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Annaly (NLY) Rides on Diversification Amid Market Volatility
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Annaly Capital Management, Inc. (NLY - Free Report) is benefiting from an improvement in the average yield on interest-earning assets. The company’s prudent asset selection will drive its performance. However, the current market volatility remains a near-term concern. Additionally, the company’s dividend reduction and an unutilized share repurchase program raise concerns regarding capital distribution.
Annaly's investment strategy is driven by the prudent selection of assets and effective capital allocation to achieve stable returns. The company's investment strategy involves traditional Agency mortgage backed securities (MBSs), which provide downside protection and investments in more non-agency and credit-focused asset classes that enhance returns.
Also, a scaled mortgage servicing rights (MSR) platform will continue to benefit from a low prepayment environment. The company is focusing on improving its capabilities by acquiring newly originated MSRs from its partner network, which will continue to provide a strong advantage in expanding its MSR business. As of Jun 30, 2024, its investment portfolio aggregated $90.3 billion.
The company is focused on diversifying its investment portfolio. In 2022, the company sold its Middle Market Lending portfolio and also exited its commercial real estate business. Through these exits, Annaly was able to enhance capabilities across its core housing finance strategy. In line with this, it allocates capital to residential credit businesses, the MSR platform and Agency MBS. Focus on residential credit will enhance the stability of returns across various rate and macro scenarios.
Further, NLY is focused on improving its liquidity and reducing leverage. Till the end of the second quarter of 2024, the company enjoyed a strong liquidity position. Annaly had an unencumbered asset portfolio, aggregating $5.4 billion, which can readily provide liquidity in times of adverse market conditions.
NLY enjoys a diverse funding profile in the industry. Annaly’s main sources of financing are repurchase agreements and various forms of equity. Arcola Securities, the company’s wholly-owned subsidiary, enters repurchase contracts on behalf of the company. This helps it enjoy flexibility in the opportunistic enhancement of its portfolio. Annaly maintains a strong presence in the residential securitization market through its residential credit business. This will enable the company to capitalize on the improving outlook for residential mortgage finance. This will support the company’s asset generation strategy.
Shares of Annaly have gained 7% over the past six months against the industry’s decline of 3.2%.
Image Source: Zacks Investment Research
At present, Annaly carries a Zacks Rank #3 (Hold).
However, the operating performances of mREITs depend on conditions prevalent in the broader financial markets and the macroeconomic situation. Any volatility in the mortgage market, unfavorable changes 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.
The current high-interest rate environment resulted in the underperformance of fixed-income assets and spread widening, affecting the company’s performance. The Federal Reserve has indicated a potential rate cut as early as September 2024. While this move is likely to be advantageous for the company in the long term, the immediate impact on its performance might not reflect the benefits of the reduced rates.
Annaly’s capital distribution plans do not seem sustainable. In January 2022, the company authorized a $1.5-billion share repurchase plan valid through Dec 31, 2024. However, the company has not repurchased shares under this plan since it was announced. Moreover, the company slashed its first-quarter 2023 cash dividend by 26% to 65 cents per share due to a moderation in earnings available for distribution. Earlier, amid the pandemic-led market volatility, NLY slashed its second-quarter 2020 dividends by 12% to 22 cents in June 2020.
Stocks to Consider
Some better-ranked stocks in the broader REIT sector are KKR Real Estate Finance Trust Inc. (KREF - Free Report) and NexPoint Real Estate Finance, Inc. (NREF - Free Report) .
Earnings estimates of KKR Real Estate Finance have been revised upward by 10.5% over the past 30 days. In the past six months, KREF’s shares have gained 18.7%. Currently, the company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings estimates for NexPoint Real Estate have been revised upward by 7.8% for 2024 over the past 30 days. Shares of NREF have gained 4.7% over the past six months. Currently, the company also sports a Zacks Rank #1.
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Annaly (NLY) Rides on Diversification Amid Market Volatility
Annaly Capital Management, Inc. (NLY - Free Report) is benefiting from an improvement in the average yield on interest-earning assets. The company’s prudent asset selection will drive its performance. However, the current market volatility remains a near-term concern. Additionally, the company’s dividend reduction and an unutilized share repurchase program raise concerns regarding capital distribution.
Annaly's investment strategy is driven by the prudent selection of assets and effective capital allocation to achieve stable returns. The company's investment strategy involves traditional Agency mortgage backed securities (MBSs), which provide downside protection and investments in more non-agency and credit-focused asset classes that enhance returns.
Also, a scaled mortgage servicing rights (MSR) platform will continue to benefit from a low prepayment environment. The company is focusing on improving its capabilities by acquiring newly originated MSRs from its partner network, which will continue to provide a strong advantage in expanding its MSR business. As of Jun 30, 2024, its investment portfolio aggregated $90.3 billion.
The company is focused on diversifying its investment portfolio. In 2022, the company sold its Middle Market Lending portfolio and also exited its commercial real estate business. Through these exits, Annaly was able to enhance capabilities across its core housing finance strategy. In line with this, it allocates capital to residential credit businesses, the MSR platform and Agency MBS. Focus on residential credit will enhance the stability of returns across various rate and macro scenarios.
Further, NLY is focused on improving its liquidity and reducing leverage. Till the end of the second quarter of 2024, the company enjoyed a strong liquidity position. Annaly had an unencumbered asset portfolio, aggregating $5.4 billion, which can readily provide liquidity in times of adverse market conditions.
NLY enjoys a diverse funding profile in the industry. Annaly’s main sources of financing are repurchase agreements and various forms of equity. Arcola Securities, the company’s wholly-owned subsidiary, enters repurchase contracts on behalf of the company. This helps it enjoy flexibility in the opportunistic enhancement of its portfolio. Annaly maintains a strong presence in the residential securitization market through its residential credit business. This will enable the company to capitalize on the improving outlook for residential mortgage finance. This will support the company’s asset generation strategy.
Shares of Annaly have gained 7% over the past six months against the industry’s decline of 3.2%.
Image Source: Zacks Investment Research
At present, Annaly carries a Zacks Rank #3 (Hold).
However, the operating performances of mREITs depend on conditions prevalent in the broader financial markets and the macroeconomic situation. Any volatility in the mortgage market, unfavorable changes 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.
The current high-interest rate environment resulted in the underperformance of fixed-income assets and spread widening, affecting the company’s performance. The Federal Reserve has indicated a potential rate cut as early as September 2024. While this move is likely to be advantageous for the company in the long term, the immediate impact on its performance might not reflect the benefits of the reduced rates.
Annaly’s capital distribution plans do not seem sustainable. In January 2022, the company authorized a $1.5-billion share repurchase plan valid through Dec 31, 2024. However, the company has not repurchased shares under this plan since it was announced. Moreover, the company slashed its first-quarter 2023 cash dividend by 26% to 65 cents per share due to a moderation in earnings available for distribution. Earlier, amid the pandemic-led market volatility, NLY slashed its second-quarter 2020 dividends by 12% to 22 cents in June 2020.
Stocks to Consider
Some better-ranked stocks in the broader REIT sector are KKR Real Estate Finance Trust Inc. (KREF - Free Report) and NexPoint Real Estate Finance, Inc. (NREF - Free Report) .
Earnings estimates of KKR Real Estate Finance have been revised upward by 10.5% over the past 30 days. In the past six months, KREF’s shares have gained 18.7%. Currently, the company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings estimates for NexPoint Real Estate have been revised upward by 7.8% for 2024 over the past 30 days. Shares of NREF have gained 4.7% over the past six months. Currently, the company also sports a Zacks Rank #1.