At a time when Treasury yields have been nonexistent, MLP investors have been able to get high payouts that are viewed as quasi-dividends, due to some payouts representing income and some representing return of capital. The question to ask now is whether the risk-reward is there for new investors at the current prices. The unit prices of many key MLPs have been hit hard along with stocks in the past few weeks, and we wanted to take a risk-reward look for summer 2012. This sector could get a recovery, or it could face additional pressure like we saw in 2011.

If investors have been involved in the MLP sector since before, during or right after the great panic selling of 2008 and 2009, they are up huge if they held on. In many cases they have doubled their money or more. And as far as they are concerned they have been getting 5% to 8% in payouts each year (again, some income and some return of capital). The problem is that the prices here have become choppy and the MLP structures often have had secondary offerings on top of secondary offerings. Those secondary offerings have provided growth and acquisition capital, but some investors have started to worry that these secondary offerings may be the biggest contribution to the never-ending payout increases that have been seen in this sector.

MLPs in the energy space often attract the same sort of investors who would buy utility shares and preferred shares of banks, but they also overlap with REIT investors who look for above-market yields. This sector has enjoyed large price gains in the unit (share) prices, and investors are looking for any safe investments that have high payouts, compared to the world of no-returns in CDs and Treasuries. A wave of secondary offerings from many MLPs came before and during the recent market sell-off.

24/7 Wall St. has evaluated some of the top MLP investments to see how much implied upside remains in this sector. We have taken price performance as far as the sell-off from recent highs, as well as issues like the payout ratios (implied yield-equivalent) and the consensus price targets from Thomson Reuters. We have evaluated the following MLPs: Enterprise Products Partners LP (NYSE: EPD), Kinder Morgan Energy Partners LP (NYSE: KMP), Plains All American Pipeline LP (NYSE: PAA), ONEOK Partners LP (NYSE: OKS), Energy Transfer Partners LP (NYSE: ETP) and Enbridge Energy Partners LP (NYSE: EEP). These MLPs mentioned and covered here are some of the ones we track and keep on our watch list in the sector. These have market caps above $8 billion, they have a history of increased payouts each quarter, for the most part, and generally speaking these MLPs are all believed to have good management teams.

Investors have made a bundle here in this sector. MLPs are not really all that correlated to the price of oil because these are the partnerships (general and limited) for pipelines, terminals, and other facilities involved in the oil and gas sector in America. MLPs must derive 90% of their income from real estate, natural resources and commodities. The issuing of K-1 statements can make the structure more complicated, but the payouts often make that worth it for many investors seeking higher streams of cash flow.

We also have evaluated some of the key ETFs and closed-end funds in this sector. Be advise that just the three vehicles we have tracked in funds and ETFs have a combined market value of more than $11 billion.

The company has priced a public offering of $750.0 million of its 5.00% convertible senior notes due out in 2015. The gross proceeds to Annaly from this offering will be $750.0 million. Annaly expects to use the $750 million in gross proceeds to purchase mortgage-backed securities for its investment portfolio and for general corporate purposes.  This may also be used to retire other parts of the REIT’s long-term debt, and additional investments and to repay short term debt.

Terms of the 5.00% notes are maturity on May 15, 2015 unless earlier repurchased or converted. The notes will be convertible into Annaly common stock at an initial conversion rate of 52.7969 shares per $1,000 principal amount of notes.  The initial conversion price is equivalently $18.94 per share but that is subject to adjustment in certain circumstances.

Credit Suisse Securities and Morgan Stanley & Co. were the joint lead book-running managers for the offering. J.P. Morgan Securities and UBS Securities are acting as the joint book-running managers for the offering. Annaly has granted the underwriters of the notes a 30-day option to purchase up to an additional $112.5 million aggregate principal amount of the notes solely to cover over-allotments.

Today’s financing is important because that $18.94 conversion price is a 15% premium to the $16.47 close on Tuesday.  It also compares to a 52-week range of $14.05 to $18.79.  Keep in mind that this REIT is one of the double-digit yields out there in Mortgage-REITs.

Annaly accounts for close to 20% weighting in the iShares FTSE NAREIT Mortgage Plus Cp Index (AMEX: REM) and that ETF is weighted almost as high with American Capital Agency Corp. (NASDAQ: AGNC).

American Capital Agency Corp. (NASDAQ: AGNC) is down only $0.02 while Annaly Capital Management, Inc. (NYSE: NLY) is down 0.4% at $16.40.  If Annaly had sold the same amount of $750 million in common shares, this reaction would have likely been worse.  The iShares FTSE NAREIT Mort Plus Cp Index (AMEX: REM) is down 0.3% at $13.98.

