Are Mortgage REITs Bribing Investors to Stay?

The recent gyrations in the mortgage REIT sector have knocked down even big players like Annaly Capital (NYSE: NLY  ) and American Capital Mortgage (NASDAQ: AGNC  ) , leaving them bruised and battered as investors flee the once-lucrative trusts for something a little less volatile. Annaly has just been downgraded to Underperform by Sterne Agee, and American Capital Mortgage's Gary Kain was forced to admit that his agency-only trust will experience another drop in book value for the second quarter, after saying earlier that book value was rebounding.

Fighting back
The mREITs aren't taking this new reality lying down. Several trusts have recently declared dividends that are unchanged from the previous payout period, despite the recent bloodbath. Is this just a desperate bid to hang onto investors, or do these companies have confidence that this storm will pass, leaving them no worse for wear?

In a show of bravado, several mREITs have declared dividends within the past week, with nary a decrease in sight. Capstead Mortgage (NYSE: CMO  ) just announced the continuation of its $0.31 per share quarterly dividend, which was upped from $0.30 just this past March. CYS Investments (NYSE: CYS  ) revealed its intention to raise its own quarterly payout to $0.34 from $0.32 per share earlier this week, and Armour Residential (NYSE: ARR  ) has joined in, keeping its monthly $0.07 per share dividend firmly in place, even into the third quarter.

All these positive vibrations seem to be doing the trick, lifting the sector out of the doldrums, at least momentarily. But, mREITs want more than just a temporary reprieve, and managers have been using public relations opportunities to talk up their businesses and allay investor fears.

Agency-only mREITs especially vulnerable
All mortgage REITs have taken it on the chin lately, but agency players like American Capital Agency and Armour Residential have been stung especially hard. In a recent article in the Financial Times, Armour co-CEO Scott Ulm notes that many investors don't have a firm grasp of how the industry works. He points out that, despite the upheaval in the sector of late, new opportunities for investment are presenting themselves, as prices drop and mortgage bonds become more of a bargain.

Likewise, American Capital Agency CIO Gary Kain spoke to investors at the Morgan Stanley Financials Conference this week, radiating a positive attitude about the mortgage-backed securities market, even in the face of a QE3 tapering or exit.

Noting that a slow exit would still likely entail another $350 to $450 billion of MBS purchases on the part of the Federal Reserve, Kain also pointed out that MBS issuance is steadily declining, as well. In addition, wider spreads, lower MBS pricing and higher yields will probably prompt banks and funds to jump back into the game, entities that Kain feels have backed off over the past few months in the face of a daunting Fed presence in the MBS market.

How has all this pushing back by mREITs been working out? Pretty well, it seems. The sector is lit up nice and green so far today, and I think all of the positivity has had the desired effect. The big question is, of course: Can they keep it up?

There's no question Annaly Capital's double-digit dividend is eye-catching. But can investors count on that payout sticking around? With the Federal Reserve keeping interest rates at historically low levels, Annaly has had to scramble to defend its bottom line. In The Motley Fool's premium research report on Annaly, senior analysts Ilan Moscovitz and Matt Koppenheffer uncover the key challenges the company faces and divulge three reasons investors may consider buying it. Simply click here now to claim your copy today!


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 13, 2013, at 1:29 PM, pace2001 wrote:

    Is it that expensive to create content that Fool are letting users with no industry experience write articles?

    One REITS are required to pay dividends up to 90% of earning for tax purposes. Failure to do so will be penalized by the IRS. These MREITS mention are just do that paying out income on a regular basis.

    Two timing, it is not s how of bravado but normal operating procedures to announce dividends at this time. ARR, CMO and CYS all announce dividends at this timeframe, if they did not announce dividend within the first half of June it would raise concern as investors expect it at this timeframe.

    Armour co-CEO Scott Ulm notes that many investors don't have a firm grasp of how the industry works. Apparently he was talking about the writer of this article and the Fools at Motely and Fool.

  • Report this Comment On June 13, 2013, at 1:59 PM, Danny337 wrote:

    You got it Pace. This type of buisness cannot be summed up in 3 paragraphs. It also takes someone who has deeply studied MReit workings and how buisness is conducted which has practically the opposite affect as normal stocks do. Nor was it mentioned what MReits are doing to hedge against such situations.

    You are correct on the have to pay out of 90% and it is not all done immediately. AGNC can pay what it is paying now till the last quarter. Others also. The dividend could hold and things get better and everyone got upset of a blip of political BS.

    Does Motley Fool have someone who is reasonably an expert on the function and buisness of MREITS? This article is ok, but is very misleading on its interpretation viewing the facts, sheets, spreads, rate changes and management.

  • Report this Comment On June 14, 2013, at 5:39 PM, jojolicious wrote:

    With the continued "bashing" of Mreits - EVERY DAY- without properly considering the fact (like SWAPS to protect rising rates, and prepayments allowing new funding to be made, or gains in the existing position which can be harvested - and several more reason Mreits can make plenty of $$$ in this environment - the Motley Fool writters are probably involved with the increasing number of shares being shorted!! This is a violation on law and i have seen several posters discussing the notion of filing a lawsuit in order to get to the bottom of just why this is occuring - its irresponsible for the Motley Fool to keep this up. It will be interesting to know the legality behind the continual bashing. I dont think it is a mere coincidence.

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