Anworth eyes higher profits as borrowing costs dip

BANGALORE (Reuters) - Real estate investment trust Anworth Mortgage Asset Corp (ANH.N) expects profits to rise in 2009 as it reaps the benefit of lower borrowing rates and investments in high-quality assets.

"By far the most important factor is that the borrowing rates we pay to finance our mortgage portfolio backed by Fannie and Freddie have gone down dramatically in the past year," Chief Executive Lloyd McAdams told Reuters in an interview.

Mortgage agency REITs like Anworth look to borrow from short-term markets at a lower rate, and invest its equity capital and borrowed funds in long-term instruments like agency mortgage-backed securities (MBS) at a higher rate to make a profit.

The company, which has seen profits rise steadily even in the midst of the financial crisis, sees higher net income in 2009.

Analysts expect the company to post 2009 net earnings per share of $1.17, according to Reuters Estimates. Anworth earned 69 cents a share in 2008.

"You are a very profitable company when you can borrow at 2 percent and invest at 3 percent or 4 percent," the CEO said referring to the consensus estimate.

McAdams said the Santa Monica, California-based company may increase its 2009 dividend "by just a bit" if profits rise.

BOOST FROM LOW-COST BORROWING

Anworth's funds largely come from the global short-term collateralized lending market where institutional investors lend money, for periods usually less than a year, based on LIBOR rates.

LIBOR-based borrowing rates have dropped to about 1.3 percent currently, from just under 4 percent in September 2008, McAdams said, adding that this was aiding the company as yield on the assets it owned had not gone down that much.

Also, the company's earnings are expected to gain from refinancing of some longer-term instruments that had been borrowed at higher rates, the CEO said.

He, however, does not expect to see a further dip in borrowing costs.

The CEO also ruled out the possibility of Anworth investing in riskier non-agency MBS in the foreseeable future.

Most of Anworth's investments are in agency MBS. U.S. agency MBS are securities that are obligations guaranteed by the U.S. government or its agencies, such as Fannie Mae (FNM.N) (FNM.P) or Freddie Mac (FRE.N) (FRE.P).

PREPAYMENTS MAY SURGE

One of the concerns for the company is that lower mortgage rates may fuel prepayments and hurt the company's profit.

"That's a risk," McAdams agreed.

Prepayments could rise if mortgage rates fall and if homeowners are allowed to refinance their mortgages without having the "standard amount of equity" in their home, he said.

Due to higher prepayments the company may then have to reinvest the prepaid principal in lower-yielding mortgages.

"Mortgage prepayment rates will increase, but will increase from historical low levels," the CEO said

In the fourth quarter, refinancing and principal payment was at an annualized rate of 10 percent in Anworth's portfolio.

"Historically, the average rate and the rate we build our business model around is about 20 to 25 percent. So, we think 10 percent is normal under any stretched imagination."

Also, McAdams does not expect mortgage rates to go down further given market economics.

The government may want lower mortgage rates, but there are large investors who would be uncomfortable with these low interest rates, McAdams said. These investors would sell mortgage assets which in turn would push mortgage rates up, he said.

"It's not as if the government has a knob to turn on the machine that makes mortgage rates go down."

(Editing by Himani Sarkar)