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On Tuesday, February 14, 2012, Hatteras Financial (NYSE:HTS), an agency mortgage REIT, reported its results for the fourth quarter and full year for 2011. During Q4 2011, the Company earned net income of $70.6 million, or $0.92 per share, compared to net income of $79.0 million, or $1.04 per share during Q3 3011. The results are in line with Wall Street expectations.

Hatteras also reported net interest margin decreased to 1.56% from 1.64% in the prior quarter. Their portfolio's weighted average coupon was 3.46% during Q4 of 2011, compared to 3.54% during Q3. The annualized yield declined to 2.60% in Q4 2011, compared to 2.72% in Q3 2011.

See a recent chart for HTS:

The Company's repo debt-to-shareholders' equity leverage ratio was 7.8x, a slight decrease from 7.9x the prior quarter. Book value increased 2.89 percent to $27.08 per share.

Hatteras buys agency mortgages that are backed by federal agencies. Other well-known agency mREITs include American Capital Agency Corp (NASDAQ:AGNC) and Annaly Financial (NYSE:NLY). Index ETFs for mREITs include the FTSE NAREIT Mortgage REITs Index ETF (NYSEARCA:REM) and the Market Vectors Mortgage REIT Income ETF (NYSEARCA:MORT), though both of these ETFs also hold mREITs that invest in non-agency backed securities.

On Monday, February 6, 2012, American Capital Agency reported net Q4 income of $208.7 million, or $0.99 per share, compared to $1.39 per share during Q3 of 2011. Following their announcement of earnings, AGNC also announced a dividend policy cut, lowering the quarterly payout to $1.25 from 1.40 per share. This was the first time in two and half years that AGNC cut or changed its quarterly dividend.

On Tuesday, February 7, 2012, Annaly reported net Q4 income of 54 cents per share, compared to 60 cents for the same quarter in 2010 and 65 cents for Q3 of 2011. Wall Street expectations were for earnings to be slightly higher.

Annaly and Hatteras have not yet reported dividend policy for the upcoming dividend, but has both reduced payouts in 2011. Hatteras cut its dividend 10% last quarter, from $1 to .90 cents. Previously, HTS maintained a $1 dividend for four quarters. Hatteras' last dividend works out to a 13.7 percent annualized yield.

It is possible that Hatteras will maintain its present dividend policy, but a forthcoming dividend reduction could be on the horizon. Given potential further spread tightening and the reduction in quarterly EPS, as much as a five to fifteen percent dividend reduction could be on the table. Last year, Hatteras announced its first dividend of the year on March 8, 2011, with an ex-dividend date of March 16, and a pay date of April 22, 2011.

Rising interest rates could reduce the value of RMBSs, because their value must decline to a rate where their yield will meet the new, higher rate. Such potential future declines will be multiplied by the leverage used by the holder. Last quarter, though, decreasing rates helped inrease HTS' book value.

If interest rates do increase, or when they do, many investors may then flee the mREIT industry. Nonetheless, U.S. Treasuries and agency debt performed well in the past year and so far in 2012.

Disclosure: I am long NLY.