Annaly Capital Clicking on All Cylinders

Annaly Capital recently reported solid first quarter results, with core EPS of $0.51/share that was in-line with analyst estimates. Spreads improved by an impressive 58 bps on a sequential basis to 1.46%. Leverage remained at 8.1:1, however, which seems slightly aggressive. However, with no exposure to non-agency assets and no apparent margin call pain, the 8.1:1 ratio appears reasonably comfortable to me.

Annaly's strong results are rooted in the Company's significant investment in fixed-rate assets several months ago. The Company had 69% of its portfolio in fixed-rate instruments at period-end, though some of that exposure was hedged. NLY's repo financing had a weighted average cost of just 4.18% during the quarter and 3.85% at period-end. With funding becoming even cheaper on the heels of yet another Fed rate cut, Annaly can look forward to several more quarters of wide spreads and flush earnings.

Annaly's book value at 3/31/08 was $13.38, so the stock is trading at 1.3x the after-hours closing price of $17.25. This valuation is on the lower end of Annaly's historical trading price, suggesting that the stock could have more room to run.

Additionally, the dividend yield is currently a robust 11%, much higher than Annaly's typical dividend yield. I believe Annaly is financially strong enough, even in the current credit environment, to have a risk-adjusted yield of just 8-10%, implying that the stock could trade at $19/share - $24/share.

Disclosure: none

Comments

[ZagnZig:]

I just received my nice NLY dividend yesterday! This is one of the sweetest stocks on NYSE, IMHO. I also think dis stock is climbing into the $17-18$ - any bets? All the best of luck.

2008 May 01 08:17 AM

[Echo To All:]

why is leverage of 8.1:1 aggressive?

(when considering leverage of +30:1 is what got the pros, and the economy, in trouble)

I do not think aggressive is the way to describe it, actually I think it is tame for NLY, but curious on why u consider it aggressive?

2008 May 01 08:41 AM

[ZagnZig:]

1Q Net Interest Income $253.5M Vs $69.4M
1Q Net Soars To $243M From $67.4M
1Q EPS 53c Vs EPS 28c
1Q Core Earnings 51c Vs 26c
1Q 2008 Core EPS Of $0.51, An Increase Of 96% From Prior Yr
and 38% From Prior Qtr
Sold $4.1B In Mortgage-Backed Secs In 1Q For $9.4M Gain

The best part of the earnings announcement was CEO Farrell’s statement concerning the current volatile financial environment: “we expect operating fundamentals to remain favorable for us...”
Performance – I guess that is why FIDAC charged 6mil instead of their usual 5.
From all of this – any guess as to what the dividend will be ?

2008 May 01 10:01 AM

[Jonathan Ch...:]

With GAAP earnings at $0.54, the dividend will be about $0.51.

2008 May 01 10:43 AM

[ZagnZig:]

Great thanks - I had figured 0.54 - lets see what they declare.

On March 07, 2008, Greg Feirman wrote:
“Thornburg is heavily leveraged and its large portfolio of mortgage backed securities is financed by debt. If it has to pay all that debt back immediately, it will have to sell large parts of its portfolio at fire sale prices in order to meet its obligations, resulting in massive losses.”

Is it reasonable to assume that Thornburg did have to sell large parts of its portfolio at fire sale prices?
Is it possible that NLY was able to take advance of the fire sale prices since NLY was not pressed by margin calls?

2008 May 01 10:55 AM

[tommyt:]

Plus you can sell options vs. the stock, additional income.

2008 May 01 12:07 PM

[Patrick Harden:]

Lots of great comments - thanks for your input.

Let me just clarify that Annaly declared a Q1 dividend of $0.48/share with respect to first-quarter earnings. The next dividend will be based on second-quarter core earnings, which should be around $0.55/share given that additional capital raises and lowered leverage will offset the widened spread. I expect Annaly's dividend to be $0.50 - $0.52/share for Q2.

Also, Annaly most likely did not buy any Thornburg assets. Thornburg focuses on non-agency jumbo lending, which is not part of Annaly's strategy of holding only agency-backed securities.

2008 May 01 12:56 PM

[osa:]

I've heard this before. I think it was in earlier this year right before the stock tanked.

2008 May 01 02:02 PM

[Patrick Harden:]

Annaly shares did pull back sharply in early March after Carlyle Capital, a private hedge fund with a similar investing strategy was margin called to the point of bankruptcy. However, Carlyle was levered 30:1, whereas Annaly is just levered 8:1 and has a reasonable amount of cash and unencumbered assets available to meet any margin calls. The stock obviously has some liquidity risk priced in (hence the 11% dividend), but Annaly is a strong player that has good relationships with its counterparties.

2008 May 01 03:09 PM

[ZagnZig:]

May 1: NLY: S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF NLY. Q1 EPS of $0.53 vs. $0.29 tops our $0.47 forecast. Interest rate spread grew 88 bps from a year ago, to 1.46%, and we see further expansion as NLY benefits from recent Fed rate cuts. We remain impressed that NLY has delivered nine straight quarters of EPS expansion in a challenging credit environment, while reducing overall leverage. We continue to look for earnings and dividend growth in '08, on wider spreads and growth at its FIDAC taxable REIT subsidiary. We raise our '08 EPS estimate to $2.40 from $2.24, keep '09 at $2.94, and maintain our $18 target price. NLY yields 11.5%.|

2008 May 01 03:38 PM

[helplessobs...:]

In a nut shell NLY is a great investment no matter how you look at it.

2008 May 01 06:05 PM

[ALPHAMASTER:]

As soon as the fed starts raising interest rates, the stock goes down. The stock was pounded three years ago when it happened. Until then, tho, they will continue to increase their earnings.

2008 May 02 01:09 AM

[BJ's Best Buys:]

I've analyzed financial statements for over 25 years - this is a great stock with a great value & great dividend - I'm surprised that Citigroup downgraded it to a hold, but then if you look at Citi's performance over the past year I wouldn't put any stock in anything they have to say anymore & for those of you who don't know their stock dropped from over $50/sh to under $20/sh in about a year's time - still overall most anyalysts consider this a buy to a strong buy - hard to find a stock this nice in today's market - I say buy, buy, buy while it's still cheap!

2008 May 02 02:57 PM