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 seventeen 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 the seventeen other mREIT peers. Table 1 will also provide a premium (discount) to BV analysis using stock prices as of 3/2/2018. 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 first quarter of 2018. This includes a BV projection as of 3/2/2018.
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 seventeen other mREIT peers: 1) leverage as of 12/31/2017; 2) hedging coverage ratio as of 12/31/2017; 3) trailing twelve-month economic return (loss); and 4) current premium (discount) to BV as of 12/31/2017. 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 accustomed to the information provided in Table 1 below. This will be beneficial when explaining how NLY compares to the seventeen other mREIT peers in regards 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 seventeen other mREIT peers (see each corresponding column): 1) on-balance sheet leverage ratio as of 9/30/2017; 2) “at-risk” (on- and off-balance sheet; total) leverage ratio as of 9/30/2017; 3) hedging coverage ratio as of 9/30/2017; 4) on-balance sheet leverage ratio as of 12/31/2017; 5) at-risk leverage ratio as of 12/31/2017; 6) hedging coverage ratio as of 12/31/2017; 7) BV per share at the end of the third quarter of 2017; 8) BV per share at the end of the fourth quarter of 2017; 9) BV per share change during the fourth quarter of 2017 (percentage); 10) economic return (loss) during the fourth quarter of 2017 (percentage); 11) economic return (loss) during the trailing twelve-months (percentage); 12) stock price as of 3/2/2018; and 13) 3/2/2018 premium (discount) to BV per share at the end of the fourth quarter of 2017 (percentage).
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”). Since these investments typically have higher durations versus most other investments within the broader mREIT sector, companies within this classification typically utilize higher hedging coverage ratios in times of rising mortgage interest rates/U.S. Treasury yields. NLY, AGNC Investment Corp. (AGNC), Arlington Asset Investment Corp. (AI), ARMOUR Residential REIT Inc. (ARR), Cherry Hill Mortgage Investment Corp. (CHMI), CYS Investments Inc. (CYS), and Orchid Island Capital Inc. (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, similar risk management strategies, 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. (CMO) and Anworth Mortgage Asset Corp. (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, other securitizations, and non-securitized debt investments. This type of company is known as a “hybrid” mREIT. In regards to non-agency MBS, this includes (but is not limited to) Alt-A, prime, subprime, and re/non-performing loans where the principle and interest are not guaranteed by a GSE. Since there is no “government guarantee” on the principle or interest payments of non-agency MBS, coupons are generally higher when compared to agency MBS of a similar maturity. However, borrowing costs (including repurchase agreements) for these specific investments are also higher (no government guarantee; credit risk). Due to the subtle yet identifiable differences between agency and non-agency MBS, I like to differentiate between an agency and a hybrid mREIT company. Dynex Capital Inc. (DX), Invesco Mortgage Capital Inc. (IVR), MFA Financial, Inc. (MFA), AG Mortgage Investment Trust, Inc. (MITT), MTGE Investment Corp. (MTGE), Two Harbors Investment Corp. (TWO), and Western Asset Mortgage Capital Corp. (WMC) are currently classified as hybrid mREIT companies.
Finally, there are mREIT companies that invest in (but are not limited to) a combination of agency MBS, non-agency MBS, other mortgage-related investments, non-securitized debt investments, and mortgage servicing rights (“MSR”). I believe Blackstone Mortgage Trust, Inc. (BXMT), New Residential Investment Corp. (NRZ), New York Mortgage Trust Inc. (NYMT), and PennyMac Mortgage Investment Trust (PMT) should currently be classified as “multipurpose” mREITs. Since BXMT has 94% of its investment portfolio in variable-rate debt as of 12/31/2017, this company currently does not need to utilize a high hedging coverage ratio. The same can be said about NRZ which currently has a majority of the company’s investment portfolio in MSR and MSR-related investments. These investments actually benefit, from a valuation standpoint, in a rising interest rate environment as prepayment risk (and in a majority of scenarios credit risk) decreases while there is an increase in projected future discounted cash flows.
