Annaly (NLY) Rides on Diversification Amid Market Volatility
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Annaly Capital Management, Inc. NLY is benefiting from an improvement in the average yield on interest-earning assets. The company’s prudent asset selection will drive its performance. However, the current market volatility remains a near-term concern. Additionally, the company’s dividend reduction and an unutilized share repurchase program raise concerns regarding capital distribution.
Annaly's investment strategy is driven by the prudent selection of assets and effective capital allocation to achieve stable returns. The company's investment strategy involves traditional Agency mortgage backed securities (MBSs), which provide downside protection and investments in more non-agency and credit-focused asset classes that enhance returns.
Also, a scaled mortgage servicing rights (MSR) platform will continue to benefit from a low prepayment environment. The company is focusing on improving its capabilities by acquiring newly originated MSRs from its partner network, which will continue to provide a strong advantage in expanding its MSR business. As of Jun 30, 2024, its investment portfolio aggregated $90.3 billion.
The company is focused on diversifying its investment portfolio. In 2022, the company sold its Middle Market Lending portfolio and also exited its commercial real estate business. Through these exits, Annaly was able to enhance capabilities across its core housing finance strategy. In line with this, it allocates capital to residential credit businesses, the MSR platform and Agency MBS. Focus on residential credit will enhance the stability of returns across various rate and macro scenarios.
Further, NLY is focused on improving its liquidity and reducing leverage. Till the end of the second quarter of 2024, the company enjoyed a strong liquidity position. Annaly had an unencumbered asset portfolio, aggregating $5.4 billion, which can readily provide liquidity in times of adverse market conditions.
NLY enjoys a diverse funding profile in the industry. Annaly’s main sources of financing are repurchase agreements and various forms of equity. Arcola Securities, the company’s wholly-owned subsidiary, enters repurchase contracts on behalf of the company. This helps it enjoy flexibility in the opportunistic enhancement of its portfolio. Annaly maintains a strong presence in the residential securitization market through its residential credit business. This will enable the company to capitalize on the improving outlook for residential mortgage finance. