Hatteras Financial (NYSE: HTS ) recently announced it would raise capital with a share offering. That follows a similar move by the big cheese of mortgage REITS, Annaly Capital (NYSE: NLY ) , only a few days earlier.
Annaly offered $1.3 billion worth of new stock, increasing shares outstanding by about 12%. Hatteras followed up with $287 million, increasing outstanding shares by more than 20%. In both cases, the market took a bite out of the stock price following the announcement.
Shareholders quickly focus on the fact that their shares are now a smaller chunk of the company. However, the new cash rolling in adds to the company value. The shares are now a smaller slice of a bigger pie, but we don't know whether each slice has more or less pie. Keep in mind that real estate investment trusts, or REITs, must distribute most of their cash flows, so issuing shares is about the only option for raising new capital.
Companies raise capital by issuing shares for a number of reasons. The share prices of big banks like Bank of America (NYSE: BAC ) and Citigroup (NYSE: C ) were hammered when they needed to sell shares to meet capital requirements and offset bad loan losses. In those cases, shareholders got smaller slices of a smaller pie. That isn't the case for the two REITs.
Annaly intends to use the new money "to purchase mortgage-backed securities" and for "general corporate purposes, which may include additional investments and repayment of short term indebtedness." It's a similar story at Hatteras. "We expect to use the net proceeds of this offering to acquire agency securities, primarily three-year, five-year and seven-year hybrid ARMs. ... We may also use net proceeds for general working capital purposes."
In other words, both companies plan to expand their existing business of borrowing short, investing in mortgages, and making money on the interest-rate spread. In addition, both companies were able to price the new shares above the most recently reported book value.
Recent increases in interest rate benchmarks while short-term rates stay near zero mean higher spreads. These two mortgage REITs have been strong performers, and both managements are raising new money, probably to take advantage of those spreads. Both issued shares above net asset value. In both cases, shareholders will end up with a little more pie in each slice.
You can follow any of the stocks mentioned using our free watchlist service, My Watchlist.