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In an article I published a month ago, on February 21st, I called the beginning of the end for mREITS.

In a follow-up article on the subject, I specifically recommended to short Annaly Capital Management (NLY). I specifically stated that:

The revenues of NLY and CIM have been shrinking dramatically, which only makes the current dividend payouts seem even more absurd.

Several events have happened in connection with NLY since I first initiated my short recommendation. We shall review them in detail:

  1. On March 20th, NLY declared the first quarter 2012 common stock cash dividend of $0.55 per common share. This dividend is payable April 26, 2012 to common shareholders of record on March 30, 2012. The ex-dividend date is March 28, 2012. This dividend represents a cut of 15% from the 2011 Q2 dividend. Although some perceive this dividend cut to be somewhat good news, the message is clear. The dividend is cut because of the anticipation of reduced future profits. Very plain and simple. Take a look at the recent dividend payouts:
  2. On March 19th, the company filed a shelf-registration of 125,000,000 shares. The proposed maximum offering price for the shares will be $16.16, that is 3.2% less than the price at which we began shorting the stock. This, of course, is only the maximum price threshold. In reality, the shares could be offered at a lower price especially considering the selling pressure on the stock. This recent issuance will add 125 ML shares to the existing float of 965 ML shares. This, in turn, will partially dilute current shareholders.
  3. In the course of this past month, the share price dropped by 3.5% and I received a few questions about closing the trade (buying to cover). My response is very clear - do not close the trade just yet. Also, bear in mind that NLY lost 3.5% while the market as a whole gained 9%. That is pretty robust.
  4. The share valuations for mREITS, as detailed in the table below, are still high. Note the slight change in NLY's dividend yield from 14.8% to 13.5%. This is the beginning of the dividend reduction move finally beginning its downward motion.

    Annaly NLY American Capital Agency AGNC Invesco Mortgage IVR Chimera CIM American Capital Mortgage MTGE
    Market Cap 16BL 6.8BL 1.8BL 3BL 0.2BL
    Trailing P/E 45 6 4.4 5.5 4.6
    Debt/ Equity 5.3 7.2 6.2 2 8
    Trailing Div. Yield 13.5% 18.5% 21.5% 17.1% 4.6%
    Payout Ratio 660% 112% 98% 116% N/A
    Quarterly Rev. Growth -58.7% 64.4% 91.3% -38% N/A

    I believe that further reductions in dividends are soon to follow. Not only that, the company's earnings will shrink and that will result in losses to buyers at current price levels.

I reiterate my recommendation to short NLY. I am moving our stop loss from $18 to $17.5 to protect our unrealized gains while giving the trade some breathing room. We will take profits at $14.

Source: Annaly Capital - The Beginning Of The End