Annaly Capital: Gauging Value Across This Near 10%-Yield Preferreds Trio

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Annaly Capital preferreds offer near double-digit yields and stable equity coverage, making them attractive even in a Fed-cutting environment.We take a look at the NLY preferreds trio in the context ...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nAnnaly Capital: Gauging Value Across This Near 10%-Yield Preferreds Trio\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-01 23:30 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4731990-annaly-capital-gauging-value-across-this-near-10-percent-yield-preferreds-trio><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Annaly Capital preferreds offer near double-digit yields and stable equity coverage, making them attractive even in a Fed-cutting environment.We take a look at the NLY preferreds trio in the context ...</p>\n\n<a href=\"https://seekingalpha.com/article/4731990-annaly-capital-gauging-value-across-this-near-10-percent-yield-preferreds-trio\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4110","symbol_name":"抵押房地产投资信托","start_time":0,"source_url":"https://seekingalpha.com/article/4731990-annaly-capital-gauging-value-across-this-near-10-percent-yield-preferreds-trio","article_id":"2480606898","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/186805810/image_186805810.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2480606898","pubTimestamp":1730475000,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Annaly Capital preferreds offer near double-digit yields and stable equity coverage, making them attractive even in a Fed-cutting environment.We take a look at the NLY preferreds trio in the context o","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4110":"抵押房地产投资信托","BK4585":"ETF&股票定投概念","NLY":"Annaly Capital Management","BK4588":"碎股"},"translate_title":"Annaly Capital：衡量这三只收益率接近10%的优先股的价值","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"NLY":0.9},"content_text":"Annaly Capital preferreds offer near double-digit yields and stable equity coverage, making them attractive even in a Fed-cutting environment.We take a look at the NLY preferreds trio in the context of the latest earnings release.NLY's modest leverage and common share issuance support preferreds, with NLY.PR.I as our pick for better yield and lower redemption risk.We also highlight a common misconception about Agency mREIT book value.SusanneB  In this third article on the Agency mortgage REIT preferreds sector, we take a look at the floating-rate Annaly Capital (NYSE:NLY) preferreds. We continue to see terrific value in these stocks as the company's modest leverage and continued common share issuance has kept equity coverage stable even in light of falling book value. This has allowed the preferreds to trounce common shares in terms of performance over the longer term. The near double-digit yields of NLY preferreds make them very compelling holdings even in a Fed cutting environment. Apart from checking on the recent earnings, we also dive into common mortgage REIT misconceptions that often prevent investors from making well-informed investment decisions in this sector. Our key takeaway is that investors should understand the underlying dynamics of agency mREITs and avoid thinking of them as typical companies. Agency mREITs are actively managed interest-rate hedged portfolios of Agency MBS - more akin to CEFs and BDCs, rather than traditional companies. And rather than being better or worse, this feature has a number of pros and cons which different investors will disagree about. NLY Update NLY had a good quarter from a preferred shareholder perspective. Book value rose 1.5% while economic leverage remained roughly flat at 5.7x. This is the lowest level of leverage in the sector and is one reason why we like NLY preferreds. The company's Agency allocation is below that of the other companies, however at 88% it's not a million miles away from the rest of the sector. Its equity coverage of 7.3x is the second-highest in the sector. Systematic Income The company's book value profile over the last 5 years is not amazing, but is on par with AGNC and only behind DX. It is also well above that of IVR and ARR, which have really struggled with their risk management over the last 5 years. Systematic Income NLY common share count has been rising steadily, with an 11% boost in Q3. This has been helped, no doubt, by the fact that the stock has been trading at a premium to its latest book value. This is a terrific trend that supports equity coverage of the preferred that we are also seeing across some of the other Agency mREITs such as AGNC and DX. SA And even though book value has fallen in the last few years (blue line), equity coverage is trading at the top of its range, helped by periodic common equity offerings. Systematic Income NLY has 3 preferreds as shown below from our service Preferreds Tool. NLY.PR.F and NLY.PR.G feature yields of around 9.9% with NLY.PR.G quite a bit behind. Systematic Income Preferreds Tool NLY.PR.F and NLY.PR.I look much better than NLY.PR.G on a forward yield profile and those are the ones we would focus on. Systematic Income Preferreds Tool We have held NLY.PR.I in our Income Portfolios for a long while now, however previously we rotated across NLY.PR.F and NLY.PR.I as shown below based on relative value. Systematic Income This rotation strategy has resulted in better performance than any of the individual NLY preferreds since mid-2022. Systematic Income There's really not a big difference at all between NLY.PR.F and NLY.PR.I, so both are reasonable holds. We prefer the latter as it 1) has a smidgen slightly higher yield at today's prices, 2) has a lower stripped / clean price (and hence a lower hit on a surprise redemption) and 3) has a lower spread over SOFR which means if NLY were to redeem one preferred it would very likely be