Tags: Annaly | Capital | sideswiped | NLY

Annaly Capital Sideswiped by Low Rates

By    |   Friday, 09 March 2012 01:02 PM

Mortgage real estate investment trust (REIT) Annaly Capital Management (NLY) is getting sideswiped by low long-term interest rates, which reduce returns.

Annaly Capital owns agency mortgage-backed securities, which are guaranteed by the government. The REIT prospers from steep yield curves, which is the spread between mortgage-backed security rates and the cost of borrowing. Lately, that spread has narrowed.

Earnings are deteriorating. For fourth quarter 2011, Annaly Capital reported earnings of 46 cents per share, down 63 percent from $1.94 a year earlier. For full-year 2011, earnings plummeted to 37 cents per share, versus $2.12 per share in 2010.

Recently, Annaly Capital rejuggled its portfolio, selling $20.1 billion in Fannie Mae and Freddie Mac MBS and debentures in 2011. “We continue to manage our company conservatively,” explained Annaly Capital CEO Michael Farrell.

For 2012, Wall Street’s consensus earnings estimate has been steadily sinking, and currently it’s $1.95 per share. For 2013, the earnings estimate is $2.09.

Dividend in jeopardy?

Narrowing interest rate margins are expected to continue to ding Annaly Capital returns in 2012. Analysts worry that the hefty dividend, now 13.7 percent, could be cut.

For now, analysts are advising investors to stay on the sidelines. Of the 23 analysts followed by Thomson/First Call, only one has a strong buy recommendation and seven have buys, with 15 holds.

UBS analysts have a neutral rating on Annaly Capital, citing a shrinking portfolio and declining book value. They do note, though, that Annaly Capital lowered its debt-to-capital ratio to 5.4x, versus 7x to 9x for its peers.

The company next reports on May 3.

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Friday, 09 March 2012 01:02 PM
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