As of 3/2/2018, CHMI and WMC had yet to report earnings for the fourth quarter of 2017. As such, metrics analyzed within Part 1 cannot be provided regarding these two mREIT companies. Therefore, these two mREIT companies are excluded from Part 1’s analysis. Now let us start the comparative analysis between NLY and the seventeen other mREIT peers.
NLY:
As of 12/31/2017, NLY’s investment portfolio consisted of 83% and 8% fixed- and variable-rate agency MBS holdings, respectively (based on FMV). When compared to 9/30/2017, NLY’s fixed-rate agency MBS portfolio proportionally increased 2% while the company’s variable-rate agency MBS portfolio decreased (1%). NLY also continued to invest in non-agency MBS and non-MBS holdings which accounted for 9% of the company’s investment portfolio balance as of 12/31/2017. This included NLY’s investments in commercial debt/real estate, preferred equity, corporate debt, middle market (“MM”) lending, and MSRs. This was a decrease of (1%) when compared to the end of the prior quarter.
As stated in prior mREIT articles, NLY’s recent added diversity typically results in reduced volatility during most interest rate environments when compared to most of the company’s fixed-rate agency mREIT peers. This reduced volatility came to fruition during the fourth quarter of 2016 as NLY outperformed most of the company’s fixed-rate agency mREIT peers when it came to quarterly valuation fluctuations (less severe BV decrease). Simply put, NLY’s non-MBS portfolio provided a “buffer” per se when compared to the company’s higher duration fixed-rate agency MBS portfolio.
Using Table 1 above as a reference, NLY had an on-balance sheet leverage ratio of 5.7x while the company’s at-risk (total) leverage ratio, when including its off-balance sheet net long “to-be-announced” (“TBA”) MBS position, was 6.6x as of 12/31/2017. NLY had an on-balance sheet and at-risk (total) leverage ratio of 5.4x and 6.9x as of 9/30/2017, respectively. As such, NLY slightly increased the company’s on-balance sheet leverage while slightly decreasing its at-risk (total) leverage during the fourth quarter of 2017. Several other fixed-rate agency mREIT peers utilized a similar strategy during the fourth quarter of 2017 due to less attractive dollar-roll financing and the “perception” of higher mortgage interest rates/U.S. Treasury yields heading into 2018. It should be noted NLY still had the lowest at-risk (total) leverage ratio as of 12/31/2017 when compared to the seven other agency mREIT peers within this analysis. Management has implied NLY continues to have a more “defensive posture” in regards to leverage due to the risk of widening spreads/lower MBS prices as the Federal Open Market Committee (“FOMC”) dictates future monetary policy heading into 2018 (in particular, the Federal [“Fed”] Funds Rate). As was previously discussed in a recent mREIT MBS pricing article, such intuition paid off during the first quarter of 2018 (through 3/2/2018).
NLY had a BV of $11.42 per share at the end of the third quarter of 2017. NLY had a BV of $11.34 per share at the end of the fourth quarter of 2017. This calculates to a quarterly BV decrease of ($0.08) per share or (0.70%). When including NLY’s quarterly dividend of $0.30 per share, the company had an economic return of $0.22 per share or 1.93% for the fourth quarter of 2017. As disclosed to readers in prior mREIT articles (as it was occurring during the quarter), a more minor-modest negative relationship between MBS pricing and derivative instrument valuations occurred during the fourth quarter of 2017. In other words, derivative net valuation gains were slightly “trumped” by agency MBS net valuation fluctuations in most instances. When compared to agency MBS price decreases within most coupons, non-agency MBS valuation fluctuations across most coupons were less severe/more attractive. Simply put, spreads widened a bit. I correctly projected agency mREIT companies would experience either relatively unchanged-minor (less than 5%) BV decreases (after accounting for dividends) within the following AGNC BV projection article:
AGNC Investment's Q4 2017 And 1/26/2018 BV Projection (Includes MTGE And NLY BV Projection)
Within that article (prior to any company reporting quarterly results; adds more credibility), I projected NLY would report a BV as of 12/31/2017 of $11.35 per share. As noted above, NLY reported a BV as of 12/31/2017 of $11.34 per share. As such, I believe my projection was basically an exact match and NLY’s performance was “as expected.”
Let us now discuss NLY’s MBS and derivatives portfolios to spot certain characteristics which will impact future results. NLY continued to maintain a portfolio heavily invested in 30-year fixed-rate agency MBS holdings during the fourth quarter of 2017. Table 2 below provides NLY’s proportion of variable- and fixed-rate agency MBS holdings as of 12/31/2017 versus 9/30/2017 (separately including TBA positions).
Table 2 – NLY Agency MBS Portfolio Composition (12/31/2017 Versus 9/30/2017)
(Source: Table obtained [with added highlights] from NLY’s quarterly shareholder presentation for the third and fourth quarters of 2017)
Using Table 2 above as a reference, NLY’s proportion of 15-year fixed-rate agency MBS holdings slightly decreased from 9.4% to 7.4% during the fourth quarter of 2017 (based on par/face value). NLY’s proportion of 20-year fixed-rate agency MBS holdings decreased from 6.4% to 5.7%. As such, NLY’s proportion of 30-year fixed-rate agency MBS holdings increased from 84.2% to 86.9%. When compared to fixed-rate agency mREIT peers like AGNC, ARR, and CYS, NLY continued to have a higher proportion of 30-year fixed-rate agency MBS holdings during the fourth quarter of 2017.
NLY’s on-balance sheet fixed-rate agency MBS holdings had a weighted average coupon (“WAC”) of 3.74% as of 12/31/2017 which was a one basis point (“bp”) increase when compared to 9/30/2017. In addition, NLY’s weighted average three-month conditional prepayment rate (“CPR”) slightly decreased from 9.2% to 8.6%. Since mortgage interest rates/long-term U.S. Treasury yields have modestly-notably net increased during the first quarter of 2018 (through 3/2/2018), lifetime CPR percentages within most fixed-rate investments should modestly decrease when compared to the end of the fourth quarter of 2017. Let us now move on to NLY’s derivatives portfolio.
When compared to most of the company’s fixed-rate agency mREIT peers, NLY continued to remain “less cautious” regarding its risk management strategy through a below average 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, NLY would have less derivative instruments in place to combat heightened interest rate risk. However, since management has continued to diversify the company’s investment portfolio into less interest rate sensitive holdings (lower durations; as discussed earlier), NLY does not necessarily need as high a hedging coverage ratio when compared to its fixed-rate agency mREIT peers. Still, the “gap” between NLY’s hedging coverage ratio as of 12/31/2017 and most fixed-rate agency mREIT peers is something to highlight/consider in light of recent events.
To highlight the overall activity within NLY’s derivatives portfolio during the fourth quarter of 2017, Table 3 is presented below.
Table 3 – NLY Hedging Coverage Ratio (12/31/2017 versus 9/30/2017)
(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 and swaptions position of ($32.9) and ($4.0) billion as of 9/30/2017, respectively (based on notional value). NLY also had a net (short) U.S. Treasury futures and Eurodollar futures position of ($8.9) and ($17.1) billion, respectively. When calculated, NLY had a hedging coverage ratio of 65% as of 9/30/2017. When compared to the five other fixed-rate agency mREIT peers within this analysis, this continued to be a fairly low hedging coverage ratio. However, when compared to the seventeen 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, NYMT, and NRZ operate with much lower hedging coverage ratios. However, in light of recent events, not having a higher hedging ratio will still negatively impact these companies as virtually all fixed-rate debt investments (even investments with lower durations) have experienced a decrease in prices with the exception of a few isolated pockets (high yield debt being one such sector).
NLY had a net (short) interest rate swaps and swaptions position of ($35.3) and ($6.0) billion as of 12/31/2017, respectively. NLY also had a net (short) U.S. Treasury futures and Eurodollar futures position of ($9.1) and ($17.2) billion, respectively. When calculated, NLY’s hedging coverage ratio slightly increased to 67% as of 12/31/2017.
