Mortgage real estate investment trusts will announce $1.7 billion in new capital offerings in 2013, said analysts at Bank of America Merrill Lynch (BAC).

REITs are making a comeback in the market due to higher mortgage-backed securitization yields as well as rising stock prices. 

Both of these factors “have changed the investment landscape for REITs from announcing share buybacks just a few months ago to raising new equity for MBS purchases,” said MBS strategists Chris Flanagan, Satish Mansukhani and Anurag Bhardwaj of BofAML.

Click on the chart to view the timeline of rebounding REIT prices.

BofAML maintains the projection of $25 billion net MBS purchases by REITs in 2013.

The purchases will provide support to the market, but the analysts noted that the continued MBS purchases by the Federal Reserve as well as overweight normalization by money managers will continue to dominate the technical picture.

Agency REITs increased leverage in the fourth quarter of 2012 to limit any reduction in portfolio holdings.

“This prevented the large asset sales that many had thought likely,” the analysts said.

As a result, the market will continue to see top REITs like Annaly Capital Management (NLY) make their mark. 

Annaly is the biggest agency MBS REIT by assets and increased leverage from 6 to 6.4 in Q412, BofAML stated.

Additionally, favorable market conditions are inducing the modest equity raises, with returns on equity now back in the 12% to 16% range, which makes the REIT investment model more attractive.

Click on the table to view leveraged return on equity on MBS.

Going forward, preferred stock yields are lower and the market is welcoming to new issuance, the analysts noted.

“We expect REITs to continue raising capital if yields and stock prices remain near current levels,” they said.

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