AAIN - Annaly Capital's Sector Comparative Metrics - Part 2 (Includes Q3 - Q4 2023 Dividend Projection)

2023-06-29 11:13:37 ET

Summary

• This article compares Annaly Capital Management, Inc.’s recent dividend per share rates, yield percentages, and several dividend sustainability metrics to 19 mREIT peers.
• This includes an analysis of Annaly’s quarterly estimated REIT taxable income, estimated core earnings, and normalized core earnings which directly impact the company's dividend sustainability.
• This article also discusses Annaly’s dividend decrease for the second quarter of 2020 and first quarter of 2023, along with projecting Annaly’s dividend sustainability for Q3 – Q4 2023.
• With last week’s market sell-off, Annaly became more “entrenched” within my/our appropriately valued range.  Therefore, Annaly is currently deemed to be a HOLD recommendation (per share ranges provided in article).

Focus of Article:

The focus of this two-part article is to provide a very detailed analysis comparing Annaly Capital Management, Inc. ( NLY ) to 19 other mortgage real estate investment trust (mREIT) peers I currently fully cover. I am writing this two-part article due to the continued requests that such an analysis be specifically performed on NLY and some of the company’s mREIT peers at periodic intervals. For readers who just want the summarized conclusions/results, I would suggest to scroll down to the “Conclusions Drawn” section at the bottom of each part of the article.

PART 1 of this article analyzed NLY’s recent results and compared several of the company’s metrics to 19 mREIT peers. PART 1 also showed how NLY’s book value (“BV”) as of 3/31/2023 compared to the 19 other mREIT peers. PART 1 helps lead to a better understanding of the topics and analysis that will be discussed in PART 2. The link to PART 1’s analysis is provided below:

REIT Forum Version (Expanded Analytics):

Scott Kennedy’s mREIT Sector Comparison Article : Annaly Capital’s BV, Sector Valuation, And Dividend Versus 19 mREIT Peers – Part 1 (Post Q1 2023 Earnings) .

Public Version:

Annaly Capital's BV, Sector Valuation, And Dividend Vs. 19 MREIT Peers - Part 1 (Includes Recommendation For All Covered Peers As Of 6/9/2023) .

The focus of PART 2 of this article is to compare NLY’s recent dividend per share rates, yield percentages, and several dividend sustainability metrics to 19 mREIT peers. This analysis will show recent past data with supporting documentation within Table 9 below. This article will also discuss NLY’s dividend sustainability which is partially based on the metrics outlined in Table 9. A more in-depth analysis of NLY’s dividend sustainability will be provided in Table 10 below. This includes a discussion of NLY’s dividend decrease of ($0.03) (($0.12) post reverse split) and ($0.23) per common share during the second quarter of 2020 and first quarter of 2023, respectively.

By analyzing these metrics, one will better understand which mREIT generally has a safer dividend rate going forward versus other peers who generally have a higher risk for a dividend decrease or a higher probability of a dividend increase and/or a special periodic dividend being declared. When both back testing and projecting the metrics within this analysis, the results have continued to be proven extremely reliable. This is not the only data that should be examined to initiate a position within a particular stock/sector. However, I believe this analysis would be a good “starting-point” to begin a discussion on the topic. At the end of this article, there will be a conclusion regarding the following comparisons between NLY and the 19 mREIT peers: 1) trailing 12-month (“TTM”) yields based on a stock price as of 6/23/2023 (including 1- and 5-year dividend change) ; 2) annual forward yield based on a stock price as of 6/23/2023 ;and 3) annual forward yield based on my estimated CURRENT BV (BV as of 6/23/2023) . I will also provide my current NLY BUY, SELL, or HOLD recommendation, price target, and dividend per share rate projection for the third and fourth quarter of 2023 .

Side Note: I believe there are several different classifications when it comes to mREIT companies. For purposes of this article series, I am focusing on 4. For readers who are new to my articles or for existing readers who need a “refresher” on several different mREIT classifications, please see PART 1 of this article (link provided above).

Dividend Per Share Rates and Yield Percentages Analysis - Overview:

Let us start this analysis by getting accustomed to the information provided in Table 9 below. This will be beneficial when comparing NLY to the 19 mREIT peers within this analysis.

Table 9 – Dividend Per Share Rates and Yield Percentages

(Source: Table created by me, obtaining historical stock prices from NASDAQ and each company’s dividend per share rates from the SEC’s EDGAR Database .)

