Five Oaks A Strong Example The REIT Market Is Growing

Five Oaks is shifting investments back into earnings from the hedge funds to increase earnings.

Five Oaks stock price is higher than the start of the year with a stronger recovery.

Earnings are expected to increase this Summer, with earnings, profits and higher dividends will follow.

Our target price for the stock by the end of 2016 is $9 per share.

Over the last 2 years the companies as real estate investment trusts (REITs) have suffered at the fate of investors fear that rising interest rates would damage their portfolios, their earnings, profits and dividends which are a return to investors. This was perceived as a serious threat to the industry that most REITs increased part of their investment as a insulation barrier against the rise in rates. Many referred this to their hedge against the rate increase. As an investment, their hedge position was suppose to increase if the interest rate rose, however what most REITs found was that month after month and quarter after quarter for 2 years the medicine was worse than the effect of the rate hike. Lost earnings which directly translates to profits and dividends for the investors was down, which pushed the stock prices down in a vicious spiral.

Although I was not a fan of raising the interest rate in December of 2015, this proved to be the singular event that freed many of the REITs from this spiral and freed cash for more investments, which is not translating into more profits and will translate to bigger dividends for investors. In the stock market, everything is cyclical. Even change. What we are seeing now is different with different factors pushing and pulling on the markets, stocks and investors, but the cycle has turned to recover the prices based on the new factors that include higher interest rates in the future that will increase earnings, profits and feed the investors pockets to bid up the prices of the REITs.

The stock market was taken hostage by oil prices during January and February the year and almost every stock dropped as the markets dropped about 10%. Some stocks much more and the oil industry has not recovered and will not for some time. But the rest of the market is doing much better as 22 of the 30 stocks on the DOW Jones Industrial Average have crossed into positive territory for the year. The DOW crossed above 18,000 on 18 April 2016, and closed above that for 2 days in a row.

The REIT industry has shown a great recovery during the last 2 months, from the drop in January/February, but also since the first drop in May of 2014, when the Federal Reserve Board first discussed the rate hike and REITs dropped about 30% within weeks. Now we are seeing a recover against that drop and I will use Five Oaks, Investment Corp (OAKS) to highlight my analysis.

Five Oaks Investment Corp. (OAKS) is focused on investing in, financing, and managing a portfolio of residential mortgage-backed securities ("RMBS"), residential mortgage loans and other mortgage related investments. The company seeks to provide attractive short-term returns (dividends) and long-term gains through capital appreciation. Investing primarily in both Agency and Non-Agency RMBS allows the company to take advantage of investment opportunities across the residential mortgage market.

Five Oaks is currently paying a monthly dividend of $0.06, which based on its stock price of $6.15 yields an annual return of 11.7%. The yield has been higher when the stock price was lower, but we believe the dividend will increase this Summer, as the company just released the dividend of April May and June of $0.06. We look for an increase for the Summer which should spur the yield and stock price higher.

In my analysis I will use the stock price from Five Oaks not including the dividend return. Five Oaks pays a monthly dividend that has ranged from $0.125 a month in February 2014 through June of 2015, where it dropped to $0.10, then dropped again in January 2016 to $0.06. During this time the company increased its hedge position which took more capital from the investments and held in accounts that were actually costing the company losses. The company reduced its dividend, which investors bid the stock price down. This is the vicious cycle that is difficult for companies to extract themselves from.

The catalyst to break free was the interest rate hike by the Federal Reserve Board that demonstrated the hedge positions were too large, and many companies have started reducing them. This will start the reverse cycle where the companies will increase their earnings, profits and begin paying out a higher dividend, with investors then bidding up the stock prices based on the higher returns.

Fives Oaks stock price in February 2015 was in the $11s. Each month it paid its dividend but the stock price steadied. Through March and April, it stayed in the $11 range and early June hit $12 a few days before dropping back into the $11s, and entered the $10s in September as the Federal Reserve Board kept talking about the interest rate hike. Back then the Board did not discuss how much, but just returning rates to historical norms. That scared investors and analysts alike, which went into a protective posture bidding down the REIT stock prices.

The stock price stayed in the $10s until May 2015, when it dropped into the $9s, the $8s in June 2015. At this time the dividend was still $0.125, and July the dividend dropped to $0.10 and the stock followed down into the $7s and $6s in August, 2015. In December 2015, when the Federal Reserve Board announced the rate hike the markets over-reacted with the stock price dropping into the $4s on December 14th, but recovered and stayed in the $5s the rest of the month.

January brought the oil crisis and the price dropped again, not due to its own issues but the market pulled everything down, and on February 11, 2016, the stock price hit bottom at $3.83 and closed at $3.96.

In the last two months we have see the recovery now hit $6.17, with a close on April 19 at $6.15. The stock is about fifty cents above the start point of 2016, and this is part of the larger recover when stock prices will reclaim losses over the last 2 years.

As I stated above, one of the drivers is the company has reduced the size of the hedge fund it was holding against the increase in the interest rates. The second factor I believe we are seeing is with the higher rate (even though it is only ¼ of 1%), interest rates have nudged up a bit allowing companies to charge higher rates and earnings are increasing. Although the initial effect is that REITs are sometimes negatively affected by interest rate hikes, the long term valuation is much more positive for REITs and investors.

During the 4 quarter of 2015, which was reported on March 23, 2016, the company stated in its financial report

http://investor.fiveoaksinvestment.com/phoenix.zhtml?c=251672&p=irol-newsArticle&ID=2150593

that it reduced its Non-Agency RMBS exposure from $303.4 million at December 31, 2014 to $121.5 million at December 31, 2015. It also increased its overall Agency RMBS assets from $314.8 million at December 31, 2014 to $375.3 million at December 31, 2015, 96% of which is represented by Agency hybrid ARMS. Arms are important to understand as they are short term (3-5 years) that allow for all the capital to be recycled with higher interest rates of the future. This will allow for increased earnings, profits and dividends.

There are quite a few good REIT companies to invest in. Five Oaks Investment Corp. is one of the many companies paying a monthly dividend that is well worth to invest in. We anticipate the financial markets as well as the REITs to do well with higher interest rates and more capital invested in the income producing funds to increase earnings. We believe Five Oaks, like many other REITs will increase earnings, profits and dividend payouts to investors as 2016 moves forward. We place a target price of $9 by the end of the year with increases in profits as investors will bid the value of the stock up.