Annaly Capital Management (NLY) reported Q4 earnings last night, missing consensus estimates by $0.03 per share.
Despite the recent miss and the past two quarters of dividend reductions, we still believe that NLY is one of the best run mortgage REITs and we think the company will continue to prosper in 2012.
The table below highlights NLY's key portfolio stats for the quarter.
Prudent Risk Management has Driven Dividend Reduction
As CEO and President, Michael Farrell, commented in the recent press release that the company continues to focus on risk management:
Participants in the global financial system continue to grapple with many issues in the market: sovereign credit risk here and abroad; a relatively weak global economic outlook; the uncertain pace and extent of regulatory reform; the potential policy decisions of central banks; and reduced investment return expectations in an extended period of low interest rates. In this environment, I believe that it is best to be conservative in our approach to risk and performance. It is intended not only to protect our portfolio but also to prepare us to take advantage of opportunities as they arise.
NLY management has been slowly reducing its leverage (see chart below) which has been the main driver of the dividend reduction. While lower leverage leads to lower profits (and dividends), it also reduces risk. We view this as a positive risk management technique, which is why we are still bullish on NLY.
The NLY management team has a proven track record of successfully managing their portfolio through various interest rate cycles and has consistently delivered positive long-term returns to shareholders. We believe that this trend will continue.
The Current Environment is Ideal for Agency mREITs
We think agency REITs continue to be a suitable investment for investors seeking good risk-adjusted yield. Agency mortgages are guaranteed by government-sponsored entities (implying limited credit risk). Conversely, non-agency securities do not carry a similar implied guarantee, making them inherently more risky due to the higher relative credit risk.
As long as interest rates remain low and the yield curve remains steep (see graph below), we will remain bullish on mortgage REITs. We think the asset class provides investors with a hedge against heavy cash and short-term bond portfolios in the event interest rates stay low for an exceptionally long period of time.
Below is a list of agency-focused mortgage REITs:
Agency REITs with bias toward Fixed Rate Mix
- Annaly Capital Management
- American Capital Agency (AGNC)
Agency REITs with bias toward Floating Rate Mix
