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Annaly Capital's BV, Dividend, And Valuation Compared To 17 mREIT Peers (Post Q4 2017 Earnings) - Part 1


  • Part 1 of this article compares NLY’s recent leverage, hedging coverage ratio, quarterly BV, economic return, and current valuation to seventeen mREIT peers.
  • Part 1 also performs a detailed analysis of NLY’s MBS and derivatives portfolios as of 12/31/2017. This includes NLY’s projected performance during the first quarter of 2018 (through 3/2/2018).
  • This detailed analysis includes NLY’s proportion of agency MBS holdings (including each specific maturity), hedging coverage ratio, and derivative instrument notional balances as of 12/31/2017.
  • Providing these metrics allows readers to better understand which mREIT companies will outperform (or underperform) sector peers during specific types of interest rate environments.
  • My Buy, Sell, or Hold recommendation, current BV projection (BV as of 3/2/2018), and current price target for NLY are 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 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

This article was written by

Scott Kennedy profile picture

Scott Kennedy is a Certified Public Accountant (CPA) and Certified in Financial Forensics (CFF). He is currently a partner at a national accounting firm. He has extensive experience in: closed-end funds, energy, financials, healthcare, homebuilders, pharmaceuticals, private equity, REITs, telecoms, C-corps., estates, high net worth individuals, LLCs, LLPs, S-corps., and trusts. Scott is a contributor to the investing group

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Analyst’s Disclosure: I am/we are long CHMI, CYS, MTGE, NRZ, ORC, TWO. 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.

I currently have no position in NLY, AGNC, AI, ANH, ARR, BXMT, CMO, DX, IVR, MFA, MITT, NYMT, PMT, or WMC. I am currently long AGNCB, CHMI-A, and TWO-B.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (50)

Thank you for the excellent analysis. NLY is beastly hard to understand, due to their many hedges and sheer size, but you appear to have figured them out. I look forward to future articles from you.
I remain nervously watchful of the almost exactly 100% dividend coverage from core earnings. NLY is a fairly substantial portion of my post-retirement portfolio, and provides a very generous current yield in the ~10% range. With the yield curve getting pretty flat while the short end (where NLY borrows) moves rapidly upward, I anticipate some possible reduction in that 30 cents per quarter pretty soon. I hope I am wrong...
Scott Kennedy profile picture
Hi posane3,

You're welcome. I appreciate the acknowledgement.

Regarding NLY, yes I believe I have a good "handle" on the portfolios. Regarding the dividend, rising borrowing costs are def. a negative. Eventually, NLY MBS portfolios would gradually increase their WAC. In the meantime, the lower IR payer swap expense (eventually will switch to income) and the gains of the U.S. Treasury futures and Eurodollar positions will help offset the repo rates. In addition, in a rising interest rate environment, prepayments typically lower which would help extend lower CPR's which would ultimately positively impact GAAP premium amortization expense and an entity's cost basis per the IRC.

If NLY had to cut the dividend, I don't see it going below $0.25 per share. PART 2 will provide my dividend per share rate for Q2 2018.

Good all around discussion.

kualla83 profile picture
Another great article. I was just wondering if you will write such an article on FSIC. I have been watching and waiting. I will eventually jump in as it appears to be attractively priced however, I do not possess the skill needed or the data needed to predict its BV at the end of Q1. I have also been waiting to see if you are going initiate a position as then I would have a good basis for where an expert is picking up shares. Anyways, thoughts on an entry point in FSIC?
Scott Kennedy profile picture
Hi kualla83,

Thanks for the positive comment.

A few readers asked a pretty similar on FSIC (perhaps a few months ago). At the time, I replied I believed FSIC is attractively priced (and still think this way). However, I want to see how the proposed merger with KKR (combination of asset managers) pans out / impacts earnings.

I will likely write an article on FSIC in the future but after the merger occurs.

Thanks for the request.

High Yield Cash Flow profile picture
Scott, I just purchased a full position of FSIC because of the KKR merger. It will become the largest BDC surpassing ARCC. Couldn't resist and with the KKR merger should fit nicely with my portfolio build. I also just acquired half position for MAIN since falling in price. Liked your MAIN reporting and hope to see your FSIC analysis in the future. Thanks.
Scott Kennedy profile picture
Hi High Yield,

Thanks for sharing your recent BDC purchases.

