Annaly Risks and Downgrades Highlight Further Risks in High-Yield Mortgage REITs

The mortgage REIT sector’s issues are starting to surface. Annaly Capital Management Inc. (NYSE: NLY) is said to be one of the safest of the high-yield mortgage REIT sector, but its shares are not doing so well after its earnings came in short of expectations earlier in the week. Unfortunately, it highlights greater mortgage REIT woes.

Now we have two analyst calls that are effectively downgrading the stock. Barclays cut the rating to Equal Weight from Overweight. Citigroup lowered its target to $15 from $17, but it already had a Neutral rating, which it maintained.

It was right after the announcement of QE3 (or QE-infinity) that we posed some risks that investors better consider here about the mortgage REIT sector. The immediate effect was a bump in valuations as the FOMC was set to buy up $40 billion or so of agency mortgage-backed securities. The problem is that this effectively would lower the available returns in late 2012 and into 2013.

Annaly shares were at $17.65 when we issued that alert on September 13, but now shares are at $14.75 after a drop of more than 3.5% today and they have broken under the prior year low as the 52-week range before today was $15.18 to $17.75.

We have not seen this note, but TheFlyontheWall.com reported that RBC Capital was defending Annaly and its Outperform rating, now that it has dropped so much.

Our own take is still one of caution because of forward earnings power and a payout per share that may be higher than its actual income if things remain static. Annaly is also pulling down the Market Vectors Mortgage REIT ETF (NYSEMKT: MORT), with its 2.6% drop to $25.52 being compared to a 52-week range of $21.87 to $28.43.

The risk here is obvious. Stocks that hit 52-week lows tend to keep hitting new 52-week lows.


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