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

Without trying to draw too much in cause and effect, this could have an impact on most of the mortgage REITs if this develops as it is being accepted today.  Specifically, this may bring a similar interest in shares of Annaly Capital Management, Inc. (NYSE: NLY), American Capital Agency Corp. (NASDAQ: AGNC), and Hatteras Financial Corp (NYSE: HTS). We would also look for the sector to impact the Market Vectors Mortgage REIT Income ETF (NYSE: MORT).

It was on November 10 that Chimera disclosed that the review by its outside independent accounting firm was with an analysis of the treatment under GAAP of “other-than-temporary impairments” related to investments in securities rated less than AA, non-rated non-Agency securities and other subordinate securities.

Chimera noted that it has not completed its analysis, but it did specify that it expects only immaterial adjustments to its historical financial statements in prior comparable periods.  Also noted was that the effect will be a non-cash change in the GAAP accounting results and this change will not affect previously stated GAAP or “economic book values, actual cash flows, dividends and taxable income for any period.”

Another note was that the second quarter GAAP book value of $3.35 per share and economic book value of $3.08 per share will not change due to this action.  As of September 30, Chimera’s GAAP book value was $3.27 per share and the economic book value was $3.01 per share.  Its taxable income for the third quarter was $0.13 per share and the analysis is said to not have an impact on prior or future dividend distributions.

Chimera shares are up 7.8% at $2.76 and the last $0.13 dividend would generate a yield of nearly 19%, but mortgage REIT yields can fluctuate wildly as taxable income and distributions come and go. The fairly new Market Vectors Mortgage REIT Income ETF (NYSE: MORT) is trading up only 0.3% at $22.72 on very thin volume.  Chimera is the third largest weighting of that ETF at 6.91%, but that falls a distant third with American Capital Agency Corp. (NASDAQ: AGNC) at 13.17% and with Annaly Capital Management Inc. (NYSE: NLY) having nearly a 19.7% weighting of the entire ETF.

Annaly Capital Management, Inc. (NYSE: NLY) is often tied to Chimera because of its past and because of management teams and its shares are actually down 0.5% at $16.23. American Capital Agency Corp. (NASDAQ: AGNC) is also down 0.5% at $27.85 and Hatteras Financial Corp (NYSE: HTS) is down 1% at $25.61.  All sport double-digit implied dividend yields if the payouts remain static.

This review brought on a rating update on Chimera by Credit Suisse with a reiterated “Outperform” rating and a $3.50 price target objective.  Credit Suisse went on to note that Chimera trades at a 15% discount to book value and that its yield before the pop was 20.4%. The end result is that this would begin to ease investor concerns as shares had fallen from $2.80 down to almost $2.50 in recent days before the recovery.

Usually investors tend to run for cover when they see accounting changes.  So far, that is not the case with Chimera as investors are taking the company at face value.  If everything represented is as-is, then Chimera is trading under its implied book values and that may be cushion enough for investors.  Stay tuned.

JON C. OGG

American Capital Agency Corp (NASDAQ: AGNC) is down 3.73% before market open to $27.58, relative to a 52-week range of $22.03 – $30.76.

Akamai Technologies, Inc. (NASDAQ: AKAM) is up 13.9% before market open to $27.05, relative to a 52-week range of $24.72 – $36.50.

Acme Packet, Inc. (NASDAQ: APKT) is up nearly 9% before market open to $32.20, relative to a 52-week range of $29.25 – $84.50.

Cisco Systems, Inc. (NASDAQ: CSCO) is up 2.8% premarket to $18.08, relative to a 52-week range of $13.30 – $24.60.

Oracle Corporation (NASDAQ: ORCL) is up 2.16% premarket to $33.10, relative to a 52-week range of $24.72 – $36.50.

