Annaly Capital's Recent BV, Dividend, And Valuation Compared To 17 mREIT Peers - Part 2

| About: Annaly Capital (NLY)

Summary

This article compares NLY’s recent dividend per share rates, yield percentages, and several dividend sustainability metrics to seventeen mREIT peers.

This includes an analysis of NLY’s quarterly estimated REIT taxable income, estimated core earnings, and normalized core earnings which impacts the company's dividend sustainability.

This article also explains why NLY had a stable dividend for the fourth quarter of 2016 (which I previously correctly projected).

This article also discusses NLY’s projected performance during the fourth quarter of 2016 when compared to the company’s fixed-rate agency mREIT peers.

My current buy, sell, or hold recommendation and near-term dividend sustainability projection for NLY is stated in the “Conclusions Drawn” section of the article.

Author's Note: PART 1 of this article analyzed Annaly Capital Management Inc.'s (NYSE:NLY) recent results and compared several of the company's metrics to seventeen mortgage real estate investment trust (mREIT) peers. PART 1 also showed how NLY's discount to book value ("BV") as of 9/30/2016 compared to the seventeen other mREIT peers. PART 1 helps lead to a better understanding of the topics and analysis that will be discussed in PART 2. The link to PART 1's analysis is provided below:

Annaly Capital's BV, Dividend, And Valuation Compared To 17 mREIT Peers (Post Q3 2016 Earnings) - Part 1

This two-part article is a very detailed analysis comparing NLY to many mREIT peers. I am writing this two-part article due to the continued requests that such an analysis be specifically performed on NLY. For readers who just want the summarized conclusions/results, I would suggest to scroll down to the "Conclusions Drawn" section at the bottom of the each part of the article.

Focus of Article:

The focus of PART 2 of this article is to compare NLY's recent dividend per share rates, yield percentages, and several dividend sustainability metrics to seventeen mREIT peers. This analysis will show recent past data with supporting documentation within Table 4 below. This article will also discuss NLY's "near-term" dividend sustainability which is partially based on the metrics outlined in Table 4. A more in-depth analysis of NLY's near-term dividend sustainability will be provided in Table 5 below.

By analyzing these metrics, one will better understand which mREIT generally has a safer dividend rate going forward versus other peers who generally have a higher risk for a dividend decrease. When back testing the metrics within this analysis, the results have continued to be proven reliable. This is not the only data that should be examined to initiate a position within a particular stock/sector or project future dividend per share rates. However, I believe this analysis would be a good "starting-point" to begin a discussion on the topic. At the end of this article, there will be a conclusion regarding the following comparisons between NLY and the seventeen mREIT peers: 1) trailing 12-month yields based on a stock price as of 12/25/2015 and 12/23/2016 (for each respective time period; including annual dividend change); 2) annual forward yield based on a stock price as of 12/23/2016; and 3) annual forward yield based on BV as of 9/30/2016. I will also provide my current BUY, SELL, or HOLD recommendation and price target on NLY.

Side Note: I believe there are several different classifications when it comes to mREIT companies. For purposes of this article, I am focusing on four. For readers who are new to my articles or for existing readers who need a "refresher" on several different mREIT classifications, please see PART 1 of this article (link provided above).

Dividend Per Share Rates and Yield Percentages Analysis - Overview:

Let us start this analysis by first getting accustomed to the information provided in Table 4 below. This will be beneficial when comparing NLY to the seventeen mREIT peers within this analysis regarding quarterly dividend per share rates and yield percentages.

Table 4 -Dividend Per Share Rates and Yield Percentages

(Source: Table created entirely by myself, obtaining historical stock prices from NASDAQ and each company's dividend per share rates from the SEC's EDGAR Database)

Using Table 4 above as a reference, the following information is provided (see each corresponding column): 1) dividend per share rate for the third quarter of 2016; 2) stock price as of 9/30/2016; 3) trailing 12-month dividend yield (dividend per share rate from the fourth quarter of 2015 through the third quarter of 2016); 4) annual forward dividend yield based on the dividend per share rate for the third quarter of 2016 using the stock price as of 9/30/2016; 5) annual forward dividend yield based on the dividend per share rate for the third quarter of 2016 using the BV as of 6/30/2016; 6) dividend per share rate for the fourth quarter of 2016; 7) stock price as of 12/23/2016; 8) trailing 12-month dividend yield (dividend per share rate from the first quarter of 2016 through the fourth quarter of 2016); 9) annual forward dividend yield based on the dividend per share rate for the fourth quarter of 2016 using the stock price as of 12/23/2016; 10) annual forward dividend yield based on the dividend per share rate for the fourth quarter of 2016 using the BV as of 9/30/2016; and 11) annual dividend increase (decrease).