Using Table 9 above as a reference, the following information is provided (see each corresponding column): 1) dividend per share rate for the first quarter of 2023 (for monthly dividend payers, the total monthly dividends during the quarter) ; 2) core earnings (or core earnings equivalent) for the first quarter of 2023 ; 3) stock price as of 4/3/2023 ; 4) TTM dividend yield (dividend per share rate from the second quarter of 2022 - first quarter of 2023) ; 5) annual forward dividend yield based on the dividend per share rate for the first quarter of 2023 using the stock price as of 4/3/2023 (for monthly dividend payers, the latest monthly dividend per share rate during the quarter) ; 6) annual forward dividend yield based on the dividend per share rate for the first quarter of 2023 using a BV as of 3/31/2023 (for monthly dividend payers, the latest monthly dividend per share rate during the quarter) ; 7) dividend per share rate for the second quarter of 2023 (for monthly dividend payers, the total monthly dividends during the quarter) ; 8) stock price as of 6/23/2023 ; 9) TTM dividend yield (dividend per share rate from the third quarter of 2022 - second quarter of 2023) ; 10) annual forward dividend yield based on the dividend per share rate for the second quarter of 2023 using the stock price as of 6/23/2023 (for monthly dividend payers, the latest monthly dividend per share rate during the quarter) ; 11) annual forward dividend yield based on the dividend per share rate for the second quarter of 2023 using estimated CURRENT BV (BV as of 6/23/2023) (for monthly dividend payers, the latest monthly dividend per share rate during the quarter) ; 12) dividend per share rate for the second quarter of 2023 versus the second quarter of 2022 (percentage fluctuation) ; and 13) dividend per share rate for the second quarter of 2023 versus the second quarter of 2018 (percentage fluctuation; shows post-COVID-19 impact to each company’s dividend).

As of 6/23/2023, ARMOUR Residential REIT Inc. ( ARR ), Dynex Capital Inc. ( DX ), New York Mortgage Trust, Inc. ( NYMT ), and Ready Capital Corp. ( RC ) (pro-rated dividend) had a stock price that “reset” lower regarding each company’s monthly/quarterly dividend accrual. In other words, each company’s “ex-dividend date” for June 2023/the second quarter of 2023 had already occurred.

As of 6/23/2023, NLY, AGNC Investment Corp. ( AGNC ), Cherry Hill Mortgage Investment Corp. ( CHMI ), Invesco Mortgage Capital Inc. ( IVR ), Orchid Island Capital Inc. ( ORC ), Two Harbors Investment Corp. ( TWO ), Chimera Investment Corp. ( CIM ), Ellington Financial Inc. ( EFC ), MFA Financial Inc. ( MFA ), AG Mortgage Investment Trust Inc. ( MITT ), Rithm Capital Corp. ( RITM ) (formerly New Residential Investment Corp.), PennyMac Mortgage Investment Trust ( PMT ), Ready Capital Corp. ( RC ) (pro-rated dividend), Ares Commercial Real Estate Corp. ( ACRE ), Blackstone Mortgage Trust, Inc. ( BXMT ), and Granite Point Mortgage Trust, Inc. (GPMT) had a stock price that had not reset lower in reference to the company’s June 2023/the second quarter of 2023 dividend accrual. Arlington Asset Investment Corp. ( AAIC ) did not declare a common stock dividend for the second quarter of 2023. Readers should take these points into consideration as the analysis is presented below. Let us now begin the comparative analysis between NLY and the 19 mREIT peers.

Analysis of NLY:

When looking back historically, it should be noted, after 22 consecutive quarters of a stable quarterly per share rate, NLY decreased the company’s common stock dividend by ($0.20) per share (on a reverse split-adjusted basis) during the second quarter of 2019. Due to the fact NLY aggressively reduced the company’s dividend from $2.60 per share during the fourth quarter of 2011 to $1.20 per share by the fourth quarter of 2013 (on a reverse split-adjusted basis), the company was also able to maintain its quarterly dividend per share rate over a longer time period when compared to most sector peers (especially its fixed-rate agency mREIT sub-sector peers). Mainly due to a flattening yield curve that began back in 2018, along with the continued less “specialness” when it came to dollar-roll (off-balance sheet) financing, there was mounting pressure for NLY to reduce the company’s dividend per share rate as 2019 progressed as short-term interest rates rose to 2.50%-2.75%.

NLY’s ($0.12) per common share dividend decrease for the second quarter of 2020 (on a reverse split-adjusted basis) was mainly the result of the lower size of NLY’s investment portfolio coming out of the initial COVID-19 “pandemic panic” during March 2020. During this timeframe, prior to the Federal (“Fed”) Reserve’s quick, decisive action to calm markets through both interest rate and monetary policy, repurchase (“repo”) agreement and hedging counterparties quickly (and incorrectly in my opinion) initiated margins calls on most sector peers which created a “snowball” effect on this specific market. This included both agency and non-agency mortgage-related investments. In other words, there was a quick, sharp leverage/liquidity crisis across certain pockets of credit markets where certain assets/investments are used as collateral to underlying outstanding borrowings/debt. Most sector peers either voluntarily, or were forced, to deleverage and raise cash during this time period. Results varied greatly from peer-to-peer regarding the severity of each company’s investment portfolio reduction. NLY was one of the sector peers who actually came out of the COVID-19 pandemic panic not too much “worse for wear.” Some agency, most hybrid, some originator + servicer, and some commercial whole loan mREIT peers could not make the same claim.

