Annaly Capital Management (NLY), the largest mortgage REIT listed on the New York Stock Exchange, has been wowing investors and analysts for 15 years - practically a lifetime compared to the creation of many REITs only a few short years ago.
Size matters - at least I'd like to think so in this case - as Annaly Capital is comprised also of five wholly-owned subsidiaries, one of which manages two other REITs. This diversity allows risk to be spread, and has kept Annaly on the list of top REITs in the country and the world. Since the current Great Recession started in 2008, however, many investors shudder when they hear the words "too big to fail" and the impact of that echoing in their empty bank vaults. Annaly is not aiming to be associated with such a thought.
There are those analysts who have been closely watching Annaly's continued strong dividends as one of the indicators of its terrific growth potential. In fact, many mortgage REITs has been seen in this positive light, and I would like nothing better than for this prophecy to be realized. There's no reason it couldn't be, or at least there are reasons why this is possible. After a slow start for its first few years of trading, Annaly Capital's returns surpassed those of REITs in S&P Financials, the S&P 500, and MSCI US REIT Index, eventually augmenting its growth multiplicatively. It becomes difficult to argue with that level of success for such a sustained period.
Annaly's sheer size, indicated in part by a market cap of over $15 billion, points to this potential. Add in an earnings multiple hovering between 40 and 50, and a dividend yield of around 14%, and this potential comes a step closer to becoming reality. With a market cap a bit less than half of Annaly, American Capital Agency (AGNC) is a mortgage REIT that invests in government backed or sponsored agencies or entities. A more average (for a REIT) price to earnings ratio of around 6 and a good dividend yield in the mid-to-high teens shows promise as well, but still doesn't quite stack up to Annaly's statistics.
RMBS specialist of those both guaranteed by government agencies and not, Chimera Investment (CIM) is one of those two REITs managed by a subsidiary (FIDAC, an SEC registered investment advisor) of Annaly. Still relatively large with an almost $3 billion market cap, it represents however only a very small part of Annaly's overall value as an entity. With an earnings multiple a little lower than that of American Capital and a pretty similar dividend yield, Chimera still has reason for optimism.
A discussion of Annaly's other REITs isn't complete without mentioning the other company managed by FIDAC - CreXus Investment (CXS). With a smaller market cap than Chimera of under $1 billion, a similar price to earnings ratio, and a dividend yield about two-thirds of Chimera's, CreXus has less diversification and less "greatness" potential. Unlike Chimera, its focus is on commercial mortgages and investments, not residential.
Finally, Anworth Mortgage (ANH) is a REIT that represents a more varied array of securities and mortgage obligations, focusing primarily but not exclusively on RMBS holdings that are backed by the US government. Similar to CreXus, its market cap is also a little under $1 billion, although its earnings multiple is a bit higher than the other competitors but still far and away from Annaly's, and its dividend yield is somewhere between that of CreXus and that of Chimera and American Capital. None of the stats for any of the REITs mentioned here are terrible, and all seem to indicate good to great potential. That alone could be cause for celebration, or at least for investment consideration.
I believe that Annaly, due to its size, is analyzed more often. Not that the simple act of being analyzed adds value to a stock or REIT, but the start of this is simply more press. Anything this big is going to have more of an impact, be it positive or negative, so it merits more frequent review. Stock analysts are not alike, in that some are very savvy individuals with a variety of market exposure and experience, some represent banks and other large entities, and still others are enigmas of whom not much is known.
There are more and less bullish reviews of Annaly, but quite plainly there are just more. After 15 years, if Annaly had shown itself to be a flash in the pan, or had decreased in size or influence, its "greatness" even with its same stats as shown here may be diluted somewhat. But this is not the case - Annaly Capital Management has indeed grown, impressed, fulfilled initial promise and had influence over other REITs.
Mighty oaks from little acorns grow - now just imagine an Olympic-size swimming pool filled with acorns. That's a lot of oak. There is something to be said in the business world for economies of scale - a REIT empire on a much smaller scale than that of Annaly Capital may have the same odds of success as Annaly, but simply have less earnings due to a higher cost to operate because economies of scale cannot be utilized. There is often no adequate replacement for experience - more time learning how to perform well in a variety of economic climates may give the edge to that seasoned management team.
I do not believe it is a fluke or "flavor of the month" mentality that has put Annaly Capital in such a positive light for many investors - their reasoning for being bullish is as solid as oak.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