JON C. OGG

GAAP net income for the quarter was $901.8 million or $0.92 per common share. Without the effect of the unrealized gains or losses on interest rate swaps and Agency interest-only mortgage-backed securities, net income was $529.3 million or $0.54 per common share.

Annaly also showed that it disposed of $5.3 billion of Agency mortgage-backed securities and debentures in the last quarter, which resulted in a realized gain of $80.3 million.

Common dividends declared for the quarters ended March 31, 2012, March 31, 2011, and December 31, 2011 were $0.55, $0.62, and $0.57 per common share, respectively. Annaly was quick to point out that it distributes dividends based on its current estimate of taxable earnings per common share rather than on its GAAP earnings.

Annaly also went on to note that it continues to see the benefits of being conservative in its business so that it can maneuver through the markets “to deliver attractive risk-adjusted returns to shareholders, protect our portfolio and maintain our flexibility to take advantage of investment opportunities as they arise.”

Investors will want to take note of a lower interest rate spread from a year ago, but this is actually flat on a sequential basis… The annualized yield on average interest-earning assets was 3.23% in the quarter and the annualized cost of funds on average interest-bearing liabilities (including the net interest payments on interest rate swaps) was 1.52%, which resulted in an average interest rate spread of 1.71%.  Annaly confirmed that this was a 46 basis point decrease from the 2.17% annualized interest rate spread at the end of March 2011 and equal to the 1.71% average interest rate spread for the quarter ended December 31, 2011

Leverage is down from a year ago at 5.81 to 1 versus 6.3 to 1 but the leverage is higher than the sequential quarter of 5.4 to 1. Fixed-rate mortgages also came in at the highest reading of 91% in this last quarter versus a year ago and versus the sequential quarter.

Shares closed down 0.7% at $16.29 on the day against a 52-week range of $14.05 to $18.79 and shares are now back up almost 0.7% at $16.40 in the after-hours on this report.  The current yield is 13.5% but we’ll have to wait for the real price action and the new dividend rate before focusing on any twelve month annualized dividend calculations.

JON C. OGG

Weyerhaeuser and competitors Plum Creek Timber Co. Inc. (NYSE: PCL) and Rayonier Inc. (NYSE: RYN) are REITs, while smaller competitor Pope Resources LP (NASDAQ: POPE) is a limited partnership. Over the past 12 months, only Rayonier has significantly boosted its share price. Rayonier’s jump was almost entirely due to a 1-for-1.5 stock split in late July.

Wood products companies such as Louisiana-Pacific Corp. (NYSE: LPX), Universal Forest Products Inc. (NASDAQ: UFPI), BlueLinx Holdings Inc. (NYSE: BXC), Builders FirstSource Inc. (NASDAQ: BLDR), and Deltic Timber Corp. (NYSE: DEL) have performed better. These companies are more closely tied to the US homebuilding and remodeling market, which has been improving in the first quarter of this year.

But will that continue? The bigger companies like Weyerhaeuser, Plum Creek, and Rayonier depend on exports to China to keep revenues and profits up. Chinese log imports totaled $8 billion last year, and North American logs contributed 22% of China’s total imports in 2011.
The bad news is that Chinese imports fell -11% in the first three months of this year, but the losses hit New Zealand and Russia hardest. Canadian log exports to China rose 23% in the first quarter and US exports rose 2%. And those gains were due, at least in part, to lower prices for North American logs.

New home construction in the US will drive log and lumber prices. If more homes are built, US demand will rise and so will prices. The various indicators for increased homebuilding in the US are mixed, but the optimistic view that construction will increase is certainly problematic. A warm winter could have pulled some construction starts ahead into the first quarter. The same is true of remodeling projects that would have improved the first quarter performance of the wood products companies.

Weyerhaeuser, which also builds and sells houses, “anticipates a small loss from single family homebuilding operations” in the second quarter. The company’s first quarter revenue from home sales fell by about -50% sequentially. While that’s not a leading indicator for the rest of the country’s homebuilders, it could be the canary in the coal mine.

Weyerhaeuser’s shares are up 0.9% in pre-market trading this morning, at $21.06, in a 52-wekik range of $14.82-$23.91.

Paul Ausick

AMTG plans to use the funds to acquire more agency residential mortgage-backed securities, non-Agency paper and other residential mortgage assets.  It of course also has the hallmark “for general corporate purposes.”  Still, more than a doubling in size?  This is oone of those offerings which feels like the real intent may be a high-yield dividend buffer.  AMTG has only been around long enough to pay two quarterly dividends and its last $0.75 payout would generate a yield of 15.7% if the last $0.75 rate remains static going forward.

This offering listed Morgan Stanley, Credit Suisse Securities, and J.P. Morgan Securities as joint book-runners; co-managers are listed as JMP Securities, Nomura Securities, Stifel Nicolaus & Company, and RBS Securities Inc.  AMTG expects to grant the underwriters a 30-day option to purchase up to 2,085,000 additional shares of common stock.