It should be noted as of 12/23/2016 ARMOUR Residential REIT Inc. (NYSE:ARR), CYS Investments Inc. (NYSE:CYS), Invesco Mortgage Capital Inc. (NYSE:IVR), MFA Financial Inc. (NYSE:MFA), AG Mortgage Investment Trust Inc. (NYSE:MITT), and New York Mortgage Trust, Inc. (NASDAQ:NYMT) had stock prices that "reset" lower regarding each company's monthly/quarterly dividend accrual (all quarterly dividends with the exception of ARR). In other words, each company's "ex dividend date" for the month/quarter has occurred. NLY, AGNC Investment Corp. (NASDAQ:AGNC), Anworth Mortgage Asset Corp. (NYSE:ANH), Capstead Mortgage Corp. (NYSE:CMO), Orchid Island Capital Inc. (NYSE:ORC), Arlington Asset Investment Corp. (NYSE:AI), Dynex Capital Inc. (NYSE:DX), American Capital Mortgage Inv. Corp. (NASDAQ:MTGE), Two Harbors Investment Corp. (NYSE:TWO), Western Asset Mortgage Capital Corp. (NYSE:WMC), New Residential Investment Corp. (NYSE:NRZ), and PennyMac Mortgage Investment Trust (NYSE:PMT) had stock prices that have not reset lower in reference to each company's monthly/quarterly dividend accrual (all quarterly dividends with the exception of AGNC and ORC).

Finally, technically speaking, several years ago AI changed its "entity status" from a REIT to a C-Corp. per the Internal Revenue Code ("IRC"). However, AI still maintained many "mREIT-like" characteristics including the type of investments held by the company and the amount of annual dividend distributions paid to shareholders (which is the focus of PART 2). As such, I believe AI should still be compared to the mREIT companies within this analysis which are REIT entities per the IRC. Readers should take all these points into consideration when the analysis is presented below. Let us now begin the comparative analysis between NLY and the seventeen mREIT peers.

NLY:

Using Table 4 above as a reference, NLY declared a dividend of $0.30 per share for the third quarter of 2016. This was the twelfth consecutive quarter of a stable dividend per share rate. Due to the fact NLY aggressively reduced the company's dividend from $0.65 per share during the second quarter of 2011 to $0.30 per share by the fourth quarter of 2013, the company's yield percentages also materially decreased by the end of 2013 which have remained relatively stable through the fourth quarter of 2016.

NLY's stock price traded at $10.50 per share on 9/30/2016. When calculated, this was a trailing 12-month dividend yield of 11.43%, an annual forward yield to NLY's stock price as of 9/30/2016 of 11.43%, and an annual forward yield to the company's BV as of 6/30/2016 of 10.43%. When comparing each yield percentage to NLY's agency mREIT peers, all three percentages continued to be slightly - modestly below average.

As was discussed in PART 1 of this article, since management basically maintained NLY's leverage during the third quarter of 2016, the company continued to have the lowest ratios (both on- and off-balance sheet leverage) out of the agency mREIT peers within this analysis. From charting past trends, typically lower leverage ratios within the fixed-rate agency mREIT sector generally equate to below average dividend yield percentages. Of course, there are various other factors at play regarding dividend sustainability. However, a company's leverage ratio is one "general" metric which I believe should be analyzed.

When combining this data with various other analytical metrics (several will be discussed shortly), I correctly projected NLY's dividend would remain stable at $0.30 per share for the fourth quarter of 2016 (stated a 70% probability). This projection was based on numerous variables at play pertaining to NLY's operations. With that being said, I continue to believe three important metrics to analyze are NLY's quarterly estimated REIT taxable income ("ERTI"), estimated core earnings ("ECE"), and normalized core earnings ("NCE"). To analyze these three metrics, Table 5 is provided below.

Table 5 - NLY Quarterly ERTI, ECE, and NCE Analysis (Q4 2015-Q3 2016)

(Source: Table created entirely by myself, partially using data obtained from NLY's quarterly shareholder presentation for the fourth quarter of 2015 - third quarter of 2016)

Using Table 5 above as a reference, NLY reported quarterly ERTI available to common shareholders of $99.1 million for the second quarter of 2016 (see red reference "E"). This figure was a notable improvement when compared to quarterly ERTI of only $22.2 million for the first quarter of 2016, but still below historical averages over the prior several years. When calculated, NLY had ERTI available to common shareholders of $0.11 per share for the second quarter of 2016. This was still materially below the company's dividend of $0.30 per common share for the same timeframe.

