NLY 2nd Quarter mREIT Analysis

Includes: NLY
by: Todd Johnson

The largest mREIT company, Annaly Capital Management (NYSE:NLY), presented their second quarter conference call yesterday. Every call has issues, but overall I give this one a solid "A" performance. To be blunt and call-to-arms, I recommend investors buy NLY for the dividends based upon the current economic environment.

Your position size should be decided between you and your portfolio advisor.

NLY's Management
Let's address this issue first. You have the best in CEO Michael Farrell. Period. Public and private equity can trust this guy. He has proven himself. Now that I have provided Mr. Farrell his well-deserved respect, let's put a couple of issues in perspective. When we listen to Mr. Farrell, remember his is talking with a significant position in NLY and within the mREIT industry. Although he may not be cognizant of this fact, he is speaking his book. Mr. Farrell prospers in greater proportion when NLY does well versus when NLY does poorly.

I, however, want to be on board with a leader who has skin in the game. We are dealing with real money - and I want someone who will share the pain or gain with me.

James Cramer and Michael Farrell

Let me cut to the chase. Jim Cramer, and his associates on "Mad Money", have not done their homework on the mREIT industry. Cramer is incompetent on the mREIT industry. When asked for his recommendation, he always responds with a two thumbs up on NLY because his fellow rich-neighbor, Michael Farrell, runs the company. This is madness.

Why Cramer avoids taking the time to perform due diligence on mREITS is a personal choice, and mREITS have worked over the past 4-5 years. I challenge Mr. Cramer to understand the basics of the industry. Why not? Cramer's due diligence - and I am calling him out on this - is incomprehensible. For right or wrong, mREITS are the right place to be right now. His ignorance is obvious and painful. I know it's a television show, but Mr. Cramer or your staff, please perform your due diligence or pass on mREITs. Please, Mr. Cramer, don't advise investors to buy NLY because he is your neighbor!

I personally emailed Mr. Cramer for a couple of years, in the 1990's, before his Mad Money show was on the air. The guy is one of the hardest working traders in the business. He admittedly can't sleep more than 3-hours per night. He trades in the "church of what's working today". He has a Harvard Law degree, bar certified, and is a Goldman alumni. Yet, Mr. Cramer lacks the time or conviction to sit down and learn the mREIT business during Treasury bill and Treasury bond all time lows. This is simply outrageous as so many sectors are weak and struggling.

I challenge Mr. Cramer to look deeper into an industry that works right here and right now. Don't tell viewers to buy NLY because Mr. Farrell is a guest on your show and he is your neighbor. Please Mr. Cramer, tell us why mREITs make sense.

NLY Dividend
NLY paid a 65-cent dividend. Annaly’s second quarter net income was $587.5-million. This provides an earnings per share of 71-cents. The yield offers a 15.5% annual dividend. As with any investment, continual watching of economic trends is required on your part. I can state what I am doing, but I am focused upon capital preservation.

NLY Book Value and Leverage
Annaly's book value change was exactly what I want from primarily agency-mREITs. NLY's book value increased from a static $15.76, on March 31st, to a $16.55, on June 30th. This is a 5% increase quarter-over-quarter gain.

The change in 1st quarter 6.3x leverage to a 2nd quarter 5.7x leverage is good to see. I'd like, in my fairly conservative way, to see the leverage decrease by a tad as the debt ceiling and the secondary occurred. Reduce the risk exposure - if there was any specific items of concern. A 5.7x leverage rate is low in mREIT historical terms.

NLY Business Outlook
The company provided a positive outlook based upon recent political events, ".....Given the recent turn of events in Congress and the performance of the REPO market last week, we are reasonably encouraged...."

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Let's examine a few facts:

  • Repo agreement rates have dropped. Treasury bill rates and Treasury bond rates have decreased and are at record lows.
  • Unemployment is increasing. Housing prices are decreasing. Deflationary pressures are in full force.
  • The debt ceiling has passed, at least, through the 2012 Presidency race.

Unfortunately the agency-mREIT sector is the place to be. This presumes a currency with a $14.5-trillion debt level is the place to enter capital into a levered 5-6x bond fund (ie mREIT). The yields are to the investors' advantage.

I personally would recommend a gold or paired position trade in the event, of a black swan event. If you believe a black swan event can not occur, then you are heeding an inappropriate pundit.

Hopefully we make some money with NLY and prosper.

Disclosure: I am long NLY.