The negative articles are flooding the investment sites once again. The hottest sector in the market these days has been the mREIT sector. Annaly Capital (NYSE:NLY) is an easy target for the doom and gloom crowd, simply because it is the one company that has the most experience navigating just about every interest rate scenario the world has seen.
NLY is also the largest mREIT on the planet with a total enterprise value exceeding $114 billion. The share price right now sells at just about book value with nearly zero premium. The company has held its dividend of $.55/share for the last 2 quarters as others have had to cut theirs.
Their management is the most experienced team in the industry, and they are well known to take a rather conservative path in the face of criticism. After all, its closets rival, American Capital (NASDAQ:AGNC) has virtually come out of nowhere and outperformed Annaly at their own "game" for the last 2-3 years.
In order to achieve their success, AGNC has used about 30% more leverage than NLY (7.5:1 vs 6.0:1) and an argument can be made supporting this strategy. After all, the proof is in capital appreciation as well as the dividends I suppose. We have recently added AGNC to our core holdings, but we also expanded our core position in NLY. Why? The one fact we find most compelling is the conservative path the company sticks to.
Keeping It Simple
As I have said quite often (some would say WAY too often), the way mREITs make money is the spread between interest rates.
Thus far, the Fed has given all mREITs an open playbook with a zero interest rate policy, as well as a stable interest rate environment with its Bond buying. Now they have added a new wrinkle to this by buying mortgage backed securities to the tune of $40 billion per month for as long as it takes for the housing market, mortgage market, and jobs market to come back to life.
To me, this telegraphs precisely what the sector faces. I don't know about you, but when we already know the answers to the questions, it makes taking the test SO much easier!
The bottom line is this chart:
Annaly has navigated every interest rate scenario on this chart. Even when the spread was flat or inverted. They paid dividends and made profits, and shareholder benefited.
Look at the last few ticks on this chart. ZIRP is in place, the spread has ticked UP, and the 10 year Treasury is now UP to 1.85%. This has all taken place after the Fed announced QE3.
I will stand by my opinion that mREITs are in a perfect storm. Annaly in particular could benefit by knowing the answers to the questions as it navigates much calmer waters.
Do you want to believe the doom and gloom crowd with their fear mongering or do you like using the facts to make your investment choices?
Oh, here is one last bit of interesting information, from this report:
"The total number of originated loans of all types and purposes reported fell by about 780,000, or 10 percent, from 2010, in part because of a 13 percent decline in refinancing. Home purchase lending also fell, but by a more modest 5 percent."
These are facts, not guesses. If the mortgage applications for refinancing are squeezed, how will that become bad news for Annaly?
Could NLY cut the dividend? Sure, but even if it is cut a few cents, where would we be able to achieve a dividend like that anyway?
I think I will stick with Annaly for awhile.