Annaly Capital (NYSE:NLY) has had a tough time of it lately, as investors were surprised first by its announced plans to purchase CreXus Investment (UNKNOWN:CXS.DL.DL), then by Annaly's rather drab fourth-quarter earnings report.
There's been a bit of a rally in Annaly's stock over the past week, however, and I think I know where it's coming from. It's looking more and more like the venerable agency mortgage REIT just might be aptly planning for the future in two very important ways: by avoiding non-agency mortgage-backed securities, and via its new venture into the commercial space, courtesy of CreXus.
CEOs in the know are taking another look at agency paper
Is government sponsored entity-backed paper making a comeback? From comments made by Larry Penn, CEO of Ellington Financial (NYSE:EFC), and Gary Kain, President and CIO of American Capital Mortgage (NASDAQ:MTGE), it seems as if GSE securities are experiencing a resurgence in popularity.
Though not categorized as a REIT, Ellington nevertheless invests in both agency and non-agency MBSes. Though the company reduced its agency holdings in the fourth quarter because of high prices, Penn notes in the earnings call that the outlook for agency paper has improved, and Ellington is again buying that flavor of security. He also hints at a cessation of the Fed's MBS-purchasing program, noting that the market is questioning just how long QE3 will last.
For American Capital Mortgage, a hybrid mREIT, compressed spreads for non-agency securities, combined with advantageous financing in the to-be-announced TBA dollar roll market are making agency MBSes look rather attractive. Doubtless, the drop in GSE-backed paper prices to pre-QE3 levels -- with the attendant spread widening -- also adds to that attraction.
Commercial MBSes are looking good, too
What about the commercial paper sector? Ellington's Penn sees promise in that arena and states that CMBSes will make up more of that company's portfolio this year, compared with 2012. Others see the opportunity, as well. Many fund managers are eagerly snapping up these instruments as commercial real estate values have rebounded.
And the news gets even better. Earlier this month, the Mortgage Bankers Association reported that the rate of new multifamily and commercial mortgages rose by 49% sequentially from the third and fourth quarters of 2012, and it predicts a rise this year of 11% over last year.
Looks like Annaly is on the right track
I'm quite sure that Annaly has been tracking the CMBS market for the past year or more, and that is exactly why it made a bid to buy up the remaining shares of CreXus. Certainly, Annaly also noticed that agency paper was settling down, despite the Fed's interference. After all, this company has been around a while, and has seen a thing or two.
For Annaly and other pure-agency players, the jobs market recently added a smidge of good news to the mix. Despite the high-ish unemployment rate of 7.9%, people are coming back into the job market, signaling a sea change in the employment picture. While this may keep the unemployment rate high for the near term as the job pool swells, analysts see the Fed beginning to wind down QE3 as early as next year if the trend continues. And that's extra-good news for mREITs with pots of agency-backed MBSes in the vault -- like Annaly.