Annaly Capital Management, Inc.’s ( NLY Quick Quote NLY - Free Report) prudent asset selection strategy, efforts to enhance capabilities across its core housing finance strategy and a robust mortgage servicing rights (MSR) platform are positives. However, spread widening and interest rate volatility might impede its near-term performance. Robust returns are likely to remain elusive, as risk management is prioritized.
NLY’s investment strategy involves traditional Agency mortgage-backed securities (MBS), which provide downside protection, and investments in more non-Agency and credit-focused asset classes that aid in enhancing returns. Also, a scaled MSR platform will continue to benefit from a low prepayment environment. As of Jun 30, 2023, its investment portfolio aggregated $78.9 billion.
The long-term investment outlook for new Agency MBS investments remains positive due to wider spreads and strong fundamentals. Hence, with $71.4 billion of its investment portfolio comprising highly liquid Agency MBSs (as of Jun 30, 2023), Annaly is expected to enjoy attractive risk-adjusted returns in the fixed-income markets.
Annaly is focusing on the diversification of its investment portfolio. The company has sold its Middle Market Lending portfolio and commercial real estate business to enhance capabilities across its core housing finance strategy. In line with this, it is allocating capital to residential credit businesses and the MSR platform, along with Agency MBS.
At the second-quarter 2023 end, it enjoyed a strong liquidity position of $4.4 billion. Also, the company maintains an unencumbered asset portfolio aggregating $6 billion, which can readily provide liquidity in times of adverse market conditions.
The operating performances of mREITs depend on conditions prevalent in the broader financial markets and on the macroeconomic situation. Any volatility in the mortgage market, unfavorable change in the shape of the yield curve, interest-rate volatility and deterioration of the generic financial conditions may affect the performance of the company's investments.
Annaly’s capital deployment plans do not seem sustainable. In January 2022, the company aauthorized a $1.5-billion share repurchase plan valid through Dec 31, 2024. However, it has not repurchased shares under this plan since the announcement. Moreover, the company slashed its first-quarter 2023 common stock cash dividend by 26% to 65 cents per share due to a moderation in earnings available for distribution.
Given the uncertainty in the current market and elevated interest rate volatility, the company had a hedge portfolio of $73 billion or a hedge ratio of 105% as of the second-quarter 2023 end. Hence, as risk and liquidity management are prioritized, at least in the short term, robust returns are expected to be elusive and might affect the book value.
Over the past six months, shares of NLY have gained 10.3% compared with the industry’s rise of 13.8%.
Image Source: Zacks Investment Research
NLY currently carries a Zacks Rank #3 (Hold). You can see
. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Peers Worth a Look
A couple of better-ranked stocks from the same industry are
Blackstone Mortgage Trust ( BXMT Quick Quote BXMT - Free Report) and Invesco Mortgage Capital ( IVR Quick Quote IVR - Free Report) .
Blackstone Mortgage’s current-year earnings estimates have been unrevised over the past 30 days. BXMT shares have gained 15.1% over the past three months. The stock currently carries a Zacks Rank #2 (Buy).
The consensus estimate for Invesco Mortgage’s current-year earnings has been unrevised over the past 30 days. Over the past three months, IVR’s share price has decreased 8.4%. The stock currently carries a Zacks Rank #2.