Annaly Capital's BV, Dividend, And Valuation Compared To 15 mREIT Peers (Post Q4 2016 Earnings) - Part 1

| About: Annaly Capital (NLY)
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Summary

Part 1 compares Annaly's recent leverage, hedging coverage ratio, quarterly BV, quarterly/trailing twelve-month economic return, and current valuation to fifteen mREIT peers.

Part 1 also performs a detailed analysis on the REIT's MBS and derivatives portfolios as of 12/31/2016.

This detailed analysis includes Annaly's proportion of agency MBS holdings (including each specific maturity), hedging coverage ratio, and derivative instrument notional balances as of 12/31/2016.

Providing these metrics allows readers to better understand which companies will outperform sector peers during specific types of interest rate environments.

My buy, sell, or hold recommendation, current BV projection (BV as of 2/24/2017), and current price target for NLY is in the "Conclusions Drawn" section of the article.

Focus of Article

The focus of PART 1 of this article is to analyze Annaly Capital Management Inc.'s (NYSE:NLY) recent results and compare several of the company's metrics to fifteen other mortgage real estate investment trust (mREIT) peers. This analysis will show past and current data with supporting documentation within three tables. Table 1 will compare NLY's recent leverage, hedging coverage ratio, BV, and economic return (loss) to that of the fifteen other mREIT peers. Table 1 will also provide a premium (discount) to BV analysis using stock prices as of 2/24/2017. Table 2 will show a quarterly compositional analysis of NLY's fixed-rate agency mortgage-backed securities ("MBS") portfolio, while Table 3 will show the company's recent hedging coverage ratio over the past two quarters.

This article also discusses the importance of understanding the composition of NLY's MBS and derivatives portfolios in light of events that have occurred during the first half of the first quarter of 2017. This includes a BV projection as of 2/24/2017.

I am writing this two-part article due to the continued requests that such an analysis be specifically performed on NLY at periodic intervals. Understanding the characteristics of a company's MBS and derivatives portfolios can shed some light on which companies are overvalued or undervalued strictly per a "numbers" analysis. This is not the only data that should be examined to initiate a position within a particular stock/sector. However, I believe this analysis is 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 fifteen other mREIT peers: 1) leverage as of 12/31/2016; 2) hedging coverage ratio as of 12/31/2016; 3) trailing twelve-month economic return (loss); and 4) current premium (discount) to BV as of 12/31/2016. My BUY, SELL, or HOLD recommendation and current price target for NLY will be in the "Conclusions Drawn" section of this article.

Leverage, Hedging Coverage Ratio, BV, Economic Return (Loss), and Current Premium (Discount) to BV Analysis - Overview

Let us start this analysis by first getting familiarized with the information provided in Table 1 below. This will be beneficial when explaining how NLY compares to the fifteen other mREIT peers in regard to the metrics stated earlier.

Table 1 - Leverage, Hedging Coverage Ratio, BV, Economic Return (Loss), and Current Premium (Discount) to BV Analysis

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

Table 1 above provides the following information on NLY and the fifteen other mREIT peers (see each corresponding column): 1) on-balance sheet leverage ratio as of 12/31/2016; 2) "at-risk" (on- and off-balance sheet; total) leverage ratio as of 12/31/2016; 3) hedging coverage ratio as of 12/31/2016; 4) BV per share at the end of the third quarter of 2016; 5) BV per share at the end of the fourth quarter of 2016; 6) BV per share change during the fourth quarter of 2016 (monetary amount and percentage); 7) economic return (loss) during the fourth quarter of 2016 (monetary amount and percentage); 8) economic return (loss) per share change during the trailing twelve months (monetary amount and percentage); 9) stock price as of 2/24/2017; and 10) 2/24/2017 premium (discount) to BV per share at the end of the fourth quarter of 2016 (monetary amount and percentage).

Side Note: As some readers know by now, writing articles at Seeking Alpha comes second when compared to my professional career (see my profile for further information). As such, I have limited "free time" and cannot specifically provide articles on all the stocks I currently cover. As such, I usually write articles based on readers' requests. This typically tends to be larger-capitalized stocks, which, in this case, continue to be NLY and AGNC Investment Corp. (NASDAQ:AGNC). I will continue to provide articles on companies that have the highest reader demand and/or stocks that I currently find attractively valued. With that being said, in trying to satisfy most readers' requests, I have provided various metrics for sixteen of the mREIT stocks I currently cover within this article. I hope readers can utilize the data provided within Table 1 above as part of one's knowledge base/investing strategy. As of the date this article was written, AG Mortgage Investment Trust, Inc. (NYSE:MITT) and Western Asset Mortgage Capital Corp. (NYSE:WMC) had yet to report results for the fourth quarter of 2016. As such, these two mREIT peers are excluded from the analysis within PART 1 of this article.