Using Table 9 above as a reference, NLY declared a dividend of $0.65 per common share for the first quarter of 2023. This was a ($0.23) per common share or (26%) dividend decrease when compared to the prior quarter. NLY’s stock price traded at $18.85 per share on 4/3/2023. When calculated, this was a TTM dividend yield of 17.45%, an annual forward yield to NLY’s stock price as of 4/3/2023 of 13.79%, and an annual forward yield to the company’s BV as of 3/31/2023 of 12.52%. When comparing each yield percentage to NLY’s agency mREIT peers within this analysis, the company’s TTM dividend yield percentage was slightly (greater than 0.50% but less than 1.00%) below average while the company’s annual forward yield percentage based on its stock price and its annual forward yield percentage based on its BV as of 3/31/2023 was notably (at or greater than 2.00%) below average (due to the recent notable dividend decrease) .

As was discussed in PART 1 of this article, as of 3/31/2023 NLY had the 3rd lowest at-risk leverage ratio (on- and off-balance sheet) when compared to the 7 other agency mREIT sub-sector peers within this analysis. Historically speaking, NLY has typically run lower leverage versus most of its fixed-rate agency mREIT peers but more recently has maintained average leverage. From charting past trends, typically leverage ratios within the fixed-rate agency mREIT sub-sector has generally equated to average dividend yield percentages. Of course, there are various other factors at play regarding dividend sustainability (especially in light of the events surrounding the COVID-19 pandemic panic back in March 2020). However, a company’s leverage ratio is one “general” metric which I believe should be analyzed.

I continue to believe three important metrics to analyze when assessing NLY’s near-term dividend sustainability are the company’s quarterly estimated REIT taxable income (“ERTI”), estimated core earnings (“ECE”), and its normalized core earnings (“NCE”). NLY’s earnings available for distribution (“EAD”) is now the equivalent to the company’s previously disclosed NCE. As such, the terms are interchangeable within this article. Currently, NLY’s NCE (or EAD) is the closest metric to the company’s “true earnings power” regarding its investment portfolio’s performance. To analyze/explain these three metrics, to see if there were any “warning signs” regarding NLY’s recent notable dividend reduction, Table 10 is provided below.

Table 10 – NLY Quarterly ERTI, ECE, and NCE/EAD Analysis (Q1 2020 – Q1 2023)

(Source: Table created by me, partially using data obtained from NLY’s quarterly shareholder presentation for the first quarter of 2019 – first quarter of 2023.)

Note: Table 10 does NOT retroactively apply NLY’s 9/23/2022 1:4 reverse stock split to periods prior to the third quarter of 2022.Most important, applying or not applying NLY’s 9/23/2022 1:4 reverse stock split does NOT impact the results of the company’s quarterly dividend distributions payout ratio [same payout ratio regardless]).

Using Table 10 above as a reference, NLY reported quarterly ERTI available to common shareholders of NLY reported quarterly ERTI available to common shareholders of ($40.9) million for the first quarter of 2020 (see red reference “E” ). When calculated, NLY had ERTI available to common shareholders of ($0.03) per share (see red reference “E / F” ). This figure was notably below the company’s dividend of $0.25 per common share for the first quarter of 2020. However, this figure excluded the impact of NLY’s net long “to-be-announced” (“TBA”) mortgage-backed securities (“MBS”) position. When including “net dollar roll” (“NDR”) income of $44.9 million (see red reference “G” ), NLY reported quarterly ECE available to common shareholders of $4.0 million for the first quarter of 2020 (see red reference “I” ). When calculated, NLY had quarterly ECE available to common shareholders of less than $0.01 per share (see red reference “I / F” ).

