The new regression equation for NLY, which is calculated quarterly, as of March 31, 2021 is:
PredNLY = 5.502 - 1.624 (FedFundsrate) + 2.73(TYXMA10).
where TYXMA10 is the 10-day moving average of the 30-yr T-bond yield.
The equation r-sq is .48, which has been gradually increasing the last 3 years. The standard error is 2.78. The predicted price for NLY using the 30-year T-bond yield and the fed funds rate is $11.83. The last price of NLY on March 31 was $8.60, which is 1.09 standard errors below the predicted mean using the equation. The stock, or mREIT ETFs, therefore, at current interest rates, are well below fair value, and the stock price has advanced a lot since June 30, 2020 when I wrote that it was a screaming buy. A price of $16 would be 1.5 standard errors above the mean, and that would be a sell, unless the spread between 30-yr T-bonds and 30-yr T-bills widens further.
NLY had sold off because of fear of a credit freeze, and fear of mortgage defaults, but agency mREITs look like they can get financing from the Fed, and so there should be no problem. NLY has some risk from the default of CMBS, but most of its assets are agency MBS. The drop in short-term rates was good for mREITs, and the spread between long-term T-bonds and short-term rates has been widening a lot. Although mortgage rates are low, people are no longer likely to refinance because they can't, or have done so, and so mREITs are unlikely to have a problem with prepayment of mortgages. I was surprised that the dividend was not raised this past quarter, especially since the 7% dividend on the D-series of preferred shares no longer has to be paid. Some of that will pay interest on the money borrowed to buy back the preferred shares, but some will be left over for dividends on common equity.
I have had good gains on REM this past quarter. I did have NLY and made some money, but I sold it to raise cash for buying leveraged funds.
Analyst's Disclosure: I am/we are long REM, PTY, TNA, UPRO.
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