Why Annaly Capital Stock fell 11.9% in February

What happened

Annaly Capital Management ( NLY -1.13% ) had a turbulent month of February as its share price fell 11.9%, according to S&P Global Market Intelligence.

Mortgage real estate investment trust (REIT) underperformed S&P500, which fell 3.2% in February, and the Nasdaq Composite, which fell 3.4%. Annaly Capital is down about 10% year-to-date 2022 to March 7, like the S&P 500.

Image source: Getty Images.

So what

Annaly Capital is a mortgage REIT, meaning it does not own any properties. Instead, he invests in mortgages and mortgage-backed securities and earns money on interest. The majority of Annaly’s portfolio is made up of agency mortgage-backed securities (MBS), which are federally guaranteed mortgages.

Fourth-quarter earnings were released Feb. 9 and showed a 20% year-over-year drop in net interest income to $361 million, while net interest margin narrowed to $1. .93% compared to 2.10% in the fourth quarter of 2020.

Annaly also experienced a significant decline in book value per share. It fell to $7.97 in the fourth quarter from $8.39 in the third quarter and $8.92 in the fourth quarter of 2020. Book value per share, which is the aggregate value of assets on the books, fell been affected by the drop in MBS prices.

This happened in part because the Federal Reserve ended its purchases of MBS, which it did after the pandemic hit. Meanwhile, spreads over US Treasuries are widening as Treasury yields rise on expectation of interest rate hikes.

Now what

Mortgage REITs are very sensitive to changes in interest rates. In fact, they generally don’t fare as well in a rising interest rate environment. This is because most of the mortgages already listed on their books are fixed rate, so they don’t qualify for the higher interest rates. In addition, they will now have to pay higher interest rates to borrow money to finance their operations. The result is shrinking profit margins, which in turn could impact the stock price, not to mention the dividend.

Annaly Capital has, however, taken steps to reduce the impact of rising rates in several ways. One is to get out of debt or reduce debt and borrowing. “We have substantial liquidity with $9.3 billion in unencumbered assets, up $500 million year-over-year,” CEO David Finkelstein said on the earnings call. fourth trimester.

Another is to reduce its agency MBS portfolio and increase its investments in non-agency MBS, which generally pay higher interest rates.

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

Sallie R. Loera