Annaly Doesn't Get Much Cheaper Than This

Summary

• NLY has faced headwinds from an inverted yield curve and a rise in prepayments.
• The company has diversified its business to better deal with volatility in economic drivers but is still impacted by the spread between borrowing and lending.
• Despite the recent dividend cut, we believe the company is one of the best mREITs and should come out of this environment with strong growth momentum.

We bought our house in September of last year and we thought we got a good deal on the mortgage with a 4.75% rate for a 30-year loan. We know some folks that got even lower rates - in the 3.5% range when they bought their home a few years earlier, but with rates expected to rise, we were happy to lock in before rates continued to rise.

Last week, we locked in a new rate on a refinancing at 3.75% that will start saving us money after just 9 months. In other words, the savings from the rate decrease will cover our closing costs over a 9-month period. After that, it's all savings.

In this type of environment, mREITS face strong headwinds from prepayments on mortgages they hold on their books - like the one I just refinanced. When mortgages are prepaid, the mREIT loses money from the future income stream lost from that mortgage and in some cases the return on that mortgage is less than the yield to maturity estimated at the time it was purchased. They also have the challenge of reinvesting the proceeds in securities that have lower yields.

Alas, this can't last forever, and with the yield curve still relatively flat if not inverted, we believe it has only one way to go - although the timing and magnitude of that change are anyone's guess. Regardless, we believe there is an opportunity to buy a premier mREIT at a bargain basement price - it might be early - but we may not see prices this low for some time. The stock has already been boosted since early September's multi-year low of $8.19.

Photo Source

Annaly Capital Management, Inc. (NYSE:NLY) invests and finances residential and commercial assets. The company was initially founded as a traditional mortgage

Analyst’s Disclosure:I am/we are long NLY. 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.

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