Brief Overview of Several Classifications within the mREIT Sector

I believe there are several different classifications when it comes to mREIT companies. For purposes of this article, I am focusing on four. It should be noted in light of several recent acquisitions and certain changes in overall investment strategies, some mREIT companies have begun to have small portfolios outside each entity's "main" concentration. However, I have continued to group certain mREIT companies in each entity's main classification for purposes of this article. Some market participants (and even some mREIT companies) have different classifications when compared to Table 1. Some market participants/companies base classifications on the percentage of capital deployed in each entity's investment portfolio. However, my preference is to base a company's classification on the monetary "fair market value" ("FMV") of each underlying portfolio. In my professional opinion, there is no "uniform" methodology when it comes to classifying mREIT companies, but more of an underlying preference. Readers should understand this as the analysis is presented below.

First, there are mREIT companies which earn a majority of income from investing in fixed-rate agency MBS holdings. These investments consist of commercial/residential MBS, collateralized mortgage obligations ("CMO"), and agency debentures for which the principal and interest payments are guaranteed by government-sponsored enterprises/entities ("GSE"). NLY, AGNC, Arlington Asset Investment Corp. (NYSE:AI), ARMOUR Residential REIT Inc. (NYSE:ARR), CYS Investments Inc. (NYSE:CYS), and Orchid Island Capital Inc. (NYSE:ORC) are currently classified as fixed-rate agency mREIT companies.

Side Note: 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 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.

Second, there are mREIT companies which earn a majority of income from investing in variable-rate agency MBS holdings. These investments generally are commercial/residential MBS for which the principal and interest payments are also guaranteed by a GSE. More specifically, variable-rate MBS generally consist of adjustable-rate mortgages ("ARM") that have varying interest rate reset periods. ARM holdings are usually classified together based on each security's average number of months to coupon reset. This is also known as the security's "months-to-roll". This is a typical indicator of asset duration which helps identify each security's price sensitivity to interest rate movements. If a security's months-to-roll is high, then this type of investment can also be described as a hybrid ARM holding. Capstead Mortgage Corp. (NYSE:CMO) and Anworth Mortgage Asset Corp. (NYSE:ANH) are currently classified as variable-rate agency mREIT companies.

Third, there are mREIT companies which earn varying portions of income from investing in agency MBS holdings, non-agency MBS holdings, and other securitizations. This type of company is known as a "hybrid" mREIT. In regard to non-agency MBS, this includes (but is not limited to) Alt-A, prime, subprime, and re/non-performing loans, where the principal and interest are not guaranteed by a GSE. Since there is no "government guarantee" on the principal or interest payments of non-agency MBS, coupons are generally higher when compared to agency MBS of a similar maturity. Due to the subtle yet identifiable differences between agency and non-agency MBS, I like to differentiate between an agency (at or above 75% of an entity's MBS based on FMV) mREIT company and a hybrid mREIT company. Dynex Capital Inc. (NYSE:DX), Invesco Mortgage Capital Inc. (NYSE:IVR), MFA Financial Inc. (NYSE:MFA), MTGE Investment Corp. (NASDAQ:MTGE), and Two Harbors Investment Corp. (NYSE:TWO) are currently classified as hybrid mREIT companies.

Finally, there are mREIT companies that invest in a combination of agency MBS, non-agency MBS, other mortgage-related securitized investments, non-securitized debt investments, and mortgage servicing rights ("MSR"). I currently believe New Residential Investment Corp. (NYSE:NRZ), New York Mortgage Trust Inc. (NASDAQ:NYMT), and PennyMac Mortgage Investment Trust (NYSE:PMT) should be classified as "multipurpose" mREITs. Now that an overview of Table 1 and a discussion of several types of mREIT classifications have been provided, let us start the comparative analysis between NLY and the fifteen other mREIT peers.