I appreciate the positive feedback on my recent MAIN comparison article.

Hello Scott
I've enjoyed the article, included the classification of mREITs
How would you classify the following ?
Scott Kennedy profile picture
Hi eta,

You're welcome. I'm glad you enjoyed the classifications.

Currently, I don't specifically cover those companies "in-depth" (will likely cover GPMT in the future). However, I do know those stock's general classification.

I would classify CIM and OAKS as a hybrid mREIT. EARN is currently more towards an agency mREIT. GPMT, LADR, and STWD are multipurpose mREITs (or what some call commercial mREITs / REITs).

Thanks for the question.

Thank you Scott,
may I bother you a bit further and ask you how you classify:
I keep track of my small mREIT investments, and will like to see what the performance has been for each class of mREIT in the last five years.

9403281 profile picture
Thank you for all your efforts to help us understand these REITs Chris
Scott Kennedy profile picture
Hi Chris,

You're welcome. Thanks for the quick, positive comment.

So helpful. Many thanks for your time spent and sharing it with us!
Scott Kennedy profile picture
Hi MDN1,

You're welcome.

Thanks for the continued positive feedback (remember you commented on my CYS / AI article).

RUWC profile picture
07 Mar. 2018
Any thoughts on why NLY-G is trading so far below par?
GaltMachine profile picture

That is quite the selloff but it actually does make it way more attractive from a yield point of view - probably yielding what it should have been at issue. NLY management are masters at getting value for shareholders at issue.

Lots of protection there.

About a buck less than NLY-F (which also looks good here).

Thanks for pointing it out. Would love to hear Scott's perspective on this.
Scott Kennedy profile picture

Simply put, NLY-G, with it's 6.50% yield at par, is less than basically all mREIT peers. While that's great for the company when it comes to paying out dividends, it's very low for investors.

Since the odds of an mREIT's preferred stock getting cut are very low, I believe investors in the preferred space want an attractive yield. As rates have net increased this year, that "demand" per se has ticked up.

Even at today's price of $23.60, NLY-G is generating an annualized yield of 6.89%. On the other hand, I just initiated a position in NYMTN at a w/a price of $23.85 which is generating an annualized yield of 8.35%. While this might not seem like a huge difference, I would point out on large monetary amounts the difference adds up. Again, I don't see the preferreds of either company being cut so I decided to take the higher yield.

For disclosure purposes, I currently have a position in AGNCB, CHMI-A, NYMTN, and TWO-B.

Thanks for the question.

Right also looked very odd to me that the preferreds are trading BELOW par ($25). SA writers like Colorado Wealth have been "pumping" preferreds last few months, yet they have performed worse than NLY! I own both , considering purchase of more NLY-F
I really enjoy the premium to discount parts. They go along way with my buying habits. I was surprised at NRZ with that big a premium. I almost bought more the other day, but decided to hang on to ORC with its huge p/d at the moment. Your articles are spot on. Regards, SG
Scott Kennedy profile picture
Hi SG,

I'm glad you enjoyed the article. I hope you find it useful when it comes to your sector investing strategies.

Thanks for sharing your ORC position.

I'm finding for income CEFS and some Reits are the way to go. Thanks for getting back to me.
Hello Scott,

What is your opinion of what would happen with a shock to the market, having a selloff where say your 10 year treasury yield goes to 4.5 - 5 %? Would you be able to work out any ranges of where book values can go? What do you think would be events that would be stressing the hedges of NLY (say where BV could halve from where it's now)?

Kind regards
Scott Kennedy profile picture
Hi hetmeel2,

I would state one key determinant of this equation is time? If this shock per se were to occur in one quarter, then you would have to expect a notable short-term "panic" where MBS valuation losses would exceed derivative valuation gains in the quarter of occurrence. High single digit-double-digit BV losses would almost certainly occur; across the sector (less so with some multipurpose mREITs). This gets back to that "spread/basis" risk I bring up in the article.

If this rise were to occur say over 1-2 years, I believe mREITs would have at least some time to reposition their portfolios for rising interest rates. This would likely mean to lower leverage, lower net long TBA positions (or even go "short"), transition to higher coupon MBS (typically lower durations), and/or keep hedges elevated or increase them further. There would still likely be some BV erosion during this period but less so than the first scenario.

Again, I continually monitor the mREIT sector. As such, I always update readers as to what is occurring in the sector. Personally, I don't see the first scenario occurring.

I hope this helps when it comes to your sector assessments.

Thank You Prof. Scott...:-) I feel like I am in NLY university. Helpful. Greatly appreciate the data and analysis. Have been accumulating NLY.
Scott Kennedy profile picture
Hi Buddhasmiles,

You're welcome. I appreciate the acknowledgement.

Thanks for also sharing your NLY position.

Thank you for the thorough analysis. Based upon your recent purchase of CHMI, I just added some shares at 16.43. In the past I have profited by buying NLY and ANH when they get below 80% of BV. Since ANH is now at that level do think it is a worthwhile purchase now? Any comments about why you bought CYS? I am also long NRZ and TWO, as are you.
Scott Kennedy profile picture
Hi dividendhigh,

Your welcome.

I can't argue against acquiring CHMI at $16.43. I believe that's a very attractive price. If CHMI's price remains at current levels (or dips even lower), I will almost certainly add to my position after the company reports Q4 2017 earnings. First, I want to see how the company was "set up" going into 2018 (since I already have a modest position).

I believe most of the sector is currently attractively priced; ANH is no exception. They were a bit "light" on the hedges entering the quarter but they have more 15-year fixed-rate agency MBS vs. 30-year (a positive this quarter; less severe price decrease) and they have a good portion in ARMs.

Regarding CYS, their discount to CURRENT BV was appealing at the time of my purchase, especially when compared to most fixed-rate agency mREIT peers (AGNC, AI, ARR, NLY, and ORC).

Thanks for sharing your NRZ and TWO disclosures.

Thank you for responding. I will keep an eye on CYS. ANH is intriguing because of the discount and also the shorter term paper and ARMs(which I did not know about before your article). I am long several mREIT's, including NLY and ANH, but may add to the latter.
What target price do you have for ORC?

GaltMachine profile picture
Doesn't this make CYS look like a no-brainer at this discount to BV?
Scott Kennedy profile picture
Hi GaltMachine,

I would note, especially for the fixed-rate agency mREITs, their CURRENT BVs are almost certainly lower vs. what was reported at 12/31/2017. I covered this aspect in the following article:


Still, I believe your assessment is correct which is why I recently initiated a position in that stock.

Thanks for sharing your thoughts.

New Keynesian profile picture
The peer comparison feature of Part I analysis is always helpful and greatly appreciated.

Your analysis is more important than ever in 2018 due to expected higher volatility. Higher hedging coverage ratios seem sensible so long as the hedges are wisely placed.

Consistently high quality analysis keeps me coming back for more!

Scott Kennedy profile picture
Hi New Keynesian,

I appreciate the continued readership and the positive comments.

Yes, I def. agree the hedging coverage ratio metric is / will be important when it comes to BV performance in the first quarter of 2018 (especially for the portfolios with a higher weighting in fixed-rate agency MBS).

12 over profile picture
A great tutorial and analysis. Thanks for sharing your expertise. Best in class!
Scott Kennedy profile picture
Hi 12 over,

You're welcome.

I appreciate the acknowledgement. I'm glad you found the analysis useful / insightful.

Good reading. Thank you for the perspective.
Scott Kennedy profile picture
Hi pgould66,

You're welcome.

I'm glad you enjoyed the article. Thanks for the positive feedback.

Scott - A couple of years ago held ANH but now long NLY and NRZ but after reading this may reconsider picking back up a position in ANH
Scott Kennedy profile picture
Hi pgould66,

Thanks for taking the time out for the response and sharing your potential investment in ANH.

Scott Kennedy profile picture
Hi Aussie2009,

I'll take that as a compliment.

I appreciate the quick, positive comment.

absolutely yes
RoseNose profile picture
Hi Scott !!!
So much valuable information to read-
These evaluations and you sharing your holdings and prices is also very much appreciated.
Thank You :)) Rose.
Happy Investing to you and with you on SA.
Scott Kennedy profile picture
Hi Rose,

You're welcome.

I'm glad you enjoyed the analysis / information.

I wish you well when it comes to your investing returns as well.

Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

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