However, NCE considers an additional Generally Accepted Accounting Principles (“GAAP”) to IRC adjustment when compared to quarterly ERTI and ECE (specifically when it comes to NLY) . When it comes to most other mREIT peers, this specific adjustment is performed within each mREIT’s quarterly ERTI figure. Very important to understand. Dependent upon management’s projected lifetime conditional prepayment rate (“CPR”) in regards to NLY’s MBS portfolio, the “catch-up” premium amortization expense adjustment can materially alter the company’s quarterly ERTI and ECE figures. NCE excludes/reverses this GAAP adjustment since an entity’s cost basis per the IRC is not par. As such, when also including NLY’s catch-up premium amortization expense adjustment of $290.7 million (see red reference “L” ), the company reported NCE/EAD available to common shareholders of $294.7 million for the first quarter of 2020 (see red reference “N” ). When calculated, NLY had NCE/EAD available to common shareholders of $0.21 per share (see red reference “N / F” ). NLY’s NCE/EAD calculates to a quarterly dividend distributions payout ratio of 121% for the first quarter of 2020 (see red reference “J / N” ). This percentage surpassed the third quarter of 2019 as being NLY’s highest quarterly dividend distributions payout ratio since the first quarter of 2014.

As such, the pressure to consider reducing NLY’s quarterly common stock dividend of $0.25 per share, which began back in the second half of 2019, only mounted with the company’s performance of this specific metric during the first quarter of 2020 (which I correctly stated at the time). I believe two of the main reasons why NLY reduced the company’s quarterly common stock dividend during the second quarter of 2020 were the following: 1) reduction in investment portfolio size as a direct result of the “spike” in leverage, liquidity ; and 2) spread/basis risk in March 2020 as a direct result of the COVID-19 pandemic panic (including the impact this event had on broader credit/equity markets).

With that said, NLY’s quarterly dividend was reduced twice within five quarters. Simply from an annual taxation standpoint, this boded well for dividend sustainability in the future (less taxable income is being paid out during the year; leading to less “shortfalls” at year-end). As important, NLY’s “prospects” for taxable income over the foreseeable future “brightened” as a direct result of the early 2020 rapid decline of the Fed Funds Rate; which in turn caused a quick drop in agency repo loan rates. In addition, the specialness/attractiveness of the forward TBA MBS market once again increased (especially within lower coupons).

At the time, since the probability of short-term rates remaining “lower for longer” appeared to greatly outweigh the 2018-2019 trend of rising short-term interest rates, mREIT peers who continued (or “rotated” ) capital into agency MBS experienced attractive net interest margins (even as lower coupons become a greater share of the secondary MBS market). This began to play out during the second quarter of 2020 which continued during the third and fourth quarters of 2020 (which was previously correctly projected). The magnitude of borrowing cost decreases “outweighed” continued elevated prepayments and the gradual shift into lower coupons. As such, net portfolio yields are an important metric to continually monitor (which is something I always project/track).

NLY reported quarterly ERTI available to common shareholders of $239.8, $298.8, and $285.4 million for the second, third, and fourth quarters of 2020, respectively. When calculated, NLY had ERTI available to common shareholders of $0.17, $0.21, and $0.20 per share, respectively. These figures were slightly-modestly below the company’s dividend of $0.22 per common share for the second-fourth quarters of 2020. As discussed earlier, this figure excluded the impact of NLY’s net long TBA MBS position and lifetime CPR adjustment. When including NDR income of $97.5, $114.1, and $99.0 million, NLY reported quarterly ECE available to common shareholders of $337.3, $412.9, and $384.4 million for the second, third, and fourth quarters of 2020, respectively. When calculated, NLY had quarterly ECE available to common shareholders of $0.24, $0.29, and $0.27 per share, respectively.

When also including NLY’s catch-up premium amortization expense adjustment of $51.7, $33.9, and $39.1 million, the company reported NCE/EAD available to common shareholders of $389.1, $446.8, and $423.5 million for the second, third, and fourth quarters of 2020, respectively. When calculated, NLY had NCE/EAD available to common shareholders of $0.27, $0.32, and $0.30 per share, respectively. This calculates to a quarterly dividend distributions payout ratio of 80%, 69%, and 73%, respectively. With the nice “bounce back” in NLY’s NCE/EAD, along with the reduced dividend, these were the lowest quarterly dividend distributions payout ratios since the I began covering this mREIT back in the first quarter of 2013 (a very positive catalyst/trend).

Moving to 2021, NLY reported quarterly ERTI available to common shareholders of $528.3, $159.3, $234.3, and $236.1 million for the first, second, third, and fourth quarters of 2021, respectively. When calculated, NLY had ERTI available to common shareholders of $0.38, $0.11, $0.16, and $0.16 per share, respectively. This figure was notably above, notably below, modestly below, and modestly below the company’s dividend of $0.22 per common share for the first, second, third, and fourth quarters of 2021, respectively. As discussed earlier, this figure excluded the impact of NLY’s net long TBA MBS position and lifetime CPR adjustment. When including NDR income of $98.9, $111.6, $115.6, and $119.7 million, NLY reported quarterly ECE available to common shareholders of $627.2, $270.9, $349.9, and $355.8 million for the first, second, third, and fourth quarters of 2021, respectively. When calculated, NLY had quarterly ECE available to common shareholders of $0.45, $0.19, $0.24, and $0.24 per share, respectively. When also including NLY’s catch-up premium amortization expense adjustment of ($214.6), $153.6, $60.7, and $57.4 million, the company reported NCE available to common shareholders of $412.6, $424.5, $410.6, and $413.2 million for the first, second, third, and fourth quarters of 2021, respectively. When calculated, NLY had NCE available to common shareholders of $0.29, $0.30, $0.28, and $0.28 per share, respectively. This calculates to a quarterly dividend distributions payout ratio of 75%, 75%, 78%, and 78% for the first, second, third, and fourth quarters of 2021, respectively. Simply put, an attractive quarterly dividend distributions payout ratio throughout 2021.

