Annaly Capital Management (NLY), with a market cap of $16.46 billion, is the largest mortgage REIT currently on the New York Stock Exchange. It is in the process of recovering from the significant downturn it recently experienced when the U.S. economy took a hit. Annaly is one of the lucky REITs to be on the rise as the housing market improves significantly. I think the company is in a great position at the moment, and I recommend investors consider this stock. Annaly is not the only REIT stock that will benefit from the improving housing market. There are strong competitors that are also profiting from this development. In this article, I will explain why shareholders in Annaly should not overlook the significance of these events, but they should remember that many other competing REITs are also improving and may have an impact on Annaly's success. This will create many investment opportunities.
Let us briefly consider the results of the Vanguard REIT ETF (VNQ). This is an index that exists for the sole purpose of monitoring the overall performance of REIT stocks that are publicly traded. According to the Vanguard REIT ETF, there has been an increase of about 10% so far this year in the fortunes of publicly-traded equity REITS. The fund has returned 14.6% this year, with a three year beta average of .98. As far as I am concerned, there seem to be no signs indicating that this trend will be abating or reversing soon. With this in mind, I think we can finally say that things are looking up for the investors of Annaly and other REIT stocks.
While there are only good signs at the moment, one needs to remain cautious. The housing situation in the U.S. has been rocky, with prices swinging up and down for a variety of reasons. This may not sound like good news for investors in REITs. Yet, REIT stocks seem to be doing well this year anyway. The last two months have seen a steady and fairly consistent increase in the prices of homes and sales of homes in the United States.
Annaly is still a high-yielding REIT with a dividend of 12.90%, but it has also been able to take advantage of the incredibly low mortgage rates we are currently experiencing. Its margins indicate that it is in a strong position to capitalize on these low rates. Annaly currently has an operating margin of 70.59% and profit margin of 63.40%. The low rate environment makes this a good time to invest in companies like Annaly, Invesco Mortgage Capital (IVR) or ARMOUR Residential (ARR). Invesco Mortgage capital currently pays a dividend yield of 13.9%, while ARMOUR Residential pays 16.2%. Invesco's margins are hovering around 90%, while ARMOUR's margins are hovering around 78%. These companies are in good positions to cash in and make the most of the situation.
At the moment, there is still some uncertainty regarding just how widespread the increase in housing prices really is. Some cities have shown no improvement at all. On the other hand, certain other cities have improved significantly, and these seem to be the ones that had previously struggled the most. While the housing market cannot be considered stable quite yet, it is in a good place, and this will likely continue for some time yet. With this in mind, I think that Annaly would be a profitable investment at the moment.
Another REIT competitor that is benefiting greatly from the improving housing market is Chimera Investment (CIM). Chimera currently has a dividend yield of 15.2%. The company's operating and profit margins are hovering around 90%. The company has been able to boost profits and provide high dividends to its stockholders. The reason that Chimera can take advantage of the situation is that it is a diversified REIT. The company invests in residential mortgage-backed securities [RMBS], residential mortgage loans, real estate-related securities, and many other areas. Borrowing rates are also very low right now, and I do not think that we will see a significant increase in those rates until about 2014. Now is the time for companies like Chimera to make their mark on the industry. Chimera's stock should be increasing for now, and it may be quite a good investment in the long term as well.
American Capital Agency (AGNC) and CYS Investments (CYS) are also strong competitors at the moment. American Capital Agency currently yields 14.6%, while CYS yields 14.1%. American Capital has margins in the 92 to 93% range, while CYS boasts a profit margin of 131% and an operating margin of 89%. American Capital invests in agency pass-through securities, while CYS invests in residential mortgage pass-through securities. As I have mentioned, the positive trend that we are seeing with Annaly is not limited to that company alone. According to the Vanguard REIT ETF, the entire market is experiencing an improvement at the moment. Stockholders should still welcome the improvement, but this is just a reminder that you should not get ahead of yourself with your enthusiasm for one specific REIT stock. I think American Capital and CYS will both be doing well in the stock market as a result of the improvements in the housing markets.
Mortgage REITs (mREITs) will also benefit significantly from the increase in prices. One such company is Apollo Commercial R.E. Finance (AMTG). Apollo currently yields 15.3%, with a profit margin of 46% and operating margin of 51%. As there has been an increase in the number of houses being sold, there is also an increase in the number of homebuyers that will need mortgages now or in the very near future. This is a situation that companies like Apollo can capitalize on. The success of this company depends largely on the maintenance of the current trend towards improvement, but I feel that the chances are in Apollo's favor. Apollo stock price should be rising in the near future as a result.
Although the housing market is improving in the United States, we must remember that the rest of the world is facing an economic crisis that will eventually make its way here. The moral of the story may be that REITs like Annaly need to make the most of the current situation and do everything that they can in order to stay in the game, and, if possible, stay ahead of the competition. The stock should be doing well, but investors should watch closely for more changes in the market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.