Are Mortgage REITs Bribing Investors to Stay?


The recent gyrations in the mortgage REIT sector have knocked down even big players like Annaly Capital and American Capital Mortgage , 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 just announced the continuation of its $0.31 per share quarterly dividend, which was upped from $0.30 just this past March. CYS Investments revealed its intention to raise its own quarterly payout to $0.34 from $0.32 per share earlier this week, and Armour Residential 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?

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