Moving to 2022, NLY reported quarterly ERTI available to common shareholders of $453.8, $429.8, $393.7, and $391.4 million for the first, second, third, and fourth quarters of 2022, respectively. When calculated, NLY had ERTI available to common shareholders of $0.31, $0.28, $0.92, and $0.84 per share, respectively (third and fourth quarter of 2022 includes the impact of NLY’s 9/23/2022 1:4 reverse stock split). As discussed earlier, this figure excluded the impact of NLY’s net long TBA MBS position and lifetime CPR adjustment. When including NDR income of $129.5, $161.7, $105.5, and $34.8 million, NLY reported quarterly ECE available to common shareholders of $583.3, $591.4, $499.2, and $426.2 million for the first, second, third, and fourth quarters of 2022, respectively. When calculated, NLY had quarterly ECE available to common shareholders of $0.40, $0.39, $1.16, and $0.91 per share, respectively (third and fourth quarter of 2022 includes the impact of NLY’s 9/23/2022 1:4 reverse stock split). When also including NLY’s catch-up premium amortization expense adjustment of ($179.5), ($127.5), ($45.4), and ($8.1) million, the company reported NCE available to common shareholders of $403.7, $463.9, $453.8, and $418.0 million for the first, second, third, and fourth quarters of 2022, respectively. When calculated, NLY had NCE available to common shareholders of $0.28, $0.30, $1.056, and $0.893 per share, respectively (third and fourth quarters of 2022 includes the impact of NLY’s 9/23/2022 1:4 reverse stock split). This calculates to a quarterly dividend distributions payout ratio of 80%, 77%, 91%, and 99% for the first, second, third, and fourth quarters of 2022, respectively. Simply put, during the third and fourth quarters of 2022, there was some growing pressure regarding NLY’s dividend sustainability during 2023.

During 2022, short-term rates rapidly increased. While this trend was similar to 2018, this time short-term rates very quickly surpassed 4.50% while NLY’s hedging portfolio was comprised more of net (short) U.S. Treasury futures and not interest rate payer swaps (in my opinion a bit of a mistake). Along with a gradual reduction in the size of NLY’s investment portfolio, along with the rapid decrease in BV during 2022 as asset valuations quickly decreased, this equated to the company’s forward dividend yield (relative to estimated CURRENT BV) surpassing 16% which was highlighted in a previous sector comparison article. In addition, NLY’s NDR income notably decreased as 2022 progress. This was due to less specialness, alone with a reduction in the company’s net long TBA MBS position.

Moving to 2023, NLY reported quarterly ERTI available to common shareholders of $376.6 million for the first quarter of 2023. When calculated, NLY had ERTI available to common shareholders of $0.77 per share (includes the impact of NLY’s 9/23/2022 1:4 reverse stock split). As discussed earlier, this figure excluded the impact of NLY’s net long TBA MBS position and lifetime CPR adjustment. When including NDR income of $18.2 million, NLY reported quarterly ECE available to common shareholders of $394.8 million for the first quarter of 2023. When calculated, NLY had quarterly ECE available to common shareholders of $0.81 per share, (includes the impact of NLY’s 9/23/2022 1:4 reverse stock split). When also including NLY’s catch-up premium amortization expense adjustment of $0.5 million, the company reported NCE available to common shareholders of $395.3 million for the first quarter of 2023. When calculated, NLY had NCE available to common shareholders of $0.807 per share (includes the impact of NLY’s 9/23/2022 1:4 reverse stock split). This calculates to a quarterly dividend distributions payout ratio of 82% for the first quarter of 2023. Simply put, this was a more attractive payout ratio (pretty logical).

