Earlier this week, mortgage REIT Annaly Capital announced that it's raising money by selling stock -- for the third time in 2011.
Annaly expects to raise $2.1 billion this time (gross of expenses and before underwriter options), after raising $1.3 billion in January and again in February. That's a total of $4.7 billion for a $14.7 billion company.
Normally, when you see a company this hot for capital in such a short period of time, it's a big red flag; such businesses usually aren't dealing from a position of strength. Recall the big banks' efforts to raise capital during and immediately after the financial crisis.
Like its fellow mortgage REITs, Annaly has a reasonable explanation for this thirst for capital. To get beneficial tax treatment, the IRS requires each REIT to shell out "90% of its taxable income to shareholders every year."
In good times, that means hefty dividend yields. It also means the REITs can't reinvest that capital back into the business. Hence, if they need more capital, they need to either lever up with debt, or float more shares of stock.
They've chosen the latter. Check out the latest stock offerings from Annaly and some of its peers, all of which offer dividend yields at or above Annaly's 14.2%.
|
Company |
Date |
Offering Size |
Market Cap |
Dividend Yield |
|---|---|---|---|---|
|
Annaly Capital (NYSE: NLY) |
July 2011 |
$2.1 billion* |
$14.7 billion |
14.2% |
|
American Capital Agency (Nasdaq: AGNC) |
June 2011 |
$1.2 billion* |
$3.8 billion |
18.7% |
|
Armour Residential REIT (NYSE: ARR) |
June 2011 |
$131.2 million |
$369.5 million |
18.8% |
|
Invesco Mortgage Capital (NYSE: IVR) |
June 2011 |
$393.9 million** |
$1.6 billion |
17.9% |
|
Two Harbors (NYSE: TWO) |
May 2011 |
$235.2 million |
$738 million |
14.7% |
|
Resource Capital (NYSE: RSO) |
March 2011 |
$46.6 million |
$440 million |
15.5% |
|
Cypress Sharpridge Investments (NYSE: CYS) |
February 2011 |
$276 million |
$1.1 billion |
18.5% |
Source: Company press releases. Includes proceeds from exercised underwriter options and net of expenses except as noted.
*Excludes underwriter options and gross of expenses.
**Includes proceeds from exercised underwriter options, but gross of expenses.
You'll notice that the size of these offerings is quite meaningful. For instance, Armour Residential REIT's June offering comprises over a third of its current market cap.
With the Fed holding down short-term borrowing rates, and thus facilitating large interest rate spreads for longer-duration mortgage-backed securities, the mortgage REITs are having a field day. That's why you see the large capital raises.
For investors, the capital raises aren't necessarily a red flag. Who wouldn't want to capitalize in this environment? But you'll want to pay attention to how these companies are preparing for the rougher times that occur when the music stops. Risky assets and leverage via short-term borrowing boost returns (and yields) when times are good, but can throttle these companies when spreads contract.
As Annaly CEO Michael Farrell puts it, "In this evolving landscape, our management team remains focused on preparing the portfolio and the company for a wide range of outcomes."
So should we as individual investors.
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