The Dividend Daily

Embattled mortgage REIT specialist Annaly Capital Management, Inc. (NLY) on Thursday said it has entered into an agreement to acquire fellow REIT CreXus Investment Corp (CXS).

Annaly had already purchased a 12% stake in CXS previously. The remaining 88% stake was bought when NLY lifted its offer to $13 per share, up from a prior offer of $12.50. The $13 per-share price equates to about $872 million.

Annaly’s Fed Conundrum

The acquisition is aimed at mitigating Annaly’s substantial business risk. The company’s model has come under fire recently, as the Federal Reserve began purchasing some $40 billion worth of mortgage-backed securities per month as part of its third round of so-called quantitative easing (QE). The actions by the fed have crushed Annaly and other mortgage REITs’ interest spreads.

Mortgage REITs typically borrow money at low interest rates in the short term, then use the funds to purchase mortgage-backed securities (MBS). As long as interest rates remain historically low, the difference between the borrowed interest rate and the rate paid by MBS can result in hefty profits. However, with the fed becoming such a huge buyer in the MBS market, the yield curve has flattened substantially. By some estimates, NLY’s margins have been compressed by 52 basis points to just 1.02% in the third quarter of 2012, meaning NLY is barely turning a profit at those levels.

Annaly Capital shares posted small gains in Thursday morning trading. The stock has fallen about 11% over the past twelve months, all but negating its eye-popping dividend yield.

The Bottom Line
Shares of NLY currently offer a 12% dividend yield, based on Wednesday’s closing price of $14.95 and the stock’s annualized dividend payout of $1.80 per share.

Annaly Capital Management, Inc. (NLY) is not recommended at this time, holding a Dividend.com DARS™ Rating of 3.3 out of 5 stars.

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