The REIT has been around only since last summer and its post-offering range has been from $14.02 to $19.59.  Shares are indicated down 6% right around $18.00 due to the sharp dilution that this offering appears to bring.

JON C. OGG

CapLease intends to file an application to list the Series B preferred shares so that they trade independently from the common shares.  As far as how the $50 million compares to the overall size of CapLease, the trust’s market value of its common stock is listed as only $276 million according to the data on Yahoo! Finance.

This REIT generally finances and invests in commercial real estate that is net leased primarily to single tenants with investment grade or near investment grade credit ratings.  The trust noted that it intends to use the net proceeds (approximately $48.3 million with consideration of an overallotment) to fund future acquisitions and for other general corporate purposes.

Wells Fargo Securities and Citigroup Global Markets were the joint book-runners; co-managers were Stifel Nicolaus & Company and Keefe Bruyette & Woods.

JON C. OGG

As far as the use of net proceeds, that is for the company to invest in excess mortgage servicing rights and for other general corporate purposes.  Those general purposes were noted as including “the repurchase of indebtedness issued by its collateralized debt obligations, as well as investments in real estate securities and/or other real estate related assets.”

Credit Suisse and Citigroup are the joint book-running managers for the offering. The company intends to grant the underwriters an option to purchase up to an additional 2.47 million shares of common stock for 30 days after the offering.

Shares are down 5% at $6.17 in the after-hours and the 52-week trading range is $3.56 to $6.75.

Newcastle Investment operates as a real estate investment and finance company which invests in and manages a portfolio consisting primarily of real estate securities.

We would note that the company recently paid out a $0.20 per share quarterly dividend just last week and that payout fluctuates from quarter to quarter as follows:

• March 22, 2012 0.20 Dividend
• December 28, 2011 0.15 Dividend
• September 29, 2011 0.15 Dividend
• June 30, 2011 0.10 Dividend

The yield at the current payout based upon the closing bell price of $6.48 comes to a whopping 12.3%.  The $107 million or so from the offering based upon the closing price compares to a market cap of $681 million before the impact of this offering.

JON C. OGG

The distribution is payable on April 25, 2012 to stockholders of record at the close of business on April 11, 2012.

The company seems to have left room for a higher payout as it discussed the current and future distributions to stockholders as creating meaningful value for its investors over the long term.  If we take a conservative approach to American Tower’s annualized earnings estimates and use a typical REIT payout the yield could be closer to 2.4% versus the 1.35% noted today.

JON C. OGG

Today’s move follows a big gap up in the stock on Wednesday because shares closed at $16.11 on Tuesday despite another dividend cut.  The new dividend is only at $0.55 per quarter, down from $0.57, $0.60, and $0.65 in the sequential quarters before.  Now the dividend yield is “only” 13.5% on a static basis.

What makes this call so interesting is that Annaly is often considered the best or one of the best in the field of REITs which are actually buyers of mortgage-backed securities on a leveraged basis.  A rise in long-term interest rates could have a very adverse impact on the portfolio of its mortgages.

The Market Vectors Mortgage REIT (NYSE: MORT) ETF is down only 0.3% at $25.17 on this volume.

JON C. OGG

First Trust showed some interesting data on the S&P dividend payers versus the non-payers.  The 396 dividend-payers in the S&P 500 on an equal-weighting basis posted a total return of 3.84% in February versus a gain of 5.55% for the 104 non-payers.

On a year-to-date basis, the numbers show that dividend payers were up 8.92% versus 14.19% for the non-payers.

The review over the trailing 12-month period showed that dividend paying stocks were up 4.08% versus a loss of 1.22% for the non-payers.  After all, the top performing sector in the S&P 500 last year was the utilities sector.

First Trust also noted that the number of dividend increases so far in 2012 were 68, up from 55 a year ago; and there were 3 dividend cuts fo far this year versus zero a year ago. Only one new S&P 500 company initiated a dividend against 6 new companies initiating dividends in the same period of 2011.

There are a couple of issues at work here, and one is the Obama dividend tax strategy on high income earners.  To think that this will not create a move out of some dividend issues is nothing less than silly.  Still, the election is eight months out and a lot can happen between now and then.  The end of the Bush tax rates will likely have an impact as well.

Investors have warmed up to a lower chance of a recession ahead and that the U.S. will escape the undertow of Europe.  If the economy is going to expand, investors may look for growth over income.  Ditto if bond yields ever start to offer investors a higher yield.

If you belive that dividends will still be relevant in the months and years ahead, there is also the recent move to launch two new emerging market dividend ETFs.

JON C. OGG