NLY.PR.F. Common vs. Preferreds As our readers have come to expect by now, here is a comparison of the total return of the preferreds against the common. Unlike in the AGNC and DX examples, NLY has occasionally outperformed preferreds in prior periods since about 2015. However, the recent interest rate volatility and valuation vs. book value suggests it is now unlikely to climb back above the preferreds. Systematic Income Misconceptions In this section, we highlight a misconception we keep hearing in the context of Agency mREITs which can easily lead investors astray in their allocation to the sector. Specifically, this one has to do with how investors think about the book value of various companies. This misconception treats mortgage REITS as traditional \"widget makers\" and expects their book value to rise over time. Investors who have spent any time looking at mREITs have probably noticed that mREIT book values have tended to move lower over time. This is in contrast to successful traditional companies, which are able to generate value over time and drive a rise in their level of equity or the difference between their assets and liabilities. Preferreds holders want to see equity move higher over time, all else equal, since it increases the amount of so-called equity coverage or cushion that protects the preferreds holders. The basic reason why mREITs don't follow this pattern is simply because mREITs are not traditional companies. They are not in the business of making \"stuff\" - they are just leveraged portfolios of fixed-income securities. The specific reason why mREIT equity / book values tend lower is a bit more involved. First, recent struggles of Agency mREIT book values has to do with the fact that Agency valuations (i.e. Agency \"basis\" or OAS) rose sharply in 2022/2023. Many investors think that mREITs have been hurt by the rise in rates, but that's simply not the case. Rather, book values have struggled until recently due to the depressed nature of Agency MBS prices, caused by the planned Fed MBS portfolio unwind, general weakness in fixed-income and high-interest rate volatility. As we discussed last year, every time Agency valuations reached the level we saw in early 2023, they backed off, driving a recovery in book values and this is indeed what happened this time again. This is despite longer-term interest rates remaining elevated. ICE Second, there is an annuity aspect to the MBS portfolio as some of the net income received includes the principal which means the mREIT will be overpaying relative to its actual underlying yield profile, causing its level of equity to fall over time, all else equal. Third, there are various drags on the portfolio, such as hedging costs. As volatility increases, the mREIT effectively has to buy high and sell low or, more precisely, pay fixed high and receive fixed low when it rebalances its interest rate swap portfolio. This is partly offset by long volatility hedges via swaptions, but the swaptions themselves carry an embedded cost via theta or time decay. Fourth, mREITs tend to go through deleveraging episodes where the book value steps lower as the company sheds assets to ensure its leverage does not rise above its comfort level. Active management can push the other way and allow the mREIT to add value, however, historically, it has not been able to override these factors. Now let's come back to the original complaint that Agency mREIT equity / book values don't rise over time. Once we understand that mREITs are just leveraged portfolios of Agency MBS, roughly hedged for parallel interest rate moves, it is much easier to see why this complaint makes no sense. To expect mREIT equity to rise over time is equivalent to the demand to see Agency MBS valuations rise continually, which is equivalent to the demand to see Agency MBS yields move below Treasury yields and eventually to negative levels. In other words, saying it's bad that mREIT equity levels don't rise over time is akin to saying it's bad that Agency MBS don't trade at increasingly negative yields. Once investors understand how mREITs actually look internally, this complaint can be easily dismissed as ludicrous. It should also be said that it's not so much equity or book value that preferreds investors care about - it's really the equity / preferreds liquidation preference ratio or equity coverage for short. MREITs can push this ratio up not just by increasing equity (organically or through share issuance) but also by redeeming preferreds which has been happening across names like DX, TWO and IVR - a trend we expect to continue. This is because it makes a lot of sense for mREITs to redeem their preferreds as their equity falls since otherwise preferreds would have a disproportionate weight in the company's financing profile, particularly as preferreds are more expensive than repo. Finally, to say that equity has been falling is very different from saying equity is too low and preferreds are in serious danger. It's important to have a good sense of what needs to happen for equity to move below the liquidation preference of the preferreds for any given mREIT. This is why investors need to track the level of equity, the preferreds liquidation preference as well as leverage to make sure they are choosing appropriately on the risk/reward spectrum. Takeaways  We continue to see value in NLY preferreds. Despite expectations of redemptions, the trio remains outstanding - a great result for investors who can claim a near double-digit yield for a low-risk asset. The yield will move lower along with the Fed Funds rate; however, it's expected to stabilize north of 8%. NLY has served preferreds shareholders very well by continuing to issue additional common equity and by keeping its leverage at a very modest level. We continue to hold NLY preferreds in our Income Portfolios.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480606898"}