Once again using Table 9 as a reference, NLY declared a dividend of $0.65 per share for the second quarter of 2023. This was an unchanged dividend when compared to the prior quarter. NLY’s stock price traded at $20.12 per share on 6/23/2023. When calculated, this was a TTM dividend yield of 15.21%, an annual forward yield to NLY’s stock price as of 6/23/2023 of 12.92%, and an annual forward yield to the company’s estimated CURRENT BV of 12.41%. When comparing each yield percentage to NLY’s agency mREIT peers within this analysis, the company’s TTM dividend yield percentage, the company’s annual forward yield percentage based on its stock price, and its annual forward yield percentage based on its estimated CURRENT BV were now modestly (at or greater than 1.00% but less than 2.00%) below average below average. Going forward, I believe NLY should have an annual forward yield slightly above the agency mREIT average. As such, with the recent notable dividend per share decrease, NLY continues to have some “room to play” regarding future dividend sustainability ; even with further decreases to the company’s NCE/EAD over the foreseeable future.

A Couple Comparisons Between NLY and the Company’s 19 mREIT Peers in Ranking Order:

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Along with identifying very high yields in Table 11, I believe Table 12 only solidifies more caution/risk should currently be assigned to ARR and ORC. Yes, even with the recent ARR monthly reduction from $0.10 to $0.08 per common share, ARR’s annual forward dividend yield (relative to estimated CURRENT BV) remains very high and needs continued monitoring.

As is always the case, this is something I/we will continuously monitor as 2023 unfolds.

I would point out ORC accounts for the company’s premium amortization expense equivalent differently when compared to its agency mREIT sub-sector peers. First, this leads to timing differences which can “prop up” weighted average yields during certain interest rate cycles. As such, ORC’s yield percentages continue to be above the agency mREIT sub-sector average. Second, this can “appear to buoy” ORC net spread metrics when, in reality, a reclassification of the company’s equivalent to premium amortization expense would show a much more modest net spread income metric. This is also typically why a larger than average agency mREIT percentage of ORC’s dividend declarations over the past several years have been classified as a “return on capital” (“ROC”) distribution. Simply put, ORC continues to distribute dividends in excess of the company’s annual REIT taxable income (“AREITTI”). However, the fairly recent (51%) dividend reduction over the past several years has notably lowered this overdistribution. Further discussion of this ORC topic is beyond a NLY sector comparison article (also has been extensively covered in prior ORC mREIT articles over the years).

Conclusions Drawn (PART 2):

PART 2 of this article compared NLY to 19 mREIT peers in regards to recent dividend per share rates, yield percentages, and several other dividend sustainability metrics. This article also discussed NLY’s past dividend decrease during the second quarter of 2020 and first quarter of 2023. Using Table 9 as a reference, the following were the recent dividend per share rate and yield percentages for NLY:

NLY: $0.65 per common share dividend for the second quarter of 2023; 15.21% TTM dividend yield; 12.92% annual forward yield to the company’s stock price as of 6/23/2023; and 12.41% annual forward yield to my projected CURRENT BV.

When combining this data along with metrics within Table 10 (most notably NCE/EAD) and other modeling sources, the following probability regarding NLY’s near-term dividend sustainability is provided:

NLY: Very High (90%) probability of a stable dividend for Q3 2023

NLY: High (80%) probability of stable dividend for Q4 2023

Q2 2023 Projected NCE/EAD: $0.700 - $0.800 per common share

Preliminary Q3 2023 Projected NCE/EAD: $0.675 - $0.775 per common share

Preliminary Q4 2023 Projected NCE/EAD: $0.650 - $0.750 per common share

I believe the movement of MBS prices will directly impact NLY’s use of the TBA forward market (which directly impacts NDR income). As explained in PART 1 of this article, NLY’s portfolio composition, leverage, borrowing costs, hedging coverage ratio (risk management strategy), and prepayment speeds also need to be considered when discussing this topic.

While I believe NLY’s NCE/EAD will net decrease over the foreseeable future as short-term funding costs continue to rise during 2023, I also believe the company continues to have a nice “cushion” to support the recently reduced dividend per share rate. I would also point out NLY will continue to rotate into higher coupons fixed-rate agency MBS (and other mortgage-related investments) which will result in a gradual increase in weighted average coupon (“WAC”), will continue to experience an increase in net yields due to both a decrease in purchased fixed-rate agency MBS pricing (including more favorable pricing of other mortgaged-related investments) and continued low constant/conditional prepayment rates (“CPRs”), and will continue to realize more favorable current period hedging income (expense) regarding its existing interest rate payer swaps and exercised swaptions (though this specific benefit will eventually fade some during 2023).

20 mREIT Dividend Projections for Q3 2023:

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My BUY, SELL, or HOLD Recommendation:

From the analysis provided above, including additional catalysts/factors not discussed within this article, I currently rate NLY as a SELL when I believe the company’s stock price is trading at or greater than a 2% premium to my projected CURRENT BV (BV as of 6/23/2023; $20.95 per share), a HOLD when trading at less than a 2% premium through less than a (8%) discount to my projected CURRENT BV, and a BUY when trading at or greater than a (8%) discount to my projected CURRENT BV.