Once again using Table 1 above as a reference, as of 3/2/2018 NLY’s stock price traded at $10.12 per share. When calculated, this shows NLY’s stock price was trading at a discount to BV as of 12/31/2017 of ($1.22) per share or (10.76%). Simply put, NLY’s stock price traded at a material (at or greater than 10%) discount to BV as of 12/31/2017 but at a slightly higher valuation when compared to a majority of the mREIT peers within Table 1.
When taking a look at the events/trends that have occurred during the first quarter of 2018 (through 3/2/2018), all 15- and 30-year fixed-rate agency MBS coupons experienced modest-material price decreases. If NLY continued to maintain a fairly low hedging coverage ratio when compared to its fixed-rate agency mREIT peers, this should be considered a negative factor during the current quarter as net (short) derivative instruments were an advantage to have as mortgage interest rates/long-term U.S. Treasury yields have modestly-notably net increased.
After a very negative relationship between MBS pricing and derivative instrument valuations during the fourth quarter of 2016 (notable widening of option adjusted spreads [OAS]), a more muted relationship occurred during the first and second quarters of 2017. A more positive relationship occurred during the third quarter of 2017. A minor-modest negative relationship occurred during the fourth quarter of 2017 (which I highlighted to readers in prior mREIT articles). Generally speaking, a notable negative relationship has occurred during the first quarter of 2018 (through 3/2/2018). Readers should be aware of this current negative scenario.
An unfavorable relationship between MBS pricing and derivative instrument valuations 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. However, the relationship between MBS pricing and derivative instrument valuations needs to be constantly monitored (which I continually perform). If I start to see a more notable positive/negative relationship unfold, I will inform readers through several avenues within Seeking Alpha (through articles, “StockTalks”, and/or comments).
Comparison of NLY’s Recent Leverage, Hedging Coverage Ratio, BV, Economic Return (Loss), and Valuation to Seventeen 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 seventeen other mREIT peers as of 12/31/2017 (in order of lowest to highest at-risk (total) leverage ratio; excluding borrowings collateralized by assets held in “securitization trusts”):
1) NRZ: 1.8x on-balance sheet leverage ratio; 1.4x at-risk (total) leverage ratio
2) NYMT: 1.7x on-balance sheet leverage ratio; 1.7x at-risk (total) leverage ratio
3) BXMT: 2.0x on-balance sheet leverage ratio; 2.0x at-risk (total) leverage ratio
4) PMT: 2.5x on-balance sheet leverage ratio; 2.2x at-risk (total) leverage ratio
5) MFA: 2.3x on-balance sheet leverage ratio; 2.3x at-risk (total) leverage ratio
6) MITT: 4.2x on-balance sheet leverage ratio; 4.4x at-risk (total) leverage ratio
7) TWO: 5.9x on-balance sheet leverage ratio; 5.7x at-risk (total) leverage ratio
8) IVR: 6.0x on-balance sheet leverage ratio; 6.0x at-risk (total) leverage ratio
9) DX: 4.9x on-balance sheet leverage ratio; 6.1x at-risk (total) leverage ratio
10) MTGE: 4.2x on-balance sheet leverage ratio; 6.2x at-risk (total) leverage ratio
11) NLY: 5.7x on-balance sheet leverage ratio; 6.6x at-risk (total) leverage ratio
12) ARR: 5.7x on-balance sheet leverage ratio; 7.0x at-risk (total) leverage ratio
12) ORC: 7.7x on-balance sheet leverage ratio; 7.0x at-risk (total) leverage ratio
14) AGNC: 5.8x on-balance sheet leverage ratio; 7.6x at-risk (total) leverage ratio
15) CYS: 7.0x on-balance sheet leverage ratio; 8.0x at-risk (total) leverage ratio
16) ANH: 7.4x on-balance sheet leverage ratio; 8.5x at-risk (total) leverage ratio
17) CMO: 10.0x on-balance sheet leverage ratio; 10.0x at-risk (total) leverage ratio
18) AI: 9.7x on-balance sheet leverage ratio; 13.0x at-risk (total) leverage ratio
Side Note: Regarding several mREITs’ leverage ratios within Table 1, some figures may not “exactly” match to 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 its leverage ratio. To provide a consistent sector-wide metric, I have calculated each company’s leverage ratios based on one uniform methodology.
Second, the following was the hedging coverage ratio for NLY and the seventeen other mREIT peers as of 12/31/2017 (in order of highest to lowest ratio):
1) DX: 235% hedging coverage ratio (hybrid mREIT) (171% as of 9/30/2017)
2) TWO: 153% hedging coverage ratio (hybrid mREIT) (116% as of 9/30/2017)
3) PMT: 123% hedging coverage ratio (multipurpose mREIT) (91% as of 9/30/2017)
4) AGNC: 97% hedging coverage ratio (fixed-rate agency mREIT) (92% as of 9/30/2017)
5) MTGE: 86% hedging coverage ratio (hybrid mREIT) (81% as of 9/30/2017)
6) AI: 85% hedging coverage ratio (fixed-rate agency C-Corp.) (93% as of 9/30/2017)
7) ORC: 84% hedging coverage ratio (fixed-rate agency mREIT) (68% as of 9/30/2017)
8) MITT: 82% hedging coverage ratio (hybrid mREIT) (72% as of 9/30/2017)
9) CYS: 77% hedging coverage ratio (fixed-rate agency mREIT) (74% as of 9/30/2017)
10) NLY: 67% hedging coverage ratio (fixed-rate agency mREIT) (65% as of 9/30/2017)
11) CMO: 66% hedging coverage ratio (variable-rate agency mREIT) (71% as of 9/30/2017)
12) IVR: 58% hedging coverage ratio (hybrid mREIT) (58% as of 9/30/2017)
13) ARR: 57% hedging coverage ratio (fixed-rate agency mREIT) (55% as of 9/30/2017)
14) ANH: 46% hedging coverage ratio (variable-rate agency mREIT) (39% as of 9/30/2017)
15) MFA: 39% hedging coverage ratio (hybrid mREIT) (37% as of 9/30/2017)
16) BXMT: 8% hedging coverage ratio (multipurpose mREIT) (9% as of 9/30/2017)
17) NYMT: 0% hedging coverage ratio (multipurpose mREIT) (18% as of 9/30/2017)
18) NRZ: (1%) hedging coverage ratio (multipurpose mREIT) (33% as of 9/30/2017)
Next, the following were the economic return (loss) percentages for NLY and the seventeen other mREIT peers during the trailing twelve-months ended 12/31/2017 (in order of highest to lowest economic return/lowest to highest economic loss):
1) NRZ: 31.76% trailing twelve-month economic return
2) MITT: 20.69% trailing twelve-month economic return
3) ARR: 17.60% trailing twelve-month economic return
4) MTGE: 17.55% trailing twelve-month economic return
5) IVR: 13.93% trailing twelve-month economic return
6) CYS: 12.71% trailing twelve-month economic return
7) NLY: 12.29% trailing twelve-month economic return
8) TWO: 12.26% trailing twelve-month economic return*
9) BXMT: 11.74% trailing twelve-month economic return
10) DX: 11.70% trailing twelve-month economic return
11) MFA: 11.49% trailing twelve-month economic return
12) NYMT: 11.02% trailing twelve-month economic return
13) AGNC: 9.91% trailing twelve-month economic return
14) ANH: 9.20% trailing twelve-month economic return
15) PMT: 8.69% trailing twelve-month economic return
16) ORC: 3.02% trailing twelve-month economic return
17) CMO: 1.82% trailing twelve-month economic return
18) AI: (3.19%) trailing twelve-month economic loss
* = Includes special periodic dividend of $3.67 per common share through the distribution of Granite Point (GPMT) common stock
Finally, the following were the 3/2/2018 premium (discount) to BV as of 12/31/2017 percentages for NLY and the seventeen other mREIT peers (in order of largest to smallest discount/smallest to largest premium):
1) CYS: (23.39%) discount to BV as of 12/31/2017
2) ANH: (20.30%) discount to BV as of 12/31/2017
3) ARR: (18.22%) discount to BV as of 12/31/2017
4) AI: (17.65%) discount to BV as of 12/31/2017 **
** = “Tangible” BV of $13.40 per share as of 12/31/2017 (when excluding net deferred tax assets); a (17.46%) discount
5) MTGE: (16.87%) discount to BV as of 12/31/2017
6) CMO: (16.68%) discount to BV as of 12/31/2017
7) DX: (16.49%) discount to BV as of 12/31/2017
8) PMT: (16.34%) discount to BV as of 12/31/2017
9) IVR: (15.26%) discount to BV as of 12/31/2017
10) ORC: (15.15%) discount to BV as of 12/31/2017
11) MITT: (14.68%) discount to BV as of 12/31/2017
12) AGNC: (13.85%) discount to BV as of 12/31/2017***
*** = Tangible BV of $19.69 per share as of 12/31/2017 (when excluding goodwill and other intangible assets); a (7.72%) discount
13) NLY: (10.76%) discount to BV as of 12/31/2017
14) TWO: (8.71%) discount to BV as of 12/31/2017**
** = 1:2 reverse stock split occurred on 11/1/2017; BV as of 9/30/2017 retroactively incorporates this event for comparative purposes
15) MFA: (6.23%) discount to BV as of 12/31/2017
16) NYMT: (6.00%) discount to BV as of 12/31/2017
17) NRZ: 7.28% premium to BV as of 12/31/2017
18) BXMT: 15.99% premium to BV as of 12/31/2017
Conclusions Drawn (Part 1):
Part 1 of this article has analyzed NLY and seventeen other mREIT peers in regards to the following metrics: 1) leverage as of 12/31/2017; 2) hedging coverage ratio as of 12/31/2017; 3) trailing twelve-month economic return (loss); and 4) current premium (discount) to BV as of 12/31/2017.
First, NLY’s at-risk leverage as of 12/31/2017 continued to be near the mREIT sector average. However, when compared to the company’s fixed-rate agency mREIT peers (excluding CHMI which has yet to report quarterly earnings), NLY continued to have the lowest at-risk (total) leverage ratio. Second, NLY’s hedging coverage ratio as of 12/31/2017 was near the mREIT sector average. However, when compared to NLY’s fixed-rate agency mREIT peers, the company’s hedging coverage ratio was fairly low. NLY’s lower hedging coverage ratio is a negative factor during the current quarter as net (short) derivative instruments were an advantage to have as mortgage interest rates/long-term U.S. Treasury yields have modestly-notably net increased (through 3/2/2018). Third, NLY’s trailing twelve-month economic return was slightly above the mREIT sector average. NLY also outperformed most agency mREIT peers when it came to this metric. This was mainly due to the recent composition of NLY’s MBS and derivatives portfolio and the net movement of mortgage interest rates/U.S. Treasury yields during 2017. However, as noted in several recent mREIT articles and in the analysis above, the movement in rates/yields during the first quarter of 2018 (through 3/2/2018) “de-coupled” from movements experienced last year. Fourth, NLY’s current valuation, when compared to the company’s BV as of 12/31/2017, was slightly-modestly less attractive when compared to most mREIT peers which should be seen as a “cautious”/negative factor.
My Buy, Sell, or Hold Recommendation:
Through an analysis that will be omitted from this particular article, my projected NLY Current BV (BV as of 3/2/2018) is approximately $10.60 per share. This per share amount excludes the company’s dividend for the first quarter of 2018 (ex-dividend date has yet to occur).
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 or greater than a 5.0% premium to my projected Current BV (BV as of 3/2/2018; projection provided above), a Hold when trading at less than a 5.0% premium through less than a (5.0%) discount to my projected Current BV, and a Buy when trading at or greater than a (5.0%) discount to my projected Current BV. These percentage ranges are unchanged when compared to my last NLY article (approximately two months ago).
