Annaly Reports Sharp Increase in Book Value Per Share


The COVID-19 crisis has been the most difficult test the real estate investment trust (REIT) industry has faced since the Great Recession of 2008-2009. Liquidity in the mortgage-backed securities markets dried up almost overnight, triggering margin calls and forced asset liquidation. Every Mortgage REIT has reported sharp declines in book value and reduced dividends.

A mortgage REIT, Annaly Capital management (NYSE: NLY), recently released second quarter results. What the company reported provides insight into the current state of the mortgage REIT market.

The worst is probably over for mortgage REITs

The management of Annaly Capital said in its report that the worst is over when it comes to the financial fallout from COVID-19. Although it ultimately depends on how far the coronavirus pandemic progresses from here, management has said that the initial crisis is over and we are now in the recovery period, where the value of assets returns to the normal. On the earnings conference call, CEO David Finkelstein said:

There are signs that the worst of the economic distress may be behind us, although the recent increase in cases in parts of the United States demonstrates the fragile nature of the recovery. Nonetheless, financial conditions have improved considerably. The market dysfunction that occurred amid the initial COVID outbreak in the United States has subsided and we have seen significant improvement in liquidity and asset valuation.

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Agency titles were the first to recover

Annaly invests primarily in agency mortgage backed securities, which are guaranteed by the US government. These stocks were the first to recover when the Federal Reserve launched an aggressive asset purchase program in March, which continues today.

Annaly invests primarily in mortgage backed securities, which have certain characteristics that make them more attractive than the peer group. These securities (called specified pools) generally trade at a premium over their generic equivalents.

During the crisis, these pools traded at a discount to their peers; however, this valuation discount has been largely recovered.

Non-agency emissions are likely to stagnate for some time

On the non-agency side, net unsecured mortgage issuance is likely to be negative for 2020. Mortgage originators have seen the unsecured mortgage market dry up and are feasting on easy refinancing deals. is why initiators like PennyMac Financial (NYSE: PFSI) outperform the markets. Annaly is still securitizing and fears of abstention appear to be fading.

The performance of the commercial real estate portfolio has been mixed, with the hotel and retail sector struggling, while multi-family and office buildings receive over 90% of contract rents. Commercial real estate typically accounts for around $ 2.5 billion of Annaly’s $ 93 billion in assets, so it’s not a major component of the portfolio. Annaly also has other assets in mortgage management rights and intermediary lending. Although Anna has some credit exposure, the vast majority of her assets are government guaranteed paper.

Annaly repurchased shares for less than book value

Annaly reported a book value per share of $ 8.39, an increase of 11.9% from March 31. Net interest margins (in other words, interest income minus interest expense divided by assets) widened from 0.18% to 1.89%. The leverage went from 6.8 times to 6.4 times. Considering the stock’s current discount to book value, Annaly repurchased shares, purchasing $ 175 million in the trading year to date. This will be accretive to the book value, even if the portfolio does nothing.

Annaly trades at an 11.8% discount to book value and pays a dividend of $ 0.88 per share per year, which works out to a return of 11.9%. Historically, mortgage REITs generally trade based on their dividend yields and stay close to book value.

Given the Fed’s activity, interest rate volatility is expected to remain subdued, which is great news for mortgage investors. Unless financial conditions collapse or inflation comes out of nowhere, the book value per share should slowly rise and the stock should slowly lower the current discount. Between the discount and the annual dividend yield, this represents a potential return of 23.7% for the share. Income and value investors should take note.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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