Times are still tough for agency mortgage REITs such as Annaly Capital (NLY 0.61%), but a healing economy, rising mortgage rates, and whispers regarding an eventual end to the Federal Reserve's quantitative easing program have spurred investors to send Annaly's stock higher over the past week or so.
Is it time to buy in? There are a few headwinds here, some that are part and parcel of investing primarily in agency paper, and at least one that is of Annaly's own making. Here are three issues that investors considering a stake in Annaly should take under advisement -- and might very well cause current investors to think about selling.
Management shakeup seems dicey
This spring, Annaly management will ask its shareholders to vote on a new management setup, which will change the current method of management by insiders to one that is carried out by an external company. As management points out, this is not uncommon in the mREIT universe. However, there are a couple of things that stockholders should be aware of that make this idea look less enticing for investors.
One confusing aspect is the makeup of the new management entity -- which will consist of Annaly's current management. This seems a bit strange, to say the least, and here's another thorny issue: Analysts note that, if the change goes through, management's pay will no longer be disclosed. In the current climate of increased calls for transparency and stockholder say-on-pay, this aspect looks very fishy.
Dwindling dividends and a shrinking spread
Annaly is well known for paying out excellent dividends, but that hasn't been the case for some time. Over the past two years, Annaly's dividend has been on a downward spiral, with the most current quarterly payout sitting at $0.45. Compared to other agency players, like American Capital Agency (AGNC 0.22%), which has paid out its juicy $1.25 dividend for the past five quarters, and Capstead Mortgage (CMO) which actually raised its payout by one penny for the first quarter of this year, Annaly looks like it is losing ground.
In addition, its spread -- the source of most of its income -- has shrunk to a measly 0.95%. Compare this to American Capital Agency's 1.63% and Capstead's 1.13%, and you can see why Annaly's dividend is looking somewhat anemic.
The exit of Fannie and Freddie could hurt Annaly
An especially problematic issue is that of the government's winding down of government-sponsored entities Fannie Mae and Freddie Mac. Of course, the exit of the two GSEs that currently back the lion's share of mortgage-backed securities might put all agency mREITs in peril. But Annaly, as the largest of all these players, would probably suffer the most, as investor concerns regarding the winding-down process impact the value of its current holdings -- and, very possibly -- make finding new investments with an acceptable risk level more difficult.
Should these issues cause investors to run from Annaly? Not necessarily. It is always better to be safe than sorry, though, and knowing all the facts before you make any important decision -- particularly one concerning investing -- should be priority No. 1.