Therefore, I currently rate NLY as a Hold (however very close to my Buy range). My current price target for NLY is approximately $11.20 per share. This is currently the price where my Hold recommendation would change to a Sell. This price target is a decrease of ($0.65) per share when compared to my last NLY article. This price target decrease is mainly due to the notable negative relationship between MBS prices and derivative instrument valuations during the first quarter of 2018 (through 3/2/2018). My current entry price for NLY is approximately $10.10 per share. This is currently the price where my recommendation would change to a Buy. This price is also a decrease of ($0.65) per share 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 high probability of multiple Fed Funds Rate increases by the FOMC during 2018 (this is a more hawkish view when compared to most of last year) due to recent macroeconomic trends/events. This also considers the eventual “wind-down” of the Fed’s balance sheet through gradual “runoff”/partial non-reinvestment (which began in October 2017). Readers should also understand 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).
Final Note: After dividends are declared for the entire mREIT sector for the first quarter of 2018, 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 nineteen other mREIT peers (amongst other metrics). My projection for NLY’s dividend per share rate for the first quarter of 2018 was provided in the following article:
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.
Current mREIT Sector Stock Disclosures:
On 11/27/2015, I initiated a position in AGNCB; Series B preferred stock. On 12/7/2015, 12/9/2015, 12/14/2015, 1/14/2016, and 1/20/2016 I selectively increased my position in AGNCB. When combined, my AGNCB position has a weighted average purchase price of $23.215 per share. This weighted average per share price excludes all dividends received/reinvested. On 10/11/2017, 10/12/2017, 10/13/2017, and 10/16/2017 I selectively sold 50% of my existing position in AGNCB at a weighted average sales price of $26.425 per share. On 10/23/2017, 11/20/2017, and 12/7/2017, I selectively sold 7%, 14%, and 9% of my existing position in AGNCB at a weighted average sales price of $26.615, $26.30, and $26.50 per share, respectively. I currently hold (personally and through affiliated entities) 0.14% of the outstanding shares of AGNCB. Each AGNCB trade was disclosed to readers in “real time” (that day) via the StockTalks feature of Seeking Alpha.
On 1/31/2017, I initiated a position in NRZ at a weighted average purchase price of $15.10 per share. On 6/29/2017 and 7/7/2017, I increased my position in NRZ at a weighted average purchase price of $15.775 and $15.18 per share, respectively. When combined, my NRZ position has a weighted average purchase price of $15.349 per share. This weighted average per share price excludes all dividends received/reinvested. Each NRZ trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.
On 6/29/2017, I initiated a position in CHMI at a weighted average purchase price of $18.425 per share. On 10/6/2017, 10/26/2017, 11/6/2017, and 1/29/2018 I increased my position in CHMI at a weighted average purchase price of $18.015, $18.245, $17.71, and $17.145 per share, respectively. When combined, my CHMI position has a weighted average purchase price of $17.797 per share. This weighted average per share price excludes all dividends received/reinvested. Each CHMI trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.
On 8/23/2017, I initiated a position in TWO’s Series B preferred stock; TWO-B. On 8/24/2017, I increased my position in TWO-B. When combined, my TWO-B position has a weighted average purchase price of $25.283 per share. I currently hold (personally and through affiliated entities) 0.26% of the outstanding shares of TWO-B. Each TWO-B trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.
On 8/31/2017, I initiated a position in CHMI-A; Series A preferred stock. On 9/12/2017, I increased my position in CHMI-A. When combined, my CHMI-A position has a weighted average purchase price of $25.198 per share. I currently hold (personally and through affiliated entities) 1.36% of the outstanding shares of CHMI-A. Each CHMI-A trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.
On 11/6/2017, I re-entered a position in MTGE Investment Corp. (MTGE) at a weighted average purchase price of $17.785 per share. This weighted average per share price excludes all dividends received/reinvested. This MTGE trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.
On 1/29/2018, I initiated a position in TWO at a weighted average purchase price of $15.155 per share. This weighted average per share price excludes all dividends received/reinvested. This TWO trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.
On 2/9/2018, I re-entered a position in ORC at a weighted average purchase price of $6.845 per share. This weighted average per share price excludes all dividends received/reinvested. This ORC trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.
On 3/1/2018, I initiated a position in CYS at a weighted average purchase price of $6.34 per share. This weighted average per share price excludes all dividends received/reinvested. This CYS trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.
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 (which cannot be changed/altered). 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).