NLY

As of 12/31/2016, NLY's investment portfolio consisted of 74% and 14% fixed- and variable-rate agency MBS holdings, respectively (based on FMV). When compared to 9/30/2016, its fixed-rate agency MBS portfolio proportionally increased 2%, while the company's variable-rate agency MBS portfolio proportionally decreased (2%). NLY also continued to invest in non-agency MBS and non-MBS holdings, and these accounted for 12% of the company's investment portfolio balance as of 12/31/2016, which was unchanged when compared to the end of the prior quarter. This included NLY's investments in commercial debt/real estate, preferred equity, corporate debt, middle market ("MM") lending, and MSR.

As I have stated in prior mREIT articles, NLY's fairly recent added diversity typically results in some reduced volatility when compared to the company's fixed-rate agency mREIT peers during certain interest rate environments. This assessment came to fruition during the fourth quarter of 2016, as the company outperformed its fixed-rate agency mREIT peers when it came to quarterly valuation fluctuations (less severe BV decrease). This mainly occurred because part of NLY's investment portfolio was outside fixed-rate agency MBS, which witnessed a notable decrease in prices as market participants had a more "risk-on" trade. Simply put, the company's non-MBS portfolio provided a "buffer" per se to the notable valuation decreases in the company's MBS portfolio.

Using Table 1 above as a reference, NLY had an on-balance sheet leverage ratio of 5.8x, while the company's at-risk (total) leverage ratio, when including its off-balance sheet net long "to-be-announced" ("TBA") MBS position, was 6.4x as of 12/31/2016. NLY had an on-balance sheet and at-risk (total) leverage ratio of 5.3x and 6.1x as of 9/30/2016, respectively. As such, both its on-balance sheet and at-risk (total) leverage slightly increased during the fourth quarter of 2016. However, the company continued to have the lowest at-risk (total) leverage ratio when compared to the seven other agency mREIT peers within this analysis. Management has implied NLY continues to have more of a "defensive posture" in regard to leverage due to the risk of widening spreads/lower MBS prices as the Federal Open Market Committee ("FOMC") dictates future monetary policy during 2017 (in particular, the Federal ["Fed"] Funds Rate). NLY's lower leverage during the fourth quarter of 2016 was another reason why the company outperformed its fixed-rate agency mREIT peers when it came to quarterly valuation fluctuations (less severe BV decrease).

The company had a BV of $11.83 per share at the end of the third quarter of 2016. It had a BV of $11.16 per share at the end of the fourth quarter of 2016. This calculates to a quarterly BV decrease of ($0.67) per share, or (5.66%). When including NLY's quarterly dividend of $0.30 per share, the company had an economic loss of ($0.37) per share, or (3.13%), for the fourth quarter of 2016. Unlike the prior quarter, a notably more negative relationship between MBS prices and derivative instrument valuations occurred during the fourth quarter of 2016. This negatively impacted sector valuations. In other words, derivative net valuation gains were "trumped" by agency/non-agency MBS net valuation losses in most instances. Simply put, spread/basis risk notably increased. I correctly projected most mREIT companies would experience a decrease in BV in the following AGNC BV projection article:

AGNC Investment's Q4 2016 And 1/25/2017 BV Projection (Includes MTGE And NLY BV Projection)

Within that article, my AGNC and MTGE BV projections came close and very close, respectively, to each company's reported results, while NLY modestly outperformed my expectations. Let us now discuss the company's MBS and derivatives portfolios to spot certain characteristics which will impact future results. NLY's proportion of variable-rate agency MBS increased 10% during the third quarter of 2016 through the acquisition of Hatteras Financial Corp. (NYSE:HTS). With that being said, it continued to maintain a portfolio heavily invested in 30-year fixed-rate agency MBS holdings during the fourth quarter of 2016. Table 2 below provides NLY's proportion of variable- and fixed-rate agency MBS holdings as of 12/31/2016 and 9/30/2016 (separately including TBA positions).

