My three-year-old granddaughter feels weird when she goes to a little boy's birthday party, as opposed to a little girl's. "It makes my tummy feel funny," she says.
That parallels how some people feel about investing in mortgage real estate investment trusts. The multi-adjectival name of the category is enough to make one's tummy feel funny. A cursory glance at its consensus flagship member, Annaly Capital Management (NLY), supplies little relief.
Annaly, over the past few quarters, would seem to have taken a relative beating. Woe is it. The stock price hasn't kept pace with other mortgage real estate investment trusts or the S&P 500 Index over the past year. Its 2011 earnings were down a startling 82% from 2010. And the dividend was cut to 57 cents a share in December, the lowest payout for the company since 2009.
To make matters worse, analysts at Wells Fargo on March 6 downgraded the company, driving the stock price down by 1% by the end of the day.
I really like this stock.
It's true that NLY has not been a stellar performer in recent memory, as it's significantly trailed the price appreciation of other mREITS like CYS Investments (CYS) and American Capital Agency (AGNC) and, to a lesser extent, that of Capstead Mortgage (CMO) and Hatteras Financial (HTS). And even its still double-digit dividend hasn't served to equalize NLY's total return vis-à-vis that of its mREIT brethren.
I really, really like this stock.
You see, NLY is a bit of an anomaly among its peers. It is roundly considered to have the most experienced management in the group and is singularly cited for its deft navigation of the 2008 financial crisis. Thus, despite the seeming "underperformance", one ascribes credibility to the company's assertion that it has been deliberately eschewing current plaudits for the sake of long-term performance.
The company is unrepentantly conservative, and especially so in this dicey cost-of-capital environment. Its leverage ratio of borrowed to invested funds is significantly lower than its peers. The company's chief investment officer explains:
"We're in the business of managing for the long haul. If others feel that it's better to enter this market with higher leverage or different parts of the curve, great. And I wish them all well. But we will continue to do what we think is right over the longer-term with the company and the shareholders."
In other words, don't draw your investment conclusions solely from a snapshot taken today, three months ago, or a year ago.
History supports that counsel, as NLY's average annual 10-year total return is 7.8% vs. 3.8% for the S&P 500 (all comparative data cited is through March 6, 2012) and 14.45% vs. 1.41% over the past five years. And even over the past 12 months, despite lagging within the mREIT category, NLY's total return has exceeded the S&P 500's by more than 1.5%.
So what of that Wells Fargo downgrade? It was from "outperform" to "market perform". Well, okay - if Wells thinks NLY is going to merely keep pace with the market, I can accept that, because I'll happily also accept its 13.7% dividend, which the company described as "sustainable" in its Feb. 8 earnings call.
If the exotic features of mREITS (i.e., the short history of the genre, the double-digit yields amid historically low interest rates, prepayment risks and high-wire arbitrage) make your tummy feel funny, then NLY is a soothing antidote.