NLY's quarterly report: oct 08. anyone with a recent one?
30 October 2008 - 8 pages
Annaly Capital Management (NLY)
Q3 Results In-Line; Navigating Choppy Repo Markets
* Q3 Results - NLY Q3 results came in at $0.61 core earnings, a miss vs. our $0.65 est but 1 c over consensus estimates of $0.60. The miss vs our est was due to lower net spreads, offset by lower G&A and higher advisory fees.
* Spreads - NLY's avg portfolio spread increased 9 bps from last qtr to 208 bps, tighter than our 216 bp est. In late Sept and Oct, repo rates were extremely volatile as money market funds that had traditionally provided liquidity to the repo mkt broke the buck. We see funding volatility as a key risk for NLY and the agency MBS REITs, though conditions seem to be more stable now.
* Leverage - NLY's leverage remained steady at 7.2x debt-to-equity as of 9/30/08. Frankly, we'd prefer to see NLY dial down leverage further given the current environment, similar to just about all other global financial institutions.
* Affiliate - NLY has a $620 mm repo loan out to an affiliated company, which is collateralized by non-agency MBS. We believe this repo loan adds some modest credit risk to NLY's story and is a conflict of interest.
* The Stock - Agency REIT fundamentals remain relatively stable compared to many other financials, benefiting from lack of credit risk and Fed rate cuts. However, we remain concerned that NLY and others may need to bring leverage down, which could pressure earnings/divs in '09. Moreover, they face financing risk from a reliance on the short-term repo market. In their favor is gov't policy to keep agency MBS spreads tight to keep mortgage rates down, so book value is stable. Target now $14. Hold rated. Risk Rating to Speculative.
Earnings / Target Revision - We are revising our estimates to $2.24 in 2008, $2.30 in 2009, and $2.10 in 2010 from $2.44 in 2008, $2.78 in 2009, and $2.60 in 2010 to reflect lower net spreads on increased cost of funding. We are lowering our target price to $14 to more appropriately reflect growing risk in the funding markets and peer comp valuation changes. Our target is 1.1x NLY's $12.70 book value as of Sept 30, 2008. |
