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While shares of Annaly Capital (NYSE: NLY ) are off a dividend-adjusted 4% since last year, the company has weathered some tough times in the industry. Potential new regulatory threats, changes to the federal government's HARP program, and other concerns about prepayments have hit mortgage REITs like Annaly. So how does the situation look for 2012?
In a phrase, more of the same. But that doesn't mean that Annaly, now yielding more than 14%, shouldn't still be able to pump out those luscious dividends.
Interest rates will continue to remain near zero, meaning that mortgage REITs such as Annaly, Chimera (NYSE: CIM ) , and American Capital Agency (Nasdaq: AGNC ) should continue to have low costs of funds for their operations. In fact, there's speculation that the Federal Reserve will continue to keep rates low into 2014. And with the Fed's promise to telegraph its moves in the near future, we should have some transparency into the direction of rates, and that's good if you want to know what might happen to your REIT's dividend.
Last year, REITs raised a record amount of capital. Fresh capital raises totaled $37.5 billion, an increase of 32% from the year before and the largest amount of money since the industry was established some half-century ago. Annaly, American Capital, Armour Residential (NYSE: ARR ) , Invesco (NYSE: IVR ) , and American Capital Agency all increased their share counts significantly, pulling in some of those billions to fund new purchases of mortgage-backed securities.
So with a generally favorable environment, I would not be surprised to see more capital raises from such mortgage REITs and Annaly, which raised its own share count from 804 million in December 2010 to 970 million as of September. It may not be as impressive as 2011, though.
Other changes in the regulatory climate could affect mortage REITs, too. Shares of such REITs were hurt early last week, as some analysts speculated that the Obama administration could introduce a mass refinancing program that is much more extensive than the current HARP program. Such a program could hurt prices of mortgage-backed securities owned by the above REITs.
However, one administration official countered the assertion that a refinance program was in the offing. And given the administration's lame attempts to help borrowers thus far, I'm hard-pressed to believe that anything truly substantive will be done, meaning mortgage REITs might suffer from investors' worries of disruption more so than from any actual fundamental change. But it's an election year, so who knows for sure? Still, color me skeptical (and cynical, too).
So I think the situation looks good for Annaly and other mortgage REITs for 2012. While the economy ever-so-slowly improves, it's still dismal enough that low rates should continue. And that means good things for Annaly and its high yield. But when we get an inkling that rates could rise, investors should be careful, since that 14% yield cannot last forever.
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