American Capital Agency (NASDAQ: AGNC) Cut to Market Perform at JMP Securities.
Apple Inc. (NASDAQ: AAPL) Reiterated Outperform with $500 target at Credit Suisse.
Archer Daniels Midland Company (NYSE: ADM) Started as Hold at Argus.
Cal-Maine Foods, Inc. (NASDAQ: CALM) named value stock of the day at Zacks.
Caterpillar Inc. (NYSE: CAT) Raised to Buy at Goldman Sachs.
Dollar Tree, Inc. (NASDAQ: DLTR) Cut to Equal-Weight at Barclays.
Family Dollar Stores, Inc. (NYSE: FDO) Raised to Overweight at Barclays.
Hewlett-Packard Co. (NYSE: HPQ) Reiterated Buy with $40 target at Argus.
Kirkland’s, Inc. (NASDAQ: KIRK) Cut to Underperform as bear of the day at Zacks.
Lincoln National Corporation (NYSE: LNC) Added to the U.S. 1 List at BofA/ML.
Monsanto Company (NYSE: MON) Reiterated Outperform as Bull of the Day at Zacks.
Navistar International Corp. (NYSE: NAV) Cut to Sell at Goldman Sachs.
Tiffany & Co. (NYSE: TIF) Started as Buy at Stern Agee.
Veeco Instruments Inc. (NASDAQ: VECO) Cut to Sell at Canaccord Genuity.

Your email address

subscribe

terms and conditions

JON C. OGG

It was just over one-month ago that we noted how BofA/Merrill Lynch downgraded 6 of the 12 major mortgage REIT stocks to Neutral from Buy.  The big call at the time was that the tax overhang might make these trade closer to book value.  We are seeing some small indicated gains right around the open this morning after many have continued to bounce.  We have to refer to an “implied dividend” rather than a true dividend because the payouts usually depend mostly on the earnings from quarter to quarter and earnings in mortgage-REITs are difficult to predict.

Annaly Capital Management, Inc. (NYSE: NLY) is trading up by 0.5% after closing at $15.68 and after breaking under $15.00 this week.  Still, the 52-week range is $14.05 to $18.79.  The latest implied dividend yield: 15.2%.

American Capital Agency Corp. (NASDAQ: AGNC) is up 0.3% after a $26.38 close but shares were down close to $23.00 at the lows this week after having been above $27.00 last week.  The 52-week range is $22.03 to $30.76 and the implied dividend yield is now north of 20%.

Hatteras Financial Corp (NYSE: HTS) is flat at $23.90 and shares broke under $23.00 earlier this week during the peak of the panic.  This stock was close to $25.50 last week and the 52-week range is $22.33 to $31.98.  The implied dividend yield is almost 17%.

Chimera Investment Corporation (NYSE: CIM), which we call the vulture mortgage REIT, is up 0.4% at $2.58  and the 52-week range is $2.38 to $4.36.  The implied dividend on last look was close to 20%.

Invesco Mortgage Capital Inc. (NYSE: IVR) is up over 1% in early trading at $14.11, and this went well under $13.00 early on Tuesday and the 52-week range is $12.55 to $24.07.  The implied dividend is now close to 23%.

The fairly new Market Vectors Mortgage REIT Income ETF (NYSE: MORT) is still down around $21.40 and shares briefly broke under $20.00 this week.  We only have one real dividend payment so far, but the implied dividend on this ETF is close to 13%.  The post-launch trading range is $19.83 (yesterday) to $26.50 and that should show how the whole sector has been slammed so hard.

Again, these dividend yields are simply “implied” because they can rise and fall and picking the trend is hard to identify from REIT to REIT.

JON C. OGG

No money was injured while filming

There was a development this week in the land of the high-yielding mortgage REITs.  Wealthy and income oriented investors have been flocking to these for years because of their high dividends which are often up in the double digits as these entities are forced to pay out almost all of their income as a dividend to be taxed at the investor level.  With low taxes on dividends and with a promise from Ben Bernanke to keep rates exceptionally low out to mid-2013, the path was set for clear skies ahead.  Until this last week…

On Friday came a sector downgrade from Bank of America’s Merrill Lynch.  This might have been considered a valuation call or that the dividends were unsustainable if you just looked at the summary.  It is worse.

Mortgage REITs underperformed the market this week because of the possible impact of changes in how the Securities Exchange Commission interprets mortgage REITs and their exemption from the Investment Company Act.  The only potential saving grace is this: “The SEC has not made formal recommendations, so any specific outcome is unclear at this time.”

