Annaly Proves That Bigger Is Not Always Better In The mREIT Space
Annaly Capital Management (NLY) is the first mREIT that the author of this research report had ever heard of. That’s not surprising since it happens to be the largest mREIT in the industry. We’re amazed that even though Annaly has 39% more assets than American Capital Agency (AGNC), American Capital Agency’s Comprehensive Income in 2012 exceeded Annaly’s by 50% in Q3 and 14% in the YTD period of 2012. We think AGNC’s stakeholders are telling Annaly’s stake holders “it isn’t the size of the mREIT that counts; it is how you manage it that counts.” Although we like Annaly enough to give it coverage, we’ve been waiting for Annaly to show how its “conservative risk-management oriented model” will result in it generating returns that are comparable to Gary Kain and AGNC.
As Annaly is the biggest mREIT in the business, it is the bellwether and we’re surprised that it is not one of the first mREITs that reports its results. Oh well, maybe Annaly waits to report in the middle of the pack because it generates middle of the pack results. Annaly’s Net Interest Income per Share declined by 31% year-over-year in Q3 2012 versus Q3 2011 and by 18% in the linked quarter. Those results are comparable to what AGNC had reported in its most recent quarterly results. Despite being the biggest mREIT in the industry, Annaly was not able to find a way to deal with the declining yields on its MBS securities. Net Interest Spreads have declined to 1.24% as of the end of the most recent quarter. The good news is that even with the bond buying, we not expecting it to get much worse and we expect Annaly to generate at least an 8-10% annualized yield.