However, this figure also excluded the impact of NLY's net long "to-be-announced" ("TBA") mortgage-backed securities ("MBS") position that remained relatively unchanged (on a net basis) during the quarter. When including "net dollar roll" ("NDR") income of $79.5 million (see red reference "G"), NLY reported quarterly ECE available to common shareholders of $178.6 million for the second quarter of 2016 (see red reference "I"). When calculated, NLY had quarterly ECE available to common shareholders of $0.19 per share.

Furthermore, when also including NLY's "catch-up" premium amortization expense adjustment of $85.6 million (see red reference "L"), the company reported NCE available to common shareholders of $264.2 million for the second quarter of 2016 (see red reference "N"). When calculated, NLY had NCE available to common shareholders of $0.29 per share for the second quarter of 2016. This calculates to a dividend distributions payout ratio of 105% (see red reference "J/N"). I believe most would agree this was a minor quarterly overpayment of NCE. Simply put, NLY's quarterly NCE continued to be relatively close to the company's quarterly dividend distributions going back to the third quarter of 2015. Let us now take a look at what occurred during the third quarter of 2016.

NLY reported quarterly ERTI available to common shareholders of $196.0 million for the third quarter of 2016. This figure was a continued improvement when compared to the prior quarter but still below historical averages over the prior several years. When calculated, NLY had ERTI available to common shareholders of $0.19 per share for the third quarter of 2016. This was still below the company's dividend of $0.30 per common share for the same timeframe.

However, as discussed earlier, this figure also excluded the impact of NLY's net long TBA MBS position that slightly increased during the quarter. When including NDR income of $90.2 million, NLY reported quarterly ECE available to common shareholders of $286.2 million for the third quarter of 2016. When calculated, NLY had quarterly ECE available to common shareholders of $0.28 per share.

Furthermore, when also including NLY's minor catch-up premium amortization expense adjustment of $3.9 million, the company reported NCE available to common shareholders of $290.1 million for the third quarter of 2016. When calculated, NLY had NCE available to common shareholders of $0.29 per share for the third quarter of 2016. This calculates to a dividend distributions payout ratio of 102%. I believe most would agree this was a very minor quarterly overpayment of NCE.

When taking a look at NLY's combined payout over the prior four quarters, the company has basically matched dividend distributions to its NCE. I believe this provides strong, factual evidence as to why NLY continued to maintain a quarterly dividend rate of $0.30 per share over the prior four quarters. This was also one of the main reasons why I correctly projected a stable dividend for the fourth quarter of 2016.

I would also highlight to readers that NLY's quarterly NCE per share amounts and payout ratios over the prior year have been notably more "steady" versus the company's quarterly ERTI and ECE figures. This is due to the fact NCE takes into account an additional Generally Accepted Accounting Principle ("GAAP") versus IRC adjustment. Dependent upon management's projected lifetime conditional prepayment rate ("CPR") in regards to NLY's MBS portfolio, the catch-up premium amortization expense adjustment can materially alter the company's quarterly ERTI and ECE figures. As reconciled above, NCE excludes/reverses this GAAP adjustment since an entity's cost basis per the IRC is initially the purchase price of a security, not par.

Once again using Table 4 as a reference, NLY's stock price traded at $10.30 per share on 12/23/2016. When calculated, this was a trailing 12-month dividend yield of 11.65%, an annual forward yield to NLY's stock price as of 12/23/2016 of 11.65%, and an annual forward yield to the company's BV as of 9/30/2016 of 10.14%. When comparing each yield percentage to NLY's agency mREIT peers, all three percentages continued to be slightly - modestly below average. I continue to believe NLY should have an annual forward yield slightly below the agency mREIT average.