BofA/Merrill Lynch downgraded 6 of the 12 mortgage REIT stocks in its coverage universe to Neutral from Buy, and the research calls with the implied dividends are below:

Annaly Capital Management, Inc. (NYSE: NLY) was downgraded from Buy to Neutral; indicated yield is 15%. American Capital Agency Corp. (NASDAQ: AGNC) was downgraded from Buy to Neutral; indicated yield is 20.5%. Hatteras Financial Corp (NYSE: HTS) was downgraded from Buy to Neutral; indicated yield is 15.3%.  Chimera Investment Corporation (NYSE: CIM) was downgraded from Buy to Neutral; indicated yield is 18%. Invesco Mortgage Capital Inc. (NYSE: IVR) was downgraded from Buy to Neutral; indicated yield is 23%.

Redwood Trust Inc. (NYSE: RWT) was maintained as Underperform; indicated yield is 8.3%.

PennyMac Mortgage Investment Trust (NYSE: PMT) was maintained Buy; indicated yield is 12.1%.  Dynex Capital Inc. (NYSE: DX) was downgraded from Buy to Neutral; indicated yield is almost 13%.  Apollo Commercial Real Estate Finance, Inc. (NYSE: ARI) maintained Buy; indicated yield is 11.1%.  Starwood Property Trust, Inc. (NYSE: STWD) maintained Buy; indicated yield is 10%. Colony Financial, Inc. (NYSE: CLNY) maintained Buy; indicated yield is almost 8.5%. CreXus Investment Corporation (NYSE: CXS) maintained Buy; indicated yield is about 11%.

The newly launched Market Vectors Mortgage REIT Income ETF (NYSE: MORT) fell almost 2% Friday to $23.26 after having been around $24.50 on Wednesday.

The Bloomberg Mortgage REIT index fell 1.7% on the week.  BofA/Merrill Lynch noted another form of caution even if the SEC action dies out, “The weak employment markets are consistent with our view that many mortgage borrowers will continue to struggle to qualify for refinances barring additional government intervention.”

BofA’s belief is that now these shares will be tied to fair value movements in the underlying asset classes.  The net effect of the SEC consideration and speculation that the government could intervene in mortgage markets only add to the issue.  As a result, Merrill Lynch’s call is that some of these stocks may reflect a discount to book value now.

Here is where this gets very interesting.  You know now that BofA has had enough with its mortgage losses that it is exiting the sector just about entirely.  Bye-bye Countrywide.  The problem is that the bank is under fire from more states, pensions, and agencies for misrepresentation and losses tied to mortgages.  It is endless.  Our take is that Merrill Lynch might know even a bit more here about what could happen to some of the mortgage-backed securities out there that are being held by these REITs.  That sounds a bit like a conspiracy theory, admittedly, but think about it for a bit…

JON C. OGG

American Capital Agency Corp. (NASDAQ: AGNC) Cut to Neutral at BofA/ML.
Annaly Capital Management, Inc. (NYSE: NLY) Cut to Neutral at BofA/ML.
Cabela’s, Inc. (NYSE: CAB) named as Bull of the Day at Zacks.
Canadian Pacific Railway Limited (NYSE: CP) Cut to Neutral at Credit Suisse.
Chimera Investment Corporation (NYSE: CIM) Cut to Neutral at BofA/ML.
Education Management Corporation (NASDAQ: EDMC) Raised to Equal-Weight at Morgan Stanley.
FedEx Corporation (NYSE: FDX) Cut to Neutral at Credit Suisse.
First Solar Inc. (NASDAQ: FSLR) Reiterated Buy with $140 target at Argus.
Goldman Sachs Group. Inc. (NYSE: GS) Maintained Outperform but cut estimates by Credit Suisse.
Hatteras Financial Corp (NYSE: HTS) Cut to Neutral at BofA/ML.
Invesco Mortgage Capital Inc. (NYSE: IVR) Cut to Neutral at BofA/ML.
Jos. A Bank Clothiers Inc. (NASDAQ: JOSB) Called the value stock of the day at Zacks.
Liquidity Services, Inc. (NASDAQ: LQDT) Raised to Outperform at Oppenheimer.
McDermott International (NYSE: MDR) named as Bear of the Day at Zacks.
Old Dominion Freight Line Inc. (NASDAQ: ODFL) Raised to Outperform at Credit Suisse.
Research in Motion Ltd. (NASDAQ: RIMM) Maintained Neutral but raised target to $37 from $25 at BofA/ML.
Saks Inc. (NYSE: SKS) Maintained Buy with $14 target at Argus.
Toronto Dominion Bank (NYSE: TD) Raised to Outperform at Credit Suisse.
United Parcel Service, Inc. (NYSE: UPS) Raised to Outperform at Credit Suisse.

