REIT Wrecks avoids the daily ugrade/downgrade wars on Mortgage REITs in favor of longer term trends, but Annaly is a bellwether and for that reason Piper Jaffray’s downgrade of NLY from Neutral to Underweight is worth noting. Piper Jaffray lowered their price target by $3, or over 15%.
The most interesting aspect of the downgrade was revealed in Piper Jaffray’s commentary: they expect the economy will steadily recover in 2010. “We view NLY as one of the premier mortgage REITs with a top-notch team. However, NLY is the only mortgage REIT in our coverage universe. We expect NLY to underperform the rest of our coverage universe over the next year as we believe the economy will continue to gradually strengthen, prompting the Fed to begin raising rates in mid-2010 from the emergency level of 0%-0.25%.”
“We are forecasting NLY’s earnings power and dividend to peak in the 1H10 and to then recede as Fed rate hikes increase funding costs. We are maintaining our ’09/’10/’11 EPS estimates at $2.73/$3.00/$2.52, as the continued signs of have increased our confidence that the Fed will begin raising rates by mid-2010. We are forecasting NLY’s net interest spread to peak at 2.80% in the 1Q10 and recede to average 2.00% for the full-year 2011.”
Mortgage REITs, especially residential Mortgage REITs like Annaly, AGNC and CMO have been absolutely killing it on net interest spreads. However, as the economy recovers, those margins will fall. This is what prompted Piper Jaffray’s downgrade, but a recovering economy is not all bad. If the economy is indeed recovering, upside can be captuured through Apartment REITs or Healthcare REITs. But don’t put the cart before the horse! It’s still way too early for Hotel REITs and Retail REITs.