Several Comparisons Between NLY and the Company's Seventeen Other mREIT Peers:

A large number of readers have continued to request that I provide yield percentages, dividend per share rates, and other metrics for all the mREIT stocks I currently cover in ranking order. As such, using Table 4 above as a reference, the following metrics are provided for NLY and the seventeen other mREIT peers:

A) Trailing 12-Month Yields as of 12/25/2015 and 12/23/2016, Respectively (Including Annual Dividend Change; Lowest to Highest Percentage as of 12/25/2015) (Good General Indicator of Back-Testing Dividend Sustainability; Exceptions Apply):

1) MFA: 11.80%; 10.47% (Stable Dividend Q4 2015-Q4 2016)

2) TWO: 12.11%; 10.23% (8% Dividend Decrease Q4 2015-Q4 2016)

3) CMO: 12.13%; 9.07% (12% Dividend Decrease Q4 2015-Q4 2016)

4) MTGE: 12.24%; 9.97% (Stable Dividend Q4 2015-Q4 2016)

5) NLY: 12.31%; 11.65% (Stable Dividend Q4 2015-Q4 2016)

6) ANH: 12.99%; 11.19% (Stable Dividend Q4 2015-Q4 2016)

7) IVR: 13.23%; 10.89% (Stable Dividend Q4 2015-Q4 2016)

8) NRZ: 13.49%; 11.30% (Stable Dividend Q4 2015-Q4 2016)

9) PMT: 13.55%; 11.26% (Stable Dividend Q4 2015-Q4 2016)

10) DX: 13.87%; 11.90% (13% Dividend Decrease Q4 2015-Q4 2016)

11) AGNC: 13.95%; 12.67% (10% Dividend Decrease Q4 2015-Q4 2016)

12) CYS: 14.88%; 12.95% (4% Dividend Decrease Q4 2015-Q4 2016)

13) MITT: 16.98%; 11.13% (Stable Dividend Q4 2015-Q4 2016)

14) ARR: 17.81%; 13.87% (33% Dividend Decrease Q4 2015-Q4 2016)

15) NYMT: 18.15%; 14.44% (Stable Dividend Q4 2015-Q4 2016)

16) ORC: 19.67%; 12.26% (Stable Dividend Q4 2015-Q4 2016)

17) AI: 20.51%; 15.97% (Stable Dividend Decrease Q4 2015-Q4 2016)

18) WMC: 23.14%; 13.26% (47% Dividend Decrease Q4 2015-Q4 2016)

When comparing each company's trailing 12-month dividend yields, a general conclusion that can be drawn is that the lower a company's percentage was as of 12/25/2015, the lower the probability of a dividend decrease (or the higher the probability of a stable/increasing dividend) during the first - fourth quarters of 2016. In addition, generally the higher each company's trailing 12-month dividend yield was as of 12/25/2015, the higher the risk for a future dividend decrease (or the lower the probability of a stable/increasing dividend) over the same timeframe. Again, there are some expectations to this general trend but I believe one can see some patterns arise when analyzing each company's trailing 12-month dividend yields.

For instance, since MFA (rank 1), MTGE (rank 4), NLY (rank 5), ANH (rank 6), and IVR (rank 7) had a relatively low trailing 12-month dividend yield as of 12/25/2015, I do not believe it was a surprise each company had a stable dividend per share rate during the first - fourth quarters of 2016. As one moves down this list, it is also not surprising companies like ARR (rank 14) and WMC (rank 18) had an extremely material (at or greater than 25%) decrease to each company's dividend per share rate during the first - fourth quarters of 2016.

Regarding ORC (rank 17), this company continued to mainly invest in 30-year fixed-rate agency MBS with higher coupons. As such, these types of securities typically generate higher net spreads when compared to most mREIT peers. With that being said, the company's quarterly ERTI has recently begun to be less than the company's quarterly dividend distributions. As such, heightened monitoring of ORC's dividend needs to occur in my opinion. I believe the same type of monitoring holds true when it comes to AI.

B) Annual Forward Yield Based on Stock Price as of 12/23/2016 (Lowest to Highest Percentage) (Another Good General Indicator of Near-Term Future Dividend Sustainability; Exceptions Apply):

1) CMO: 8.79%

2) MTGE: 9.97%

3) MFA: 10.47%

4) TWO: 10.56%

5) IVR: 10.89%

6) MITT: 11.13%

7) ANH: 11.19%

8) PMT: 11.26%

9) NRZ: 11.30%

10) NLY: 11.65%

11) AGNC: 11.90%

11) DX: 11.90%

13) WMC: 11.91%

14) ARR: 12.12%

15) CYS: 12.82%

16) NYMT: 14.44%

17) ORC: 15.26%

18) AI: 15.97%

C) Annual Forward Yield Based on BV as of 9/30/2016 (Lowest to Highest Percentage) (A Very Good General Indicator of Near-Term Future Dividend Sustainability; Exceptions Apply):

