3 Reasons Annaly Thinks the Future Is Very Bright

After a rocky 2013 for the mREIT sector, there is reason to believe the future is bright for the biggest and best.

Mar 4, 2014 at 7:29AM


Annaly Capital Management (NYSE:NLY), along with the rest of the mREIT sector, did not have a very good 2013, with shares down more than 30% for the year. But the bad times appear to be over -- that is, if you believe what management had to say.

1. Low leverage means potential
Annaly's leverage ratio is now just five to one, which is extremely low on a historical basis, and well below most of its peers in the sector. This leaves the company with tremendous purchasing power to take advantage of future opportunities, some of which have already begun to present themselves. In fact, to bring their leverage up to a ratio of seven to one (still well below most peers), Annaly could purchase $24 billion in additional assets.

Annaly's CEO mentioned with new money spreads approaching 200 bps (2%), the company plans to considerably add to its positions over the next few quarters as opportunities present themselves.

2. Better uses of capital than buybacks
Many of Annaly's peers, including the very widely held American Capital Agency (NASDAQ:AGNC) have been buying back shares at a fairly aggressive pace in order to take advantage of the fact that shares are trading for well below their book value. However, Annaly disagrees with this strategy, stating that with new money spreads on the rise, it will be a much more efficient use of capital to increase leverage and add assets to the portfolio.

3. Commercial real estate means diversity
Annaly has grown its commercial real estate investments tremendously over the recent quarters, and it now equals about 14% shareholder equity. During the conference call, the company said it was in talks with a "very large holder and originator of real estate" that would give Annaly exclusive access to certain securitizations.

Annaly is allowed to allocate 25% of its capital to assets other than agency mortgage-backed securities (MBSes), and management has made it very clear that they intend to continue growing the company's commercial portfolio.

Is now the time to buy Annaly?
No investment that yields over 10% is without risk, and Annaly does have a few obstacles to overcome. For instance, supplies of agency MBSes are rather low right now and are projected to stay that way, at least for the short term.

Mortgage REITs in general are pretty volatile and extremely sensitive to interest rates and overall monetary policy. Over the long run, these can produce excellent income, but investors need to be prepared to ride out some ups and downs along the way.

Annaly is the best-in-breed of the mREITs and has excellent management that has acted very responsibly with their leverage ability in order to maximize future benefits for shareholders. With such low leverage right now and high purchasing power, combined with the fact that interest rate spreads have been on the rise lately, now may be a great time to get in.


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Matthew Frankel owns shares of Annaly Capital Management. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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