Keefe Bruyette Sees Lower Book Values on MBS REIT's (NLY, MFA, CMO, ANH)

In a research report issued this morning, Keefe Bruyette & Woods considered several issues that may have substantial effects on the major U.S. mortgage-backed securities REIT's: Anworth Mortage (NYSE: ANH), MFA Mortgage (NYSE: MFA), Annaly Capital (NYSE: NLY) and Capstead Mortgage (NYSE: CMO).

The firm said its weaker outlook reflects lower book values related to widening agency spreads, in addition to lower leverage as these REIT''s will likely carry more excess capital in response to potential uncertainties in the repo market.

Keefe Bruyette downgraded MFA Mortgage and Anworth from Outperform to Market Perform and removed Annaly and Capstead from its Best Ideas List. The firm also lowered its price targets on each company: Anworth from $9.50 to $9.00, MFA Mortgage from $10 to $9, Annaly from $23 to $22 and Capstead from $19 to $18.

The firm believes that widening spreads on agency mortgage backed securities has made book values come down thus far in 2008. Additionally, Keefe Bruyette said, "Although the recent disruption in the mortgage markets has not had any discernible impact on margin requirements for the Agency MBS REITs, we believe that these companies will hold more capital than we had originally estimated to protect against potential increases in margin requirements."

Responding to this concerning environment, Keefe Bruyette also lowered its Q1 EPS estimates on each of the Company's: Anworth from $0.29 to $0.25, Capstead from $0.60 to $0.56, MFA from $0.25 to $0.23 and Annaly from $0.62 to $0.54. The firm also moved its FY08 EPS estimates lower on each company, save Anworth. Keefe Bruyette now expects Capstead to report $2.37, down from $2.78, MFA to report EPS of $1.03, down from $1.20, and Annaly's earnings to come in at $2.41, down from $2.91.

Notably, while the firm certainly has a much more sobering take on these Company's, it believes all four will experience strong growth in 2008 and report solid earnings.

REIT' are taking a dive today; Capstead is down about 13%, Anworth is down 18.5%, Annaly has fallen by 13% and MFA has moved about 11.4% lower. [bcs]

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