1) MTGE: 7.79%

2) CMO: 8.29%

3) IVR: 8.85%

4) PMT: 9.30%

5) AGNC: 9.43%

6) ARR: 9.47%

7) TWO: 9.59%

8) ANH: 9.60%

9) NLY: 10.14%

10) CYS: 10.21%

11) MITT: 10.28%

12) MFA: 10.47%

13) WMC: 10.80%

14) DX: 10.82%

15) AI: 13.28%

16) NRZ: 13.50%

17) ORC: 14.99%

18) NYMT: 15.14%

Conclusions Drawn (PART 2):

PART 2 of this article compared NLY to seventeen mREIT peers in regards to recent dividend per share rates, yield percentages, and several other dividend sustainability metrics. This article also discussed NLY's near-term dividend sustainability. Using Table 4 as support, below were the recent dividend per share rates and yield percentages for NLY:

NLY: $0.30 per share dividend for the fourth quarter of 2016; 11.65% trailing 12-month dividend yield; 11.65% annual forward yield to the company's stock price as of 12/23/2016; and 10.14% annual forward yield to the company's BV as of 9/30/2016

When combining this data with various other analytical metrics not discussed within this specific article (some factors were covered in PART 1), the following projection regarding NLY's near-term dividend sustainability is provided:

NLY: Relatively high to high (75%) probability of a stable dividend for the first quarter of 2017

I believe the movement of MBS prices will directly impact NLY's use of the TBA forward market (which directly impacts NDR income). As explained in PART 1 of this article, NLY's hedging coverage ratio also needs to be considered when discussing this topic.

My projected NLY CURRENT BV (BV as of 12/23/2016) is $10.50 per share. This EXCLUDES the company's upcoming dividend for the fourth quarter of 2016. This is due to the notable increase in spread/basis risk that has recently occurred, mainly following the U.S. presidential election and the Federal Open Market Committee's ("FOMC") recent "hawkish" rhetoric regarding monetary policy. The following article discussed these recent events:

AGNC Investment And Orchid Island Capital: MBS Pricing Update For Q4 2016 (Continued mREIT BV Decreases In December)

My BUY, SELL, or HOLD Recommendation:

From the analysis provided above, including additional catalysts/factors not discussed within this article, I currently rate NLY as a SELL when I believe the company's stock price is trading at less than a modest (5%) discount to my projected CURRENT BV (BV as of 12/23/2016), a HOLD when trading at or greater than a (5%) but less than a (15%) discount to my projected CURRENT BV, and a BUY when trading at or greater than a (15%) discount to my projected CURRENT BV. These percentage ranges are unchanged when compared to my last NLY article (approximately one month ago).

Therefore, I currently rate NLY as a SELL since the stock is trading at or less than a (5.0%) discount to my projected CURRENT BV ($10.50 per share). My current price target for NLY is approximately $10.00 per share. This is currently the price where my SELL recommendation would change to a HOLD. This price target is a ($0.50) per share decrease when compared to my last NLY article. This price target decrease is due to the projected continued decrease in CURRENT BV during the second half of the fourth quarter of 2016 (through 12/23/2016). Specifically, there has recently been a notable negative relationship between MBS pricing and derivative instrument valuations (spreads materially widened). Currently, the price where my recommendation would change to a BUY is approximately $8.95 per share. This price is a ($0.40) per share decrease when compared to my last NLY article.

Along with the data presented within this article, these recommendations consider the following mREIT catalysts/factors: 1) projected future MBS price movements; 2) projected future derivative valuations; and 3) projected near-term dividend per share rates. This recommendation also considers the higher probability of multiple Fed Funds Rate increases by the FOMC during 2017 (this is a more hawkish view when compared to earlier in the year) due to recent macroeconomic trends/events.

Final Note: Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader's current investing strategy. The factual information provided within this article is intended to help assist readers when it comes to investing strategies/decisions. All trades/investments I have performed over the past few years have been disclosed to readers in "real time" (that day at the latest) via the "StockTalks" feature of Seeking Alpha. Through this resource, readers can look up all my prior disclosures (buys/sells) regarding all companies I cover here at Seeking Alpha (see my profile page for a list of all stocks covered).

Disclosure: I am/we are long AGNC, MTGE.

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.

Additional disclosure: I currently have no position in NLY, AI, AMTG, ARR, CMO, CYS, DX, IVR, MFA, MITT, NRZ, NYMT, ORC, PMT, TWO, or WMC.

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