Table 2 - NLY Agency MBS Portfolio Composition (12/31/2016 versus 9/30/2016)

(Source: Table obtained [with added highlights] from NLY's quarterly shareholder presentation for the third and fourth quarters of 2016)

Using Table 2 above as a reference, NLY's proportion of 15-year fixed-rate agency MBS holdings slightly decreased from 13.6% to 12.0% during the fourth quarter of 2016 (based on par/face value). Its proportion of 20-year fixed-rate agency MBS holdings slightly decreased from 10.1% to 8.7%. As such, NLY's proportion of 30-year fixed-rate agency MBS holdings modestly increased from 76.3% to 79.3%. When compared to fixed-rate agency mREIT peers like AGNC, ARR, and CYS, the company continued to have a higher proportion of 30-year fixed-rate agency MBS holdings during the fourth quarter of 2016.

It should be noted there was a notable sell-off in premiums associated with "prepayment-protected" securities during the fourth quarter of 2016 as well. Such MBS holdings are classified as "specified pools" and consist of mortgages classified under the "Home Affordable Refinance Program" ("HARP") and "low loan balance" ("LLB") securities. This was mainly due to a modest "downtick" in projected lifetime conditional prepayment rate ("CPR") percentages. This strategy is to directly combat an increase in CPR percentages when mortgage interest rates/long-term U.S. Treasury yields net decrease (or hold near historical lows) over a prolonged period of time. However, there was an actual notable "spike" in mortgage interest rates/long-term U.S. Treasury yields during the fourth quarter of 2016. As such, markets experienced the notable sell-off of specified pools during the quarter (not as severe as the 2013 "taper tantrum", though).

It should also be noted NLY's on-balance sheet fixed-rate agency MBS holdings had a weighted average coupon ("WAC") of 3.67% as of 12/31/2016, a (0.06%) decrease when compared to 9/30/2016. In addition, its weighted average three-month CPR decreased from 14.7% as of 9/30/2016 to 14.2% as of 12/31/2016. However, the company's lifetime CPR percentage within its entire investment portfolio notably decreased as of 12/31/2016 when compared to 9/30/2016 (10.1% versus 14.4%). As such, NLY's premium amortization expense notably decreased during the fourth quarter of 2016. I believe this should be seen as a "very aggressive" estimate for that point in time (which partially led to NLY's outperformance when compared to my projections for the fourth quarter of 2016). Since mortgage interest rates/long-term U.S. Treasury yields have net decreased during the first quarter of 2017 (through 2/24/2017), lifetime CPR percentages should partially "reverse course" when compared to the end of the fourth quarter of 2016. Let us now move on to the company's derivatives portfolio.

NLY continued to remain "less cautious" when compared to the rest of the fixed-rate agency mREIT sector regarding the company's derivatives portfolio (lower hedging coverage ratio). If mortgage interest rates/long-term U.S. Treasury yields net decrease in any given quarter, then NLY's strategy will pay off under most scenarios. However, if mortgage interest rates/long-term U.S. Treasury yields were to notably net increase, the company would have fewer derivative instruments in place to combat heightened interest rate risk. However, with that being said, since management has continued to diversify the company's investment portfolio into less interest rate-sensitive holdings (discussed earlier), NLY does not necessarily need as high a hedging coverage ratio when compared to its fixed-rate agency mREIT peers.

To highlight the overall activity within NLY's derivatives portfolio during the fourth quarter of 2016, Table 3 is presented below.

Table 3 - NLY Hedging Coverage Ratio (12/31/2016 versus 9/30/2016)

(Source: Table created entirely by myself, partially using NLY data obtained from the SEC's EDGAR Database [link provided below Table 1])

Using Table 3 above as a reference, NLY had a net (short) interest rate swaps position of ($25.2) billion as of 9/30/2016 (based on notional value). It should also be noted, the company had a net (short) swaptions, U.S. Treasury futures, and Eurodollar futures position of ($0.8), ($1.2) and ($15.0) billion as of 9/30/2016, respectively. When calculated, NLY had a hedging coverage ratio of 49% as of 9/30/2016. When compared to the five other fixed-rate agency mREIT peers, this continued to be a fairly low hedging coverage ratio. However, when compared to the fifteen other mREIT peers within this analysis, this was more of an average hedging coverage ratio. When compared to agency MBS, non-agency MBS and mortgage-related assets typically have lower durations. As such, companies like MFA, MITT, NRZ, and PMT operate with lower hedging coverage ratios.

