Train your sights on Annaly Capital Management, Inc (NYSE:NLY)
Most REIT’s have been reporting a drop in book value Annaly Capital Management, Inc (NYSE:NLY) is the one and only mortgage REIT which is bigger than American Capital who said that its book value fell 4 percent. However, the company is diversifying its existing portfolio and is acquiring Crexus Investments. The company primarily invests in Commercial Mortgage Backed Securities. This segment is that which offers significantly higher interest-spreads.
Though CMBS do not have federal agency backing, thus carrying a greater risk, it would be possible for NLY to increase its net-earnings without really leveraging the existing portfolio. Crexus Investments operates with just 4% debt/equity. This can very comfortably be leveraged further to increase the company’s commercial holdings. It can also boost Annaly Capital Management, Inc’s dividend payouts. Apart from value addition, NLY posted a 100bps sequential decline in conditional pre-payment rates for the most recent quarter. Although the CPRs stand at a high 18%, its decline indicates declining risks of pre-payments and improving asset quality. In comparison to American Capital Agency Corp, Annaly Capital Management, Inc. (NYSE:NLY) definitely offers better growth-potential.
Time to wake-up
Mortgage REITs have been amongst the most benefited from government policies to revive housing and to energize the economy. The so-called, central bank policy of quantitative easing, purchasing mortgage and Treasury bonds, now means that it cheaper for all REITs to borrow money and invest in the very same government-backed mortgage bonds that have been targeted by the Fed. Since 2009 end, this has helped drive a 67% increase in mortgage REIT stocks, including re-invested dividends. Now, with the U.S housing market on a comeback trail and the unemployment rate finally dropping in April to 7.5% from its 10% the general feeling is that the Fed will step-away sooner than anticipated.