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Annaly Capital Management (NYSE:NLY) offers dividend investors a 14% annual yield. Annaly is the sector's agency mortgage real estate investment trust (mREIT) leader in market cap size. Annaly continues to provide outsized dividend yields versus the overall stock market. Many mortgage REIT investors own Annaly due to its size and long-term presence and expertise. This article focuses upon Annaly's business model and its role in the mREIT competitive landscape.

Here is Annaly's dividend history for the past 4 quarters:

Annaly Annualized Return versus Peers

Annaly currently sports a 14% annual dividend yield and is trading at just 75 basis points over book value per share, per the below table.

Annaly Background

Annaly Capital Management is the umbrella organization at the head of seven other subsidiaries within the Annaly group of companies. It is a self managed self advised mortgage real estate investment trust (mREIT) company that earns from the difference in interest rates from its loans both as lender and lending institution. Annaly Capital Management is a Maryland corporation that primarily deals in owning, managing and financing investments related to real estate, especially mortgage pass-through certificates, collateralized mortgage obligation (CMO) loans, agency callable debentures, and other securities related to interests and mortgage loans. The revenue from the difference in interest rates is managed to be enough for future acquisitions, present payments and dividends to Annaly's investors.

REIT Qualification

Annaly is carefully managed to qualify as a REIT under the Internal Revenue Code of 1986. Its investments in hedge funds are monitored closely to keep Annaly within the definition of a REIT, in order to gain the full benefits of little or no federal tax, in exchange for distributing 90% of its net profits to its investors and stockholders.

FIDAC as the Investment Advisor

Directly under Annaly's management is Fixed Income Discount Advisory Company (FIDAC), an Annaly wholly owned subsidiary. FIDAC was founded in 1994 by Michael Farrell, the present Chairman of Annaly, and was bought by Annaly in 2004. FIDAC is an SEC registered investment advisor. The focus of FIDAC is on residential and commercial loans and securities management, and because of Michael Farrell, virtually the same people on Annaly head FIDAC. This makes FIDAC not only a wholly owned subsidiary, but also externally managed by Annaly.

Directly under FIDAC is Chimera Investment Corporation (NYSE:CIM). Founded in 2007, Chimera manages residential mortgage backed securities (RMBS), residential mortgage loans, and other real estate related securities. Also under FIDAC is Crexus Investment Corporation (CXS), which is responsible for acquiring, financing and managing commercial MBS, commercial mortgage loans and other assets or securities related to mortgages. Both Chimera and Crexus are externally managed by FIDAC, which is, in turn, externally managed by Annaly.

By making the division clear between Chimera and Crexus, with Chimera concentrating on the residential related side of the business and Crexus on the commercial, the management of FIDAC between the two companies becomes more efficient in the specialization of the product, which in turn allows Annaly to cater to both residential and commercial real estate mortgage businesses.

Merganser Capital Management, Inc. (Merganser)

Merganser, like FIDAC, is an SEC registered investment advisor. However, unlike FIDAC, Merganser focuses on institutional clients that include pension, Taft Hartley, endowment and public operating funds, whereas FIDAC concentrates on both residential and commercial MBS, as can be seen by the focus of both Chimera and Crexus. Merganser was founded in 1985 and was acquired by Annaly in 2008 to support its operations with institutional clients. Merganser, like FIDAC, is fully owned by Annaly.

RCAP Securities Inc.

RCAP is another wholly owned subsidiary by Annaly founded by Annaly itself in 2008. RCAP is a self clearing broker dealer regulated by FINRA. RCAP focuses on repurchases and securities lending primarily of U.S. agency-backed MBS and Treasury securities. RCAP also trades in private placement and debt securities, as well as underwriting and brokering interests in mortgages or other forms of receivables.

Annaly's March 13th Dismissal of Accountant

Investors should be aware that the company dismissed its accountant, Deloitte & Touche LLP. The company has filed all of its SEC documents on time. Replacing an accountant is viewed as a red flag by some investors. I do not have any reason to question the integrity of Annaly's financial statements.

mREIT Competitors

CYS Investments (NYSE:CYS)

CYS Investments is an agency mortgage real estate investment trust. CYS is trading, as of March 22, below the company's December 31st book value per share.

American Capital Agency (NASDAQ:AGNC)
American Capital Agency is the second largest, in terms of market cap, agency mortgage real estate investment trust. The company had a successful 62 million offering of shares on March 7. The current yield is 16.9%. Gary Kain leads the management team.

American Capital Mortgage

American Capital Mortgage is a hybrid mortgage real estate investment trust. A hybrid mREIT can invest in non agency mortgage backed securities. Agency-backed securities have an implicit full faith guarantee from the U.S. Federal Government. Non agency MBS do not possess such a guarantee. Gary Kain manages the agency MBS within the portfolio.

The company's stock has taken a recent dip after a successful secondary offering on March 13th. The company's book value has continued to increase in value. Per the company's latest SEC 10K, the vast majority of the holdings continue to be in agency MBS.

Two Harbors Investment (NYSE:TWO)

Two Harbors is a hybrid mortgage real estate investment trust. The company has an experienced and well respected management team. Due to an anticipated rise in the company's book value per share, the mREIT trades at a lofty 12.51% premium to book value. An increase in the non agency MBS valuations since December 31, is expected to be announced for the first quarter. This should provide an upside to the anticipated March 31, book value per share.


Annaly still offers a high-dividend yield to income investors. Investors are wise to invest in mREITs with valuations close to book value per share. The sector has witnessed an upward move in the Treasury Bond market, as today's Treasury table shows:

The sector continues to offer high yields with historical low rates. In retrospect, the recent upward move in rates is not a major spike. The agency mREITs earn profits on the net interest margins between short-term borrowing costs and ownership of Government Sponsored Entity (GSE) mortgage-backed securities. The mREITs do not own Treasury Bonds. The Treasury Bond market provides a perspective on where GSE MBS may be trading as pass through securities.

Disclosure: I am long AGNC, MTGE, CYS.