More Caution in Mortgage REITS, High Dividends at Risk

There remains some concern in the high dividend mortgage REIT sector. A fear of higher interest rates, compression of mortgage-backed securities valuations, and a lack of new mortgage-backed securities supply are all working against the sector. While we have not exactly seen another broad sector call, we have seen two cautious calls today from analyst Douglas Harter at Credit Suisse in shares of Annaly Capital Management Inc. (NYSE: NLY) and in Javelin Mortgage Investment Corp. (NYSE: JMI).

Annaly Capital Management Inc. (NYSE: NLY) was reinstated as Neutral with a price target of $14.00, which was just above the $13.61 closing price. Investors have to know that this so-called 13.3% listed dividend is going to be at risk. What we find interesting is that Credit Suisse was actually somewhat positive in the assessment of the company. It said that the combination of Annaly’s relatively low leverage and the recent CreXus acquisition has the company fairly well positioned to take advantage of the current market. Annaly is currently only about 2.5% above its 52-week low.

Javelin Mortgage Investment Corp. (NYSE: JMI) was also reinstated as a Neutral rating, with its closing price of $14.98 coming in at almost a 7% discount to the $16.00 price target. Javelin is listed as having a 17% or so dividend on the screens, and again investors have to at least suspect that the pressure on the group will hurt that dividend too. Harter’s assessment is that Javelin’s high allocation to agency MBS is about 75% of equity and its book value has continued to come under pressure. This one actually hit a 52-week low of $14.53 today.

We recently outlined a sector-by-sector interest rate risk outline for investors, and the high-risk and high-dividend mortgage REITs are one of the most rate-sensitive groups out there.

To show that the risk continues here in the sector, the Market Vectors Mortgage REIT ETF (NYSE: MORT) is down 0.5% at $25.83 against a 52-week trading range of $23.35 to $29.90.