Therefore, with a closing stock price of $20.31 per common share as of 6/27/2023, I currently rate NLY as APPROPRIATELY VALUED from a stock price perspective .

As such, I currently believe NLY is a HOLD recommendation.

My current price target for NLY is approximately $21.35 per common share. This is currently the price where my recommendation would change to OVERVALUED/a SELL recommendation. The current price where my classification/recommendation would change to UNDERVALUED/a BUY recommendation is approximately $19.25 per common share. Put another way, the following are my CURRENT BUY, SELL, or HOLD per share recommendation ranges (the REIT Forum subscribers get this type of data on all 20 mREIT stocks I currently cover on a weekly basis):

$21.35 per share or above = SELL

$19.26 - $21.34 per share = HOLD

$17.21 - $19.25 per share = BUY

$17.20 per share or below = STRONG BUY

Along with the data presented within this article, this recommendation considers the following mREIT catalysts/factors: 1) projected future MBS/investment price movements ; 2) projected future derivative valuations ; and 3) projected near-term (up to 1-year) dividend per share rates. As discussed earlier, this includes all recent, current, and projected macroeconomic indicators and FOMC monetary policy.

Recent NLY/AGNC Stock Disclosures:

On 3/18/2020, I initiated a position in NLY at a weighted average purchase price of $5.05 per share (large purchase). This weighted average per share price excluded all dividends received/reinvested. On 6/9/2021, I sold my entire NLY position at a weighted average sales price of $9.574 per share as my price target, at the time, of $9.55 per share was surpassed. This calculates to a weighted average realized gain and total return of 89.6% and 112.0%, respectively. I held this position for approximately 15 months.

On 3/18/2020, I once again initiated a position in AGNC at a weighted average purchase price of $7.115 per share (large purchase). This weighted average per share price excluded all dividends received/reinvested. On 6/2/2021, I sold my entire AGNC position at a weighted average sales price of $18.692 per share as my price target, at the time, of $18.65 per share was surpassed. This calculates to a weighted average realized gain and total return of 162.7% and 188.6%, respectively. I held this position for approximately 14.5 months.

On 10/11/2022, I once again initiated a position in AGNC at a weighted average purchase price of $7.445 per share. On 10/24/2022, I increased my position in AGNC at a weighted average purchase price of $7.500 per share. When combined, my AGNC position had a weighted average purchase price of $7.473 per share. This weighted average per share price excluded all dividends received/reinvested. On 11/9/2022, I sold my entire AGNC position at a weighted average sales price of $8.750 per share as my price target, at the time, of $8.75 per share was surpassed. This calculates to a weighted average realized gain and total return of 17.1% and 18.7%, respectively. I held this position for approximately 3 weeks.

Final Note: All trades/investments I have performed over the past several years have been disclosed to readers in “real time” (that day at the latest) via either the StockTalks feature of Seeking Alpha or, more recently, the “live chat” feature of the Marketplace Service the REIT Forum (which cannot be changed/altered). Through these resources, readers can look up all my prior disclosures (buys/sells) regarding all companies I cover here at Seeking Alpha (see my profile page for a list of all stocks covered). Through StockTalk disclosures and/or the live chat feature of the REIT Forum, at the end of May 2023 I had an unrealized/realized gain “success rate” of 86.4% and a total return (includes dividends received) success rate of 93.9% out of 66 total past and present mREIT and business development company ( “BDC”) positions (updated monthly; multiple purchases/sales in one stock count as one overall position until fully closed out). I encourage other Seeking Alpha contributors to provide real time buy and sell updates for their readers/subscribers which would ultimately lead to greater transparency/credibility. Starting in January 2020, I have transitioned all my real-time purchase and sale disclosures solely to members of the REIT Forum. All applicable public articles will still have my “main ticker” purchase and sale disclosures (just not real-time alerts).

Table 14a – The REIT Forum NLY + AGNC Seeking Alpha Recommendations (November 2019 – March 2023 Timeframe)

(Source: Table directly from Seeking Alpha; 1 ^st AGNC “Bearish” indicator included by me directly from the public AGNC article dated 2/5/2020 recommendation [which can’t be changed once public], AGNC “Bullish” indicator included by me directly from the public AGNC article dated 4/17/2020 recommendation [which can’t be changed once public], 2 ^nd AGNC and 1 ^st NLY “Bearish” indicator included by me directly from the REIT Forum’s weekly subscriber recommendation article series [ week of 6/4/2021 for AGNC and week of 6/11/2021 for NLY], 3 ^rd AGNC “Bearish” indicator included by me directly from the REIT Forum’s weekly subscriber recommendation article series [ week of 4/8/2022 ], 2 ^nd AGNC “Bullish” indicator included by me directly from the REIT Forum’s weekly subscriber recommendation article series [ week of 6/17/2022 ], and 3 ^rd AGNC “Bullish” indicator included by me directly from the REIT Forum’s weekly subscriber recommendation article series [ week of 9/30/2022 ].)