NLY had a net (short) interest rate swaps position of ($25.9) billion as of 12/31/2016. It should also be noted, the company had a net (short) U.S. Treasury futures and Eurodollar futures position of ($3.9) and ($15.0) billion as of 12/31/2016, respectively. When calculated, NLY's hedging coverage ratio increased to 53% as of 12/31/2016. This has been the seventh consecutive quarter since I have covered NLY that management utilized Eurodollar future contracts which, data dependent, can have a positive impact regarding future mitigation of BV losses and dividend sustainability. However, I also believe Eurodollar futures can be less effective than interest rate payer swaps pertaining to a mitigation of MBS valuation losses in a rising interest rate environment. The reasoning behind this has been discussed in prior mREIT articles.

Once again using Table 1 above as a reference, as of 2/24/2017, NLY stock price traded at $11.05 per share. When calculated, this shows the stock was trading at a discount to BV as of 12/31/2016 of ($0.11) per share, or (0.99%). Simply put, NLY stock traded at a minor (less than a 5%) discount to BV as of 12/31/2016 and at a slightly-to-modestly higher valuation when compared to most of the mREIT peers within this article.

With that being said, when taking a look at the events/trends that have occurred during the first quarter of 2017 (through 2/24/2017), most 15- and 30-year fixed-rate agency MBS coupons experienced minor-to-modest price increases. In addition, NLY likely continued to maintain a low hedging coverage ratio when compared to its fixed-rate agency mREIT peers. As such, its lower hedging coverage ratio is a positive factor during the current quarter, as net (short) derivative instruments were not needed as much when compared to the prior quarter, given mortgage interest rates/long-term U.S. Treasury yields have slightly-to-modestly net decreased.

Through an analysis that will be omitted from this particular article, I am projecting NLY's CURRENT BV (BV as of 2/24/2017) is slightly higher when compared to the company's reported BV as of 12/31/2016 (similar scenario throughout most of the mREIT sector; exceptions apply).

This is due to a more "muted" relationship between MBS prices and derivative instrument valuations during the first quarter of 2017 (through 2/24/2017). Last quarter, there was a notably more negative relationship. This unfavorable relationship is always a possibility in the mREIT sector and is termed "spread/basis risk". While companies can take steps to minimize spread/basis risk, a company can never completely "mitigate" this risk. This heightened spread/basis risk was mainly the result of the U.S. presidential election. As most readers know, this result was unexpected by most market participants. In addition, due to the anticipated growth in the U.S. economy by the Republican-led legislative and executive branches of government (lower regulations; lower taxes), market participants anticipated an increase in inflation, which has led to the "knee-jerk" reaction in debt/equity markets (quick, notable increase in rates/yields).

Comparison of NLY's Recent Leverage, Hedging Coverage Ratio, BV, Economic Return (Loss), and Valuation to Fifteen mREIT Peers

Once again using Table 1 above as a reference, the following were the on-balance sheet and at-risk (total) leverage ratios of NLY and the fifteen other mREIT peers as of 12/31/2016 (in order of lowest to highest at-risk (total) leverage ratio; excluding borrowings collateralized by assets held in "securitization trusts"):

1) NRZ: 1.5x on-balance sheet leverage ratio; 1.1x at-risk (total) leverage ratio

2) NYMT: 1.3x on-balance sheet leverage ratio; 1.6x at-risk (total) leverage ratio

3) MFA: 3.1x on-balance sheet leverage ratio; 3.1x at-risk (total) leverage ratio

4) TWO: 3.9x on-balance sheet leverage ratio; 3.5x at-risk (total) leverage ratio

5) PMT: 3.6x on-balance sheet leverage ratio; 3.6x at-risk (total) leverage ratio

6) MTGE: 3.7x on-balance sheet leverage ratio; 4.8x at-risk (total) leverage ratio

7) IVR: 5.8x on-balance sheet leverage ratio; 5.8x at-risk (total) leverage ratio

8) DX: 6.2x on-balance sheet leverage ratio; 6.2x at-risk (total) leverage ratio

9) NLY: 5.8x on-balance sheet leverage ratio; 6.4x at-risk (total) leverage ratio

10) AGNC: 5.4x on-balance sheet leverage ratio; 7.1x at-risk (total) leverage ratio

11) CYS: 7.3x on-balance sheet leverage ratio; 7.7x at-risk (total) leverage ratio

12) ORC: 8.4x on-balance sheet leverage ratio; 7.8x at-risk (total) leverage ratio

13) ANH: 7.4x on-balance sheet leverage ratio; 8.4x at-risk (total) leverage ratio

