. Belvedere will report a substantial loss that will not jeopardize any of Anworth's gross income tests. In the absence of surprising positive news, Belvedere will be a defunct entity with minimal remianing assets and liabilities in the process of being wound down.

    If Anworth failed to qualify as a REIT then it would impact the impact statement (ANH would pay tax on current earnings), but not the balance sheet or NAV. Therefore it would have no impact on my recommendation of ANH.

    It seems likely that the Belvedere loss will occur within a Qualified REIT Subsidiary rather than a Taxable REIT Subsidiary. If it had been a TRS, then there would be a NOL carryforward that could shield future earnings in the same entity from tax. But it's just as well, value managers get hypnotized by a tax NOL as if it were Sauron's ring of power. Throw it in the fire and be done with it.

    SubjectUpdate
    Entry09/07/2007 04:51 PM
    Memberjohn771
    News today.

    1) from 8-k. "Anworth Mortgage Asset Corporation’s (“Anworth”) wholly-owned subsidiary, Belvedere Trust Mortgage Corporation (“Belvedere”), recently engaged two financial advisers to assist Belvedere with identifying term financing alternatives to replace the financing previously provided by certain of Belvedere’s Master Repurchase Agreements with several counterparties. On September 5, 2007, following discussions with Belvedere’s financial advisers during which discussions it was determined that obtaining alternate financing with a maturity of one year or more was presently unlikely, it was concluded that a material charge for impairment with respect to all of Belvedere’s assets is required under accounting principles generally accepted in the United States of America. Anworth’s estimate of the amount of this impairment charge is $142.8 million, which consists of its initial investment in Belvedere of $100 million and inter-company loans to Belvedere totaling $42.8 million. The effect on stockholders’ equity will be approximately $125.8 million, which is the total amount of the impairment charge of $142.8 million less approximately $17 million of unrecognized losses, which is reflected in Accumulated Other Comprehensive Loss at June 30, 2007. Anworth does not anticipate that the impairment charge will result in future cash expenditures."

    Comment: The net impairment of $125.8mm is exactly the amount that I expected ANH to lose on Belvedere ($83mm of equity + $42.8mm intercompany loan).

    2) From NR and 8-K: "SANTA MONICA, California – (September 7, 2007) – Anworth Mortgage Asset Corporation (NYSE: ANH) announced today that it had recently sold approximately $692 million in face amount of its MBS holdings which resulted in a realized loss of approximately $21 million. These sales consisted of approximately $637 million of Agency MBS and approximately $55 million of AAA-rated Non-Agency MBS. The sale of Agency MBS resulted in a realized loss of approximately $11.5 million. As of June 30, 2007, these Agency MBS had a carrying value that had reflected an unrealized loss of approximately $13 million. The sale of Non-Agency MBS resulted in a realized loss of approximately $9.5 million.

    In recent weeks, liquidity and credit concerns surrounding the subprime mortgage and commercial paper markets have continued to grow and have resulted in banks and other lenders becoming more cautious in providing repurchase agreement lending relative to both Agency MBS and AAA-rated MBS. While the effect on the availability of financing for AAA-rated MBS has been more pronounced than for Agency MBS, the Company has recently seen increases in the borrowing rate relative to its Agency MBS financings as well as more limited liquidity in terms of length of borrowing term, margin requirements and amount of financing available. Given the higher rates, limited liquidity and increased uncertainty surrounding the Company’s borrowings relative to its Agency MBS and Non-Agency MBS holdings, the proceeds from the Company’s MBS sales have and will be used to reduce its outstanding repurchase agreement borrowings and reduce the Company’s financial leverage in the near term. Should conditions warrant, the Company may look to sell additional MBS and further reduce its leverage in the future. Throughout this challenging period, Anworth has at all times been in full compliance with all of the terms of its repurchase agreement borrowings relative to both its Agency MBS and Non-Agency MBS holdings.

