Annaly (NLY)

NO INVESTMENT IS SUITABLE FOR EVERY INVESTOR.

Is that clear?  You may come away from reading my blog with the conclusion that you should do or not do something with your money.  It could turn out very badly for you.

I don’t know you, and I can’t possibly know your situation.  I guarantee that I don’t know the future.

Whatever you choose to do with your money is ON YOU.  You pays your money and you takes your chances, as my Daddy used to say.

At over $10 billion market cap, NLY  is “bigger” than all the others combined.  In fact, when you throw in the $3 billion the same team manages in Chimera (CIM), Mike Farrell’s team sports nearly two thirds of the market cap for the whole space.

Annaly spent its first decade of existence as a fairly short-duration “barbell” portfolio of ARMs, floating-rate CMO’s and fixed-rate CMOs.  They did very little hedging, and financed themselves in rolling 1, 3, and 6 month repos.

They noticed that all the juice in their portfolio was coming from the fixed rate portfolio, so their reaction to the liquidity crisis of 2008 (when everybody was afraid they might not even get repo any more) was to lower their leverage ratio and own a lot more fixed rate bonds.

For the past couple of years, they’ve been running about 75% fixed rate, which has prompted them to put on some hedges, but only to help mitigate an increase in their funding costs.  I’m guessing they bought interest rate caps, “captions” (options to buy caps) and/or entered swaps where they pay-fixed and receive-floating.  They don’t tell us what they’re doing, except to say they are 1/3rd hedged.

With a nearly 3-year duration, this amREIT has quite bit more exposure to changes in the middle part (the “belly”) of the yield curve than the peers that keep their portfolio durations under 1 year.  That translates into several times as much exposure to changes in mortgage bond prices on the portfolio (now over $70 billion), and that whole change in price on the $70 billion ripples back into the book value owned by the equity holders.

Go into this one with your eyes open.  This stock, trading at $17.50, sports a nice yield today around 15%, and trades at slight premium to last quarter’s book value of $16.80.  Chances are the book value has gone up, since the mortgage bonds they hold have increased by about half a percent so far this quarter (pure guess, not calculated).  Using the 7-1 multiplier mentioned above, that’s a hefty 3.5% or so increase in book value to around $17.40 before paying the next dividend.

As I mentioned in the lead-in to these company-specific posts, I am NOT setting myself up to do the job of an equity analyst the way I would if I were being paid by Citi or Morgan Stanley.  This is purely back-of-the-envelope stuff using my general sense of what’s going on in the MBS market.

I can’t (or won’t) go through the pain of modeling each company separately.  First of all, they aren’t about to give me a list of CUSIPs.  Secondly, whatever they do is shifted by anywhere from 5% to 25% by trading and/or hedging, which nobody but their hairdresser knows for sure.

Finally, the purpose of this series of posts is to share my impressions, not my analysis.  How they choose to run their business is more important to me than what they specifically hold in portfolio at any given time.

hh

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2 Responses to Annaly (NLY)

  1. iousa says:

    I have followed you blog and have acted upon key learnings here, but I agree that the individual must accept negative as well as positive outcomes. Even with “professional investment advise” there is no gaurantee. It is sad that you have to write on your blog these essays on individual responsibilities and I hope you DO NOT give up and talk freely of your ideas. Thank you for all that you do.

  2. Annaly Capital Management, Inc. Announces 2nd Quarter Dividend of $0.68 per Share

    http://www.snl.com/irweblinkx/file.aspx?IID=113558&FID=9713104

    Company Release – 06/17/2010 16:05

    NEW YORK–(BUSINESS WIRE)– The Board of Directors of Annaly Capital Management, Inc. (NYSE: NLY) declared the second quarter 2010 common stock cash dividend of $0.68 per common share. This dividend is payable July 29, 2010 to common shareholders of record on June 29, 2010. The ex-dividend date is June 25, 2010.

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