Since I have been writing for Seeking Alpha, I have been banking the drum loudly for Annaly Capital (NLY), one of my favorite stocks since 1999. Recently we have jumped on the American Capital (AGNC) bandwagon after thoughtful deliberation, and the obvious performance of the company and the stock. We simply could not leave the two best mREITs out of our portfolio, and quite frankly they make a nice fit together.
Annaly uses less leverage and has been more conservative in its approach, while American has taken advantage of the stable interest rate environment to tweak its leverage over the course of a few years now, and has outrun Annaly on all metrics.
That being said, Annaly has rewarded shareholders just fine and dandy thank you, and there is something to be said for management, its conservative approach, and its long track record. AGNC has yet to prove itself under fire so to speak, but I believe they have proven themselves right now to be worthy of holding shares in our core portfolio.
The Fed And The mREITs
What can be said that has not been repeated over and over at this point? Actually PLENTY! The FOMC minutes have just been released and it looks even better for the entire sector.
Here is the press release from the Fed. They state quite clearly that the ZIRP, which has been in place for nearly three years (or more) will continue at least through LATE 2014 (if not longer).
"To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the committee expects to maintain a highly accommodative stance for monetary policy. In particular, the committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions - including low rates of resource utilization and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
Well now it has been affirmed, reaffirmed, and re-reaffirmed. It seems to me that the Fed might even seek to extend this policy well beyond 2014 as well.
The minutes are quite revealing as well (here are the entire minutes), regarding some mortgage commentary.
"Despite new historical lows for residential mortgage rates over the intermeeting period, refinancing activity remained relatively muted. Evidence from the Senior Loan Officer Opinion Survey on Bank Lending Prac-tices (SLOOS) conducted in July indicated that mortgage underwriting standards at banks generally have not eased much from their tightest post-crisis levels."
What this means to me is that the rate of pre-payments have not increased. That is a positive for the mREIT sector, as well as the ongoing steady interest rate environment, and the ZIRP (zero interest rate policy).
When one looks at a chart that clearly relates to interest rates, the spreads, and the correlation to the dividend yields, of both NLY and AGNC, we can see that we are solidly in the "sweet spot" for now, and the foreseeable future.
Low interest rates, a decent spread, and the continuation of strong dividends from these two stocks are very clearly intertwined.
By no means are these stocks immune to all of the risks we have discussed in every article we have written. That being said, it appears to me that we are in "the zone" for solid returns for at least a few years to come.
If not longer.