Your email address

subscribe

terms and conditions

JON C. OGG

The new ETF tracks the performance of the Market Vectors Global Mortgage REITs Index.  The underlying index has 25 constituents and is a market cap-weighted index where the companies have to derive at least half of their revenues from mortgage REITs. The allowance can include those which purchase or service commercial or residential mortgage loans or mortgage-related securities.  Van Eck noted, “Unlike other indexes used in mortgage REIT-focused ETFs, the Index does not include mortgage finance companies or savings associations.”

The weighting of the top-5 members in the index is as follows (as of July 31, 2011): Annaly Capital Management, Inc. (NYSE: NLY) at 19.73%; American Capital Agency Corp. (NASDAQ: AGNC) at 11.46%; Chimera Investment Corporation (NYSE: CIM) at 7.27%; MFA Financial, Inc. (NYSE: MFA) at 6.07%; and Hatteras Financial Corporation (NYSE: HTS) at 5.04%.  The top five of the twenty-five constituents account for just over 49.5% of the entire weighting.

This new ETF has a gross expense ratio of 0.54% and a net expense ratio of 0.40%, with expenses capped at 0.40% until May 1, 2013.

What makes this interesting is that all five of the top constituents carry a yield of well above 10% based on the last dividend payments.  These underlying entities are required to distribute 90% of their income as dividends to investors, so the returns can fluctuate wildly.

With a promise from Ben Bernanke to keep rates at near-zero for the next two years, the spread between short-term borrowings and leveraging up for mortgage yields is likely to keep the environment positive for entities such as these.  The problem is when the short-term borrowing rates go back up.  When… If…

JON C. OGG

American Capital Agency Corp.  (NASDAQ: AGNC) is down 3.3% premarket on heavy volume to $28.13, relative to a 52-week range of $24.06-$30.68.  The company initiated a public stock offering valued at $780 million.

Hot Topic, Inc. (NASDAQ: HOTT) is up 8.6% premarket on very light volume to $5.60, relative to a 52-week range of $4.58-$9.96. The company reported the replacement of a board member.

Netflix, Inc. (NASDAQ: NFLX) is up 3% premarket on moderate volume to $219.50, within a 52-week range of $70.05-$247.55. According to AOL jobs, the video rental and streaming company is one of the ten biggest hiring companies this week.

Amazon.com Inc. (NASDAQ: AMZN) Reiterated Buy and raised target to $198 at BofA/ML.
American Capital Agency Corp. (NASDAQ: AGNC) Raised to Buy with $30 target at BofA/ML.
American Express Company (NYSE: AXP) Reiterated Buy and raised target to $53 at BofA/ML.
Annaly Capital Management, Inc. (NYSE: NLY) Raised to Buy with $18.50 target at BofA/ML.
Anheuser-Busch InBev (NYSE: BUD) Started as Buy at Citigroup.
Atheros Communications Inc. (NASDAQ: ATHR) Cut to Market Perform at William Blair.
BJ’s Wholesale Club Inc. (NYSE: BJ) Maintained Hold but cut estimates at Argus.
Brocade Communications Systems, Inc. (NASDAQ: BRCD) Started as Hold at Wunderlich.
China Mobile Limited (NYSE: CHL) Cut to Neutral at Goldman Sachs.
DR Horton Inc. (NYSE: DHI) Raised to Outperform at Wells Fargo.
Exxon Mobil Corp. (NYSE: XOM) Raised to Outperform at Oppenheimer.
Microsoft Corporation (NASDAQ: MSFT) Maintained Outperform with $36 target at Credit Suisse.
Motorola Solutions Inc. (NYSE: MSI) Started as Hold at Argus.
Rackspace Hosting, Inc (NYSE: RAX) Cut to Perform at Oppenheimer.
Randgold Resources Ltd. (NASDAQ: GOLD) Raised to Buy at Citigroup.
Toll Brothers Inc. (NYSE: TOL) Cut to Market Perform at Wells Fargo.

If you missed yesterday’s analyst calls from 247WallSt.com, the Top Analyst Upgrades & Downgrades included tickers AA, AMZN, AEP, ADSK, AAPL, BKS, BA, KO, HBAN, NFLX, GOOG, PEP, PCLN, Q, SONC, YHOO.

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.
JON C. OGG