14) ARR: 6.2x on-balance sheet leverage ratio; 8.9x at-risk (total) leverage ratio

15) CMO: 9.8x on-balance sheet leverage ratio; 9.8x at-risk (total) leverage ratio

16) AI: 9.7x on-balance sheet leverage ratio; 11.6x at-risk (total) leverage ratio

Side Note: Regarding several mREITs' leverage ratios within Table 1, some figures may not "exactly" match what was reported by each company. This is due to the fact not all companies within the mREIT sector have a "uniform" methodology for computing an entity's leverage ratio. To provide a consistent sector-wide metric, I have calculated each company's leverage ratios based on a uniform methodology. With that being said, I believe the slight difference in several companies' leverage ratios does not impact any concluded thoughts about each company's recent investing/risk management strategies.

Second, the following were the hedging coverage ratios for NLY and thirteen other mREIT peers as of 12/31/2016 (in order of lowest to highest ratio):

1) MFA: 33% hedging coverage ratio (hybrid mREIT)

2) NRZ: 41% hedging coverage ratio (multipurpose mREIT)

3) ARR: 44% hedging coverage ratio (fixed-rate agency mREIT)

4) AI: 46% hedging coverage ratio (fixed-rate agency C-Corp.)

5) IVR: 50% hedging coverage ratio (hybrid mREIT)

6) NLY: 53% hedging coverage ratio(fixed-rate agency mREIT)

7) ANH: 57% hedging coverage ratio (variable-rate agency mREIT)

8) CMO: 67% hedging coverage ratio (variable-rate agency mREIT)

9) ORC: 70% hedging coverage ratio (fixed-rate agency mREIT)

10) CYS: 85% hedging coverage ratio (fixed-rate agency mREIT)

11) MTGE: 86% hedging coverage ratio (hybrid mREIT)

12) AGNC: 91% hedging coverage ratio (fixed-rate agency mREIT)

13) DX: 104% hedging coverage ratio* (hybrid mREIT)

14) TWO: 138% hedging coverage ratio (hybrid mREIT)

NYMT: Not available**

PMT: Not available**

* = Estimated hedging coverage ratio as of 12/31/2016 based on available data. As of the date this article was written, DX had yet to file the company's annual report (10-K) to the Securities and Exchange Commission ("SEC").

** = As of the date this article was written, NYMT and PMT had yet to file the company's annual report (10-K) to the Securities and Exchange Commission ("SEC"). An accurate/actual hedging coverage ratio could not be calculated from the information provided within each company's earnings press release/earnings presentation slides.

Next, the following were the economic return (loss) percentages for NLY and the fifteen other mREIT peers during the trailing twelve months ended 12/31/2016 (in order of highest to lowest economic return/lowest to highest economic loss):

1) NRZ: 20.30% trailing twelve-month economic return

2) MFA: 13.25% trailing twelve-month economic return

3) IVR: 11.74% trailing twelve-month economic return

4) PMT: 9.03% trailing twelve-month economic return

5) NYMT: 8.47% trailing twelve-month economic return

6) TWO: 6.19% trailing twelve-month economic return

7) MTGE: 5.83% trailing twelve-month economic return

8) NLY: 5.43% trailing twelve-month economic return

9) ANH: 5.00% trailing twelve-month economic return

10) DX: 4.11% trailing twelve-month economic return

11) AGNC: 3.98% trailing twelve-month economic return

12) CMO: 3.38% trailing twelve-month economic return

13) ORC: 1.24% trailing twelve-month economic return

14) CYS: (0.21%) trailing twelve-month economic loss

15) ARR: (2.41%) trailing twelve-month economic loss

16) AI: (12.41%) trailing twelve-month economic loss

Finally, the following were the 2/24/2017 premium (discount) to BV as of 12/31/2016 percentages for NLY and the fifteen other mREIT peers (in order of largest to smallest discount/smallest to largest premium):

1) PMT: (16.73%) discount to BV as of 12/31/2016

2) MTGE: (14.71%) discount to BV as of 12/31/2016

3) IVR: (12.41%) discount to BV as of 12/31/2016

4) ANH: (9.08%) discount to BV as of 12/31/2016

5) AI: (8.20%) discount to BV as of 12/31/2016 ***

*** = "Tangible" BV of $13.11 per share as of 12/31/2016 (when excluding net deferred tax assets); a 13.50% premium

6) ARR: (8.12%) discount to BV as of 12/31/2016

7) AGNC: (7.70%) discount to BV as of 12/31/2016****

**** = Tangible BV of $19.80 per share as of 12/31/2016 (when excluding goodwill and other intangible assets from internalized manager); a 0.21% premium

