02-11-2014, 05:40 PM
(This post was last modified: 02-11-2014, 05:53 PM by hendi_alex.)
mREITs raise equity, then borrow to lever up 7x-10x. The cash is generally deployed by holding mortgages in their portfolio. Income is generated from the spread between borrowing and lending rates. Some of the mREITs are originators, while others simply buy bundled products on the market. Most do both. When spreads narrow or heaven forbid, invert, the huge use of leverage can get them into trouble very quickly. If the mark to market for holdings drops, that can eat up the 10%-15% equity very quickly and can trigger loan covenants. IMO the best time to buy is very near the end of a fed. rate increasing cycle, or shortly after the decreasing cycle has begun. The time to exit is well in front of any fed increases. IMO, jobs creation and inflation rates are the best indicators for early exit before the mass exodus and share price collapse that invariably takes place. All of these operations do a significant amount of hedging, but the hedging only covers modest changes in rates for fairly short duration. I've seen more retail long investors lose more money on mREITs than on any other single investment, at least in the context of several years of reading posts on various investment boards.
BDC's are basically in the same business, of holding loans and making profit from the spread between borrowing and lending, but..... Leverage use is much smaller, no more than value of equity. They hold loans for various businesses which can't access capital through more normal means with banks or share offerings. The BDC also can get very creative in their terms and can write the loans with strings attached that are heavily in their favor. BDCs are generally more diversified than mREITs, but they are also serving many clients who are not in the soundest of financial condition. They have the same issue with revolving debt and with loan covenants. ACAS is a great example of one of the best BDCs which was almost brought down when loan covenants were triggered in 2008-2009. Everyone thought that ACAS was the most conservative investment in the BDC realm. Shares have still not come anywhere close to recovering from the near b.k. during the last crisis.
![[Image: z?s=ACAS&t=my&q=l&l=on&z=l&a=v&p=s&lang=en-US®ion=US]](http://chart.finance.yahoo.com/z?s=ACAS&t=my&q=l&l=on&z=l&a=v&p=s&lang=en-US®ion=US)
BDC's are basically in the same business, of holding loans and making profit from the spread between borrowing and lending, but..... Leverage use is much smaller, no more than value of equity. They hold loans for various businesses which can't access capital through more normal means with banks or share offerings. The BDC also can get very creative in their terms and can write the loans with strings attached that are heavily in their favor. BDCs are generally more diversified than mREITs, but they are also serving many clients who are not in the soundest of financial condition. They have the same issue with revolving debt and with loan covenants. ACAS is a great example of one of the best BDCs which was almost brought down when loan covenants were triggered in 2008-2009. Everyone thought that ACAS was the most conservative investment in the BDC realm. Shares have still not come anywhere close to recovering from the near b.k. during the last crisis.
Alex