Wednesday, June 8, 2011

Hattaras Financial - 4.2 %

In a future blog post, I'll get to another of our smaller holdings.  This smaller holding, which goes by the symbol WAC, was my introduction to Real Estate Investment Trusts or REITs.  Without WAC, there would be Hattaras Financial (HTS) in our portfolio.

Without stealing my WAC post's thunder, I'll just say that our second largest holding Walter Energy wasn't always Walter Energy.  When I bought it, it was Walter Industries.  When Walter streamlined, its real estate investment portion was jettisoned from Walter proper; but all owners of Walter received a portion of this new spin-off.  One day, I noticed a small amount of WAC was in my portfolio without my ever actually buying it.  I didn't really know what to do with it, so I sat and waited.  Eventually, this waiting took me to tax season.  While filling out the dividend portion of our taxes, I was stunned to see a huge jump from the previous year, I mean a gigantic leap.  Walter (WAC), the piddling amount I owned, had yielded more dividends than all my other stocks combined.  And thus I was indoctrinated into the world of REITs.  REITs are mandated by law to pay 90% of their profits as dividends in order to be taxed differently, I assume.  This payment in dividends can be more than a decent stock may increase over the same period.  Deciding I'd like a larger percentage of our portfolio to be these relatively high returns, I looked at a number of REITs and eventually settled on Hatteras Financial.  HTS promised 14% return in dividends and so far has paid off exactly that.

Now, lest people be looking the 700% return on Mitek systems or the 800% return on Ford and decide that 14% is laughable, Mitek was a risk/reward proposition and I have others like it in my portfolio, and Ford was a once in blue moon opportunity in which a series of unique circumstances came together.  At this point in a stagnant economy and the market making up most of its loss since Lehmen fell, a chance for 14% returns - cash every quarter in my ETRADE account - is very good (compare any CD or savings account).

So what is the catch?  Well, HTS makes its money by borrowing at very low short term interest rates and re-lending at higher long term interest rates.  As long as the spread in large enough, these 14% profits should keep rolling in.  If interest rates suddenly rise and the spread narrows, I assume my profits dwindle.  If the stock tanks once this spread contracts, well, therein lies the rub.  However, for now, I'll keep this small portion in my portfolio and along with WAC, see how different circumstances effect the wild and wacky world of REITs.  As a long term cash generator, I may see more REITs in our future.

There is really not much to say historically about HTS.  Its been around for 4 years and is based in North Carolina (Winston-Salem) much as one of my favorite other stocks is.  Hatteras gets its name from an island in North Carolina.  Despite its relatively recent start, Hattaras' management team has been around much longer, with plenty of experience in the real estate investment world.  The management team seems confident that they can whether interest rate changes maintaining these high returns.  As long as they stay above 8% without the value collapsing, I'll deem this a long term success.

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