8) TWO: (4.91%) discount to BV as of 12/31/2016

9) CYS: (4.56%) discount to BV as of 12/31/2016

10) DX: (4.04%) discount to BV as of 12/31/2016

11) CMO: (3.23%) discount to BV as of 12/31/2016

12) ORC: (1.84%) discount to BV as of 12/31/2016

13) NLY: (0.99%) discount to BV as of 12/31/2016

14) NYMT: 5.06% premium to BV as of 12/31/2016

15) MFA: 5.51% premium to BV as of 12/31/2016

16) NRZ: 20.61% premium to BV as of 12/31/2016

Conclusions Drawn (PART 1)

PART 1 of this article has analyzed NLY and fifteen other mREIT peers in regard to the following metrics: 1) leverage as of 12/31/2016; 2) hedging coverage ratio as of 12/31/2016; 3) trailing twelve-month economic return (loss); and 4) current premium (discount) to BV as of 12/31/2016. First, NLY's at-risk leverage as of 12/31/2016 continued to be near the mREIT sector average. However, when compared to the company's fixed-rate agency mREIT peers, it continued to have lowest at-risk (total) leverage ratio. This helped the company mitigate the severity of its BV decrease during the fourth quarter of 2016 when compared to its fixed-rate agency mREIT peers. Furthermore, NLY's trailing twelve-month economic return was also near the mREIT sector average. This was mainly due to the recent composition of the company's MBS and derivatives portfolio (which were discussed within the analysis above). In addition, NLY's current valuation, when compared to the company's BV as of 12/31/2016, was less attractive when compared to most mREIT peers, while being more attractive when compared to several others.

With that being said, the mREIT sector as a whole currently has stock price valuations that are now noticeably more closer to (and in some cases, in excess of) each company's BV as of 12/31/2016. As such, from a valuation perspective, this sector looks less attractive when compared to several months ago, when most mREIT peers within this analysis were trading at notably larger discounts/smaller premiums.

Through an analysis that will be omitted from this particular article, my projected NLY CURRENT BV range (BV as of 2/24/2017) is $11.25-11.55 per share. This range EXCLUDES the company's upcoming dividend for the first quarter of 2017.

Readers should also understand that certain trends may change between now and the end of the quarter. As such, constant monitoring of all the variables at play within the mREIT sector needs to occur (which I continuously perform).

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 the mean of my projected CURRENT BV range (BV as of 2/24/2017), a HOLD when trading at or greater than a (5%) but less than a (15%) discount to the mean of my projected CURRENT BV range, and a BUY when trading at or greater than a (15%) discount to the mean of my projected CURRENT BV range. These percentage ranges are unchanged when compared to my last NLY article (approximately two months ago).

Therefore, I currently rate NLY as a SELL, since the stock is trading at or less than a (5%) discount to my projected CURRENT BV ($11.40 per share). My current price target for NLY is approximately $10.85 per share. This is currently the price where my SELL recommendation would change to a HOLD. This price target is a $0.85 per share increase when compared to my last NLY article. This price target increase is mainly due to the more muted relationship between MBS prices and derivative instrument valuations during the first quarter of 2017 (through 2/24/2017). In addition, NLY outperformed the company's fixed-rate agency mREIT peers during the fourth quarter of 2016 regarding BV fluctuations. My current entry price for NLY is approximately $9.70 per share. This is currently the price where my recommendation would change to a BUY. This entry price is a $0.75 per share increase when compared to my last NLY article.

Along with the data presented within this article, this recommendation considers 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 most of last year) due to recent macroeconomic trends/events.

Final Note: After dividends are declared for the entire mREIT sector for the first quarter of 2017, I will provide PART 2 of this article taking a look at the recent past and current dividend per share rates and yields for NLY and the company's fifteen other mREIT peers (amongst other metrics).

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, NRZ.

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, ANH, ARR, CMO, CYS, DX, IVR, MFA, MITT, NYMT, ORC, PMT, TWO, or WMC.