Table 14b –NLY Public Seeking Alpha Recommendations (June 2022 – June 2023 Timeframe)

(Source: Table directly from Seeking Alpha.)

I just want to quickly highlight my/our AGNC and NLY Seeking Alpha recommendation ranges over the past several years. In my personal opinion, a stock with a BUY recommendation should increase in price over time, a SELL recommendation should decrease in price over time, and a HOLD recommendation should remain relatively unchanged in price over time (pretty logical). Simply put, my/our “valuation methodology” has correctly timed when both AGNC and NLY have been undervalued (a BUY recommendation; bullish), overvalued (a SELL recommendation; bearish), and appropriately valued (a HOLD recommendation; neutral).

Using Table 14a above as a reference, I believe we have done a pretty good job in my/our AGNC and NLY recommendation ratings. For NLY, both pricing charts should really be viewed as 1 combined chart since CO and I are part of the same Marketplace service team. Not only do I/we want to provide guidance/a recommendation that enhances total returns for subscribers, I/we also want to protect these generated returns by subsequently minimizing total losses. I personally believe this methodology/strategy is very important. In other words, correctly spotting both positive catalysts/trends and negative factors/trends as economic and interest rate cycles fluctuate.

This methodology/strategy was extremely useful/accurate when going back to very late 2019 and early 2020 (both pre-COVID-19) where I/we had a SELL recommendation on both AGNC and NLY. For some reason, this S.A. pricing chart does not show my AGNC SELL recommendation pre-COVID-19 but one can simply look back to past public articles in early 2020 (just an omission on S.A.’s end in this particular case). As an alternative, simply look at the NLY SELL recommendation highlighted in CO’s pricing chart (AGNC and NLY typically have very similar recommendation ranges when considering similar time periods). Furthermore, after the initial “pandemic panic” , I/we had a STRONG BUY recommendation on both AGNC and NLY later in the spring of 2020.

Simply put, a contributor’s/team’s recommendation track record should “count for something” and should always be considered when it comes to credibility/successful investing. You will not see most (if not all) other contributor teams use this type of factual, recommendation-driven price chart because the results are not nearly as “attractive” when compared to our own.

Understanding My/Our Valuation Methodology Regarding mREIT Common and BDC Stocks:

The basic "premise" around my/our recommendations in the mREIT common and BDC sectors is value. Regarding operational performance over the long-term, there are above average, average, and below average mREIT and BDC stocks. That said, better-performing mREIT and BDC peers can be expensive to own, as well as being cheap. Just because a well-performing stock outperforms the company’s sector peers over the long-term, this does not mean this stock should be owned at any price. As with any stock, there is a price range where the valuation is cheap, a price where the valuation is expensive, and a price where the valuation is appropriate. The same holds true with all mREIT common and BDC peers. As such, regarding my/our investing methodology, each mREIT common and BDC peer has their own unique BUY, SELL, or HOLD recommendation range (relative to estimated CURRENT BV/NAV). The better-performing mREITs and BDCs typically have a recommendation range at a premium to BV/NAV (varying percentages based on overall outperformance) and vice versa with the average/underperforming mREITs and BDCs (typically at a discount to estimated CURRENT BV/NAV).

Each company’s recommendation range is "pegged" to estimated CURRENT BV/NAV because this way subscribers/readers can track when each mREIT and BDC peer moves within the assigned recommendation ranges (daily if desired). That said, the underlying reasoning why I/we place each mREIT and BDC recommendation range at a different premium or (discount) to estimated CURRENT BV/NAV is based on roughly 15-20 catalysts which include both macroeconomic catalysts/factors and company-specific catalysts/factors (both positive and negative). This investing strategy is not for all market participants. For instance, not likely a “good fit” for extremely passive investors. For example, investors holding a position in a particular stock, no matter the price, for say a period of 5+ years. However, as shown throughout my articles written here at Seeking Alpha since 2013, in the vast majority of instances I have been able to enhance my personal total returns and/or minimize my personal total losses from specifically implementing this particular investing valuation methodology. I hope this provides some added clarity/understanding for new subscribers/readers regarding my valuation methodology utilized in the mREIT common and BDC sectors.

Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader’s current investing strategy. The factual information provided within this article is intended to help assist readers when it comes to investing strategies/decisions. Please disregard any minor “cosmetic” typos if/when applicable.

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