Boxer-Menendez Bill- U.S. Senators Robert Menendez (D-NJ) and Barbara Boxer (D-CA) will introduce legislation this week to help millions of responsible, struggling homeowners refinance at lower rates and save thousands of dollars each year. This is one of a number of possible cuts in on REIT profit margins. We already know that REIT profit margins have been tightening because of Operation Twist. After the election, stock values nosedived. Can companies like Annaly Capital Management (NLY) continue to keep a large enough "dividend" (just a descriptive term for its payouts) to keep investors coming?
Enormous Headwinds
With Obama's reelection, REITs are facing the continuation of what has been known as "Operation Twist" that has cut into its net income margins and now it may also be facing the replacement of Edward DeMarco as head of the Federal Housing Finance Agency.
The huge drop in the value of REITs since the election, (including NLY) has been attributed to Obama's reelection. Here is the thinking… DeMarco differed on policy with the White House last summer when it came to dealing with principal reduction on "underwater" mortgages. His position was that it was not a wise use of taxpayer money nor would it have a positive effect upon foreclosure rates. With Obama back in office, it is highly likely that DeMarco will be looking for a new job and the new head of FHFA will not be as averse to accelerated refinancing.
What will be the outcome for the REITs? Pools of loans will be up for grabs and it appears older loans with higher interest rates will be the main attraction. Prepaying these will really cripple the margin rate for REITs even more. Not only will NLY be hit even harder, but other competitors like American Capital Agency (AGNC) will also be affected.
Are these Headwinds as Strong as they appear?
Even if this takes place, will it be all that great? Banks are presently swamped with refi activity. Are they going to jump at another wave of refi's opened up by a new FHFA director when they are swamped right now? Not enthusiastically. A change in leadership at FHFA is complicated, but a change in the charter would be necessary to open up more refinancing. So it is not an easy fix. Maybe it's more of a breeze coming. After all, the REITs have rebounded nicely as of late.
If Dividends are Taxed as Normal Income
Dividends taxed as normal income- New Century wrote an article for Seeking Alpha and addressed this issue:
"However, as any seasoned mREIT investor knows, mREIT dividends are already taxed at ordinary income rates due to the legal structure of mREITs. So, if Obama's tax increase is approved (or even if a compromise is made), mREIT yields are going to become significantly more attractive compared to the yields of regular companies." This could bring a boatload of investors into the REITs because of the higher yield.
The mREITs trade at approximately 0.88x to Q3 BV. The last two times they were at this level, the stocks in this sector had bullish runs that lasted six months or more. That was in (7/2007) and (12/2005).
Wells Fargo upgraded Annaly Capital Management from Market Perform to Outperform as part of a broader call on the mREIT sector.
Kevin Keyes, President of Annaly Capital Management, just invested $1.4 million in the company buying stock. Top management tends to have the best inside view into the business, so when company officers make major buys, investors are wise to take notice.
It appears that REITs could be set for a comeback. The stock looks bearish but elements in the investment world appear to be signaling that the industry could see another bullish run if all the cards fall in the right places!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
