As I have stated all along, Annaly (NLY) has been on quite a positive run of late, and it does not seem to be abating.
I still consider this mREIT to be the "best of breed" in the sector due to it's more conservative approach with leverage, as well as the numerous interest rate environments that the company has had to navigate through.
While it is a fact that American Capital (AGNC) has done a wonderful job by using more leverage, and has outperformed NLY over the course of several years, I feel in the long run Annaly will have much more flexibility navigating future interest rate environments than AGNC. Of course I cannot predict the future but by virtue of the fact that Annaly has more cash available, they can deploy it in a wider array of opportunities.
Annaly And Our Current Economic Climate
I have said repeatedly that Annaly has had the benefit of a rather stable interest rate environment in which to work. This is one case in which government "intervention" has actually worked in their favor.
As stated in their market commentary of July 12:
The second quarter of 2012 proved yet again the resilience of the agency mortgaged-backed securities (MBS) market. Despite the unsettling headlines regarding the continuing European sovereign debt crisis, spreads between the 30-year Fannie Mae current coupon and the ten-year US Treasury ended the quarter just eight basis points (BPS) wider than where they began. This is due to a number of factors, such as the perceived superior credit quality of agency MBS, the support of the Federal Reserve and relatively tame prepayment speeds.
To sum this statement up in my own words, the environment is very favorable for NLY to continue making money. Keep in mind that the Fed has vowed to keep rates low through at least late 2014, and actually given the sluggish economy and weaker reports of late, we should not be surprised by the Fed moving that time frame out even further. Maybe 2015, or 2016? Who knows, but it sure seems more of a possibility than just 3 months ago.
If this does happen it could also explain the run up in price of just about all of the mREITs. This could also be wonderful news for investors in this sector, as those sweet dividends will continue to roll in.
Here is some more from the commentary;
The desire for yield has continued to support demand for commercial real estate investments. It hasn't hurt that the underlying fundamentals have painted a picture where the glass is half-full rather than half-empty.
It's not often that I have heard this positive sort of commentary from NLY. Since I have owned the stock, they tend to be more cautious in their comments, which I happen to like. This little excerpt is quite telling to me, in that the commercial sector potential for loans is more favorable now. That means another playground for NLY to profit in can be on the upswing.
One more thing I see happening, is that with the Bush Tax Cuts expiring at the end of the year, investors are looking for other investments to perk up their dividend income. The mREITs offer a strong yield, in a favorable environment, and the dividends be taxed as it always has, as regular income not dividend income. Ergo; less confusion, more flexibility.
Finally, Annaly is selling right now at 1.04% of book value. To me that could mean even more capital appreciation and if a secondary offering is announced it will be at a higher price which in many ways protects current shareholders as well as giving NLY even more cash available to deploy.
All of the risks associated with mREITs have been well documented and require constant monitoring. You really need to do your own research before taking the leap, and remember that these are my opinions.
The bottom line, to me: Annaly is a buy.
Disclosure: I am long NLY.