How The Fed Could Send mREITs Higher

| About: Annaly Capital (NLY)

Many investors are waiting for the Fed to announce further monetary easing tomorrow. The consensus among the talking heads on CNBC and others who watch the Fed, is that there is a significant likelihood that the Fed will take some sort of action.

What this could mean for the mREIT sector is significant. Fed actions in the past have left us wondering, but now that we know what actions are likely, we can anticipate what the future could hold for the sector.

Annaly Capital (NYSE:NLY) has benefited from the zero interest rate policy (ZIRP) of the Fed in various ways.

  • The interest rate "stability" has made their business in this sector much less volatile.
  • Keeping short term rates near zero has made the "spread" much less likely to narrow, which of course allows NLY to remain conservative with its business model.
  • The spread between the 2 year Treasury and the 10 year has remained favorable for a conservative approach that can continue to profit.

Obviously, the benefit to the shareholders are evident with a more stable dividend. American Capital (NASDAQ:AGNC) just announced that they are maintaining their dividend, which reverses their recent cut from the previous quarter.

The main difference between Annaly and American is their use of leverage. Annaly uses less than AGNC and has not performed nearly as well as them. To me this also means that NLY could be better positioned to take advantage of market conditions after the Fed acts.

What Actions The Fed Could Take

  • The most likely announcement is that the Fed will continue with the zero interest rate policy well into 2015, if not longer (maybe even actually cut another .25%).
  • The next most likely announcement is that the Fed will do another round of Treasury purchasing to keep the longer term rates down.
  • Less likely would be actions taken to spur lending by the banks by charging them (right now the central bank pays interest) to keep spare cash with the Fed. In effect, forcing the banks hand. (I do not see this happening)

Several other options have been tossed around, but these are the main ones, and actually the first two are the ones that we could see benefiting the mREIT sector. In particular, Annaly Capital.

This 6 month chart shows the dividend being stable for the last few quarters, but the share price has risen significantly. From a low of $15.50/share to $17.75/share as of today's close. A 12% surge in the share price is nothing to sneeze at for an mREIT, or for Annaly, which has had a relatively stable share price throughout its history.

More importantly is the fact that since Annaly has consistently used less leverage in its business model, they do have the option to take on more risk (leverage), if the Fed keeps interest rates in a very stable environment.

If NLY does take on more risk, and goes further out on the yield curve, that could mean that not only could their share price continue to rise, but they could also earn more money and pay more dividends.

All companies in the mREIT sector could benefit from these actions, but NLY has a few more options than the others who are already using more leverage. Since I believe actions speak louder than words, to me it seems that investors are buying up shares seeing much of what we see.

If the Fed accommodates, Annaly will continue to profit. That spells shareholder value in my book.

Disclosure: I am long NLY, AGNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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