An article appeared in the Motley Fool today, which is quite typical of that pub's diligence and attention to detail, as well as the spin that goes on when presenting things as simple as an earnings release.
Here's the article.
Now, the first thing you should know, before reading it, is that NFI just beat the Street's estimates by 25%. They had a record quarter for loan production. They significantly reduced their cost of production. All systems are wildly positive.
And yet this article, by a "concerned shareholder" who is purported to be long, ignores all of those elements, preferring to paint the latest release as ominous and troubling. He erroneously describes apparent lower YOY earnings a result of the Fed's interest rate policy. He incorrectly states that NFI has been somehow harmed by an inverted yield curve - but never says how. He questions the solidity of the dividend, ignoring the now ONE YEAR of banked dividends - they are only paying out 2005's accumulated dividend in 2006, reserving 100% of 2006's dividend to be paid in 2007 - the only REIT that has that guaranteed earned income in the bag, making it the most reliable dividend in the business. The article's tone makes it clear that the author views everything about NFI as risky - and yet all the things he cites are either erroneous, not a risk, or simply negative sentiment masquerading as analysis.
Normally I wouldn't waste my time, however I am familiar enough with NFI's accounting to be able to rebut the "concerns." The funniest is his concern over his return. He freely mixes the dividend yield (17+%) with the return on the share price, and pays passing tribute to the fact that NFI is the poster boy for naked short selling manipulation (on the SHO list, with rare exception, since the list was published) and that the short interest is huge - and has been for years, as the hedge funds playing the stock have INCORRECTLY bet on the company's business fundamentals faltering for 4 YEARS. He doesn't apparently understand that companies with huge short interests and unknown FTD levels (but abusive given the SHO list) tend to be depressed price-wise. He also fails to mention that the large short interest has been betting against the company for a long time - all the way through the largest housing boom in history - thus their apparent negativity over the company's prospects have been 100% wrong for the whole period.
I have some advice for the author: If the dividend has been rock solid since you bought it, and if there is a year's worth of dividend banked after paying out 2006, why are you acting concerned over the dividend? Name one company that has that kind of buffer of accumulated dividend. You can't. There isn't any. Your complaint is that the share price has sunk, rendering your investment a lower total return, IF YOU SOLD NOW, which you haven't. That depression is typical of the manipulated depression we see in many of the Reg SHO stocks being played by a certain cabal of hedge funds. The stock price in no way reflects any uncertainty over the stability of the dividend, any more than it has for the last 4 years. It does reflect the capabilities of a well funded, powerful group of hedge funds to be able to manipulate the share price of targeted companies, regardless of the business fundamentals. That's why it is illegal, although you'd never know it from the lack of enforcement by our regulators.
I normally don't discuss company specifics here, as that isn't my thing - I am usually concerned with the broader strokes of manipulation, and collusion with the press. This was too good an example to pass up, however, of the insidious sort of pap that passes for journalistic comment from NY-based pubs these days.
My point here is that even supposedly friendly sources can spin disinformation. This would be an example where either the author is wholly ignorant of all positives and the basics of the company, or simply elected to not mention them. One says he is ignorant of the company's business, the other that he has an agenda. I shall leave it up to you to decide, after reading the article, and my emailed correspondence to him.
This type of article is typical, BTW, and used to come from Herb Greenberg - his 31 examples in one 12 month period ended abruptly when he was otherwise occupied by subpoenas. Thankfully, the MF has stepped into the breach.
I'm just surprised it isn't Seth writing it...
"I read with interest your latest piece on NFI in MF.
Perhaps I can clarify some of the issues you see as a concern.
For starters, the YOY GAAP earnings decline you cite is a phantom, and a disingenuous one at best. Consensus estimates for this quarter were .79 cents. They turned in .99 cents. That is a 25% UPSIDE surprise, is it not?
Now, as to YOY shrinkage, is that because NFI is making less money? No. It is because of the way that the company structured their securitizations and has nothing to do with economic impact.
Last year, the company structured their securitizations as sales, resulting in gain on sales that contributed to GAAP. This year, same securitizations were treated as financings, resulting in no contribution to GAAP. Same money in, different accounting treatment. A good and fair question at this point would be, OK, let's compare apples to apples - what would NFI's GAAP have been if they had used the same accounting treatment this year for the securitizations? Answer: GAPP of around $1.50 - a net increase YOY no matter how you slice it, and in keeping with the increases in the size of the portfolio, and the originations - hopefully you noted that Q2 was a new record for those.
So, the lesson here is that you need to look a bit closer at the accounting treatment before you jump to conclusions.
Ditto for Taxable Income, which was off from Q1 by .65. Why, you would have to ask? Same thing. In order to meet the REIT requirements, they moved some hedges into the taxable subsidiary. That, and the difference in sale vs. financing, accounted for roughly $25 million of discrepancy in TI. So again, look at what they actually did in terms of performance. If they had structured the securitization as they did last year, and had kept the hedges in place in the REIT, their TI would have been around $2.10. So again, not a decline in pure earnings terms, but rather an accounting artifact.
Why does any of this matter?
If I picked 7 apples last year, and picked 10 this year, but had to hide 3 due to the farmer's arcane rules, did my apple production decrease this year? If I still get to eat them, but have to count them somewhere else, did my apple consumption get impacted negatively?
REIT accounting can be difficult at times. This isn't. If you don't believe me, call investor relations and ask them about the GAAP number if they had selected a different accounting treatment, and further explore the actual economic difference to the company in terms of dollars in. You will find a YOY increase - a rather significant one.
Hope this shines a bit of light on the matter for you.
Regards,
AKA Bob O'Brien"