    The Company’s sales of MBS are also expected to positively impact the yield on our portfolio going forward. The MBS sold had a yield on historic amortized cost of approximately 4.6% relative to the overall portfolio yield of 5.1% during the quarter ended June 30, 2007. In addition, once the current uncertainties subside and a more normal level of liquidity for financing returns in the future, we expect to increase our level of leverage to facilitate the acquisition of additional Agency MBS at yield spreads we expect to be higher than current portfolio levels.

    The Company’s remaining Non-Agency MBS holdings currently consist of AAA-rated MBS with a current face amount of approximately $52 million."

    Comment: The agency sale resulted in a net gain of $1.5mm vs the 6/30 valuation and the AAA sale produced a loss of about $9.5mm (minimal valuation allowance at 6/30). The combined loss of $8mm is about $0.18 per share. I'm going to make a WAG that gains on the remaining agency portfolio approximately offset losses on the remaining AAA investments. So that could push BV at 9/30 to about $6.33.

    Anworth sold assets with low current yield. As a result the NIM and potential dividend payments will increase.

    SubjectRe: Max
    Entry09/10/2007 10:35 AM
    Memberjohn771
    ANH would not give me more detail on the AAAwful bonds aside from repeating that they were CMO floaters backed by first lien mortgages. ANH was quite surprised that the value fell so far. These bonds had been pledged as repo collateral. I believe that the counterparties significantly reduced the amount they were willing to lend against these bonds leaving ANH in a tight margin position and prompting the sale. The low price reflects a combination of some presumably undesireable characteristics of this paper and the very weak market for any non-agency bonds.

    Subjectfloaters
    Entry09/10/2007 01:10 PM
    Memberoscar1417
    >>> ANH would not give me more detail on the AAAwful bonds aside from repeating that they were CMO floaters backed by first lien mortgages <<<
    I'd be surprised if they are all variable rate, I would have thought that the spike in non-conforming rates would be responsible for a large part of the exposure. Reports are coming in that the rate on non-conforming (i.e. jumbo) loans went from around 7% to 8.5-9.0%, so any fixed-rate MBS's at the lower rate would show an impairment.
    A 17% hair cut due exclusively to credit concerns with AAA-rated MBS would be unbelievable. I wonder who was on the other side of that transaction.

    Subjectfloaters
    Entry09/11/2007 06:18 AM
    Membersparky371
    I'm just getting up to speed on this stuff, but, from what I can gleen, not all floaters are created equal. Is it possible that the floaters they'd sold had capped out and thus it was an interest rate issue and not a credit issue?

    SubjectCompany Update
    Entry10/18/2007 10:38 AM
    Memberjohn771
    I don't see any surprises in yesterday's news:
    http://phx.corporate-ir.net/phoenix.zhtml?c=66253&p=irol-newsArticle&ID=1064356&highlight=

    9/30 book value is estimated to be $6.25, a few cents lower than I expected. This should be a very solid valuation backed by a portfolio of agency MBS.

    4Q portfolio spread is estimated to be 40bp. This probably puts EPS in the range of $0.10-0.15 and will allow an increase in the dividend rate.

    ANH remains cheap relative to comps (CMO, MFA, and NLY) that are all trading at a premium to book value. But ANH's absolute value is no longer a bargain.


    SubjectUpdate
    Entry11/16/2007 10:09 AM
    Memberjohn771
    Each share is now backed by $6.28 of baby and $0.16 of bathwater.

    Counterparties liquidated a majority of the Belvedere Trust assets, but Anworth says that some BT counterparties continue to provide repo financing, even though Anworth believes the liquidation value of the collateral is below the loan value. It is unlikely that ANH will salvage any value from Belvedere so it seems strange that ANH continues to shows a positive $7mm as net assets of discontinued operations ($74mm assets - $67mm liabilities). ANH says the asset values were the mark-to-market valuations set by repo counterparties.

    During the conference call Anworth indicated an eagerness to make a secondary offering that could be invested at high current spreads (generating a low teens ROE after leverage). In the current market it appears that an offering would be accretive to book value, current earnings, and allow for an increased dividend.

    I still hold some shares because I don’t want to realize more gains this year, but my original investment thesis has been fully realized.
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