Annaly Capital's 4th quarter 2013 earnings: Must-know takeaways (Part 3 of 3)
Highlights of the conference call
On the company’s conference call to analysts and investors, Annaly CEO Wellington Denahan addressed the current interest rate environment and where she saw the company heading in the future.
On the current interest rate environment
“The market has sobered up a little bit about the the implications on the lack of demand.”
What Denahan is saying here is that the market has realized that demand for mortgage-backed securities isn’t going to simply evaporate once the Fed stops buying.
“The forward guidance and the low rate policy out of the Fed is much more meaningful to a position that carries assets via short-term interest rates.”
What she’s saying here is that while tapering will affect the value of Annaly’s assets, that’s only part of the puzzle. The other half is Annaly’s borrowing rates. And since the Fed has pretty much said short-term rates are going nowhere for the near term, that gives it more leeway to increase risk.
“We will be opportunistic in these moves around the volatility associated with this exit.”
Change in investment posture
The biggest change will be that the company will transition from a defensive posture (low leverage and heavy hedges) to a more offensive posture (more leverage, less hedging). Denahan mentioned that Annaly could add $24 billion in assets to reach 7x leverage, which would leave the company still less levered than its peers.
“Unless things change over the next several months, we intend to opportunistically add to our position over the next few quarters.”
At current MBS spreads with a steeper curve, it’s more economic to buy MBS and leverage the portfolio than it is to repurchase stock. Note that American Capital Agency (AGNC)—Annaly’s biggest competitor—has not only been buying its own stock, but it has also been buying stock in its competitors.
If Annaly increases leverage and rates manages to hold in here, then its earnings should increase, which would mean a higher dividend per share.
To learn more about investing in REITs, see Consumer confidence is still in the right direction despite a fall.
Browse this series on Market Realist: