3 Things Every Annaly Capital Management Inc. Shareholder Should Hear

Annaly Capital isn't following in its peers' footsteps. See how it differs from another major mREIT, American Capital Agency.

Mar 1, 2014 at 8:00AM

Threee

Photo: Flickr/401(K) 2013

Annaly Capital Management (NYSE:NLY) is one of the largest and oldest mortgage REITs, or mREITs, in existence, making it a bellwether for the sector as a whole.

But Annaly Capital is doing things differently than its competitors, reporting better-than-expected earnings in the fourth quarter. Here's what Annaly is doing differently from its competitors:

1. Holding leverage lower than peers
mREITs are all about leverage. The more leverage, the higher the earnings, all else being equal. During this period of volatility in the mortgage markets, Annaly has lowered its leverage to 5 times equity, well under the industry norm of 7-8 times equity.

Company management cites the opportunity that lower leverage created. CEO Wellington Denahan noted that the 2-10 spread (the difference between two- and 10-year U.S. Treasury yields) is now 2.4%, up from 1.6% a year earlier. The 2-10 spread is a good proxy for returns Annaly Capital can earn on agency assets.

By keeping leverage low, Annaly now has additional capital to reinvest in widened mortgage spreads to earn bigger margins between its funding costs and investment yields. Patience is paying off.

2. Buybacks aren't in the cards
Annaly Capital diverges from another major mREIT, American Capital Agency (NASDAQ:AGNC), in turning away from share repurchases. In the recent quarter, American Capital Agency repurchased 7% of its outstanding shares. The two strategies couldn't be more different.

Annaly Capital had some interesting reasons for why it wasn't in the market for its own shares, or shares of its competitors. The reasons were largely to do with liquidity and risk. Repurchasing shares isn't easy to reverse when your stock trades below book value, locking up capital Annaly may later desire to invest elsewhere.

Additionally, investing in other mREITs creates new risks. On the conference call, the company noted that in the past mREITs had been found to own riskier paper. In 1998 and 1999, for example, a major mREIT invested in Russian debt securities at the same time Russia defaulted on its debt. Buying into the abilities of other managers seems unlikely for Annaly Capital going forward. You just don't know where other asset managers will invest the capital. It's all about control.

3. Commercial mortgages may play a bigger role
Annaly's managers revealed that commercial mortgages now make up 14% of the portfolio, and that the position will continue to grow within the 25% of the equity that Annaly allocates to non-agency investments.

Other noteworthy developments are the company's negotiations to work with a "very large holder and originator of real estate that will give [Annaly Capital] exclusive access to certain of its originations." This happens to come at the same time Annaly's commercial team grew to 20 employees, evidence that higher-yielding commercial paper will drive forward earnings.

Commercial mortgages present a unique opportunity to create larger returns, but with added risk. Historically, commercial mortgage mREITs have largely underperformed, so investors will have to have faith in management that maybe, just maybe, this time might be different.

9 dividend stocks for your income portfolio
Find stocks with huge dividend yields like Annaly Capital is easy. But that is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Jordan Wathen and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers