% | $
Quotes you view appear here for quick access.

Annaly Capital Management, Inc. Message Board

  • frontsept frontsept Dec 3, 2004 5:21 PM Flag

    rates - spreads

    Remember hylbrid ARMs are Fixed rate for the first few years. They do not 'float' during this period. If rates rise, their borrowing cost goes up while their ARM rates stay the same. This compresses their spread.

    Ive included my previous post below.


    The term 'economic income' was probably not clear. The accounting for mortgages is based on the level yield, aka 'interest method'. This is the income you see on audited GAAP financials. For the most part, GAAP accounting fails to accurately reflect the economic accumulation of value. This is not unique to NLY. It applies to all companies. It is also one of the reasons that the FASB is trying to move towards a full fair value accounting paradigm. These inaccuracies related to current GAAP accounting affect other financial banks or thrifts or insurance companies.

    That said, most banks (banks being the most comparable) offer quite a bit more in terms of 'value' than NLY. Like NLY, most banks hold large, levered mortgage positions. Unlike NLY, most banks have tremendous pricing power over its borrowing costs - much of which is subsidized by the FDIC.

    For the most part, NLY's borrowings are a function of the fed funds rate. This is the dominant index by which repos are priced. It is also a market driven index and is perfectly correlated to fed rate hikes.

    NLY relies on the spread between its mortgage assets and its repo borrowing cost to earn a spread. NLY's assets do not reset as frequently as its liabilities (repos) do. Most of NLYs positions are in hybrid ARMS. These ARMs pay fixed for a number of years and then reset off of a floating index. NLY's repos reprice in well under a year. That means as rates move up, NLY's borrowing costs will go up while their asset yields will remain unchanged.

    This means that their spreads will contract. This is also probably why NLY is doing a new stock issuance. This issuance will mute the contracting spread since they can buy assets at market. Their current holdings are well below market.

    Take a look at NLY's financials and you will see a line item called Other Comprehensive Income (OCI). This item reflects their market value loss on their assets. It is a large negative number because their current asset holdings are well below current market levels. In fact, if NLY were a fund, and marked-to-market, the net asset value would reflect OCI. In other words, the unrealized loss in their assets would be reflected as a loss. So for example, if NLY's accounting were based on a mark-to-market basis, the negative 120-200million or so of OCI would have been reported as a loss. However, since NLY uses accrual accounting, this loss does not get reflected in their reported income.

    Another way of looking at it is that since NLY is purely a levered bond fund, the price at which you purchase NLY at relfects a 50% premium to net asset value. This is derived from its current 1.5 premium to book.

    Would you buy a bond fund at a 50% premium?

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • You (and other posters here..) have pointed out that NLY has a little extra money stashed away that could be used for dividends in the 4th quarter.

      They have about 8 million in income this year that has not been paid out as dividends. They are obligated to pay out I believe at least 90% of their income to satisfy the REIT requirements. Eight million out of an annual income total of about 240 million is less then 4%. Management is not obligated to pay out any of the 8 million. I think they might be trying to build up a little buffer to use during 2005 with the Fed still raising rates at every meeting....

      Summary: I expect a dividend of $ .52, but would not be surprised at $ .50 either...

    • Near the end of the 10Q(3rd Quarter), is a description of current asset structure. The fixed rate paper was at 5.19%, the ARM paper was at 4.12%.

      For the fixed=rate component, I was very conservative to use 5.2% in my model, as the premiums come in and get reinvested at higher rates, the fixed rate paper is starting to have an increased coupon rate.

      The ARMs will not increase as fast as the Fed increases the Federal Funds rate because of NLY's use of hybrid paper, but none the less, I expect around 25-30 basis point improvement in the ARM portfolio.
      The premium amortization is more of an educated guess ...Take the amount of outstanding premium that is published in the 10Q (Page 8), this quarter 409 million. Follow the refi rates as published by the MBAA.ORG every Wed. morning and make a guess.
      Also, a nice new web site has appeared that publishes expected refi rates by the major NY trading houses.


      For the purposes of my 4th quarter model, I used the same refi rate against the premium outstanding which grew by about 5%.

    • can you detail how you got your premium amortization numbers and asset yields for the 3rd quarter please.

      thanks very much.

      i also believe that they have several cents in the "bank" for their dividend.

    • I agree with the basic analysis. Keep in mind the arms are FIXED RATE for 2-3 more years or so (I dont remember how long exactly). Also keep in mind that the repos reprice in like 3-6 months.

      The repos reprice with the fed basically leading to the shrinking spread.

    • excellent analysis.

      i'll have to do a little work to see if i agree with your numbers!

    • hotrrend says:

      I can't say when it will happen but it will.
      Hence, the options hedge I hold on the stock.
      As they say love is blind.

      I must admit that it is a safe stock to hold as once rates rise they will eventually fall again. I like the stock, just not now. A better entry point is comming.

      We are talking over 70% in ARMS and 80 % AAA. We are talking an incredibly transparent and nimble managment team with major holdings in Annaly. We are talking a dividend that at most will temporarily shrink in a very minor way if at all. For those who are long and collect dividends, we aren't much concerned unless the whole economy goes to hell in a hand basket and then we all would wish we owned a lot of Gold.

      Is it a good time to buy--with dividends still above 10%, that is mighty healthy compared to much higher risk for that level of return. You can wait for it to drop, but all those who were claiming it was going back to 16 or even 17 and buy then might be waiting for Godot. Timers are statistcially losers. They get lucky once in while and think they are geniuses--but the law of averages along with all the friction on taxes and some level of commissions means they never do as well as they think they do even when they hit the timing right.

      Again read Grant in Forbes at:

      Grant is one tough customer in terms of saying kind words about most any investment. Holding because I already own a bunch--if I didn't own any I would be buying around 19 if it drops down there again.

    • OK. I can see that possibility.

    • some believe that higher oil will do the tightening.

    • Why would oil help push NLY higher? High oil = inflation = higher interest rates... no?

      Of course, gradually higher rates would not be bad for NLY, in my opinion, as it would gradually steepen the yield curve and avoid the compression that can hurt their profits.

    • oil helping to push stock today. Looks like we will see 20.

    • View More Messages
10.32+0.02(+0.19%)Oct 13 4:01 PMEDT