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Non-Tech : All Industries Value Investing

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To: Elroy who wrote (4245)	9/16/2011 11:29:13 AM
From: Keith Feral	of 13719

CIM could be in real trouble this quarter. They have 70% of their exposure to non agency paper which probably got crushed again this quarter. If IVR reduced their payout 20%, CIM might reduce their payout alot more than that. It really makes no sense how an unlevered reit could maintain at 17% dividend. The underwater mortgages they bought will either go into foreclosure or get refi'd. It's as simple as that. They should have a yield around 6% given the lack of leverage. The refi plan plays utter havoc for non agency reits, since all their legacy positions will get called away or go into default. The main question for agency reit's will be whether or not the regulators put an end to their highly leveraged REIT status. Every hedge fund in the country should try to apply for REIT status if mortgage reits are allowed to operate with 8 to 1 leverage and no taxes. If regulations go against mREIT's, the damage will be swift and severe even if they scale in the restrictions over a longer time period to give them time to adjust. Canada got into a pickle with CRT's a couple years back that were trying to give away double digit yields tax free. Now, they have about 8% yields. In order for the mREIT's to exist, I think their yields will have to fall to about 8% which would be consistent with high yield MLP's, CRT's or high yield alternatives. The mREIT's will certainly survive, but not with the risk free 20% yields they have right now with no taxes. At least the US have given everyone a heads up that a review of the leverage is under way. Canada just pulled the trigger overnight and left no one with an opportunity to scale out. I'm taking heed of the warning flags the SEC is throwing up for the grossly unfair operating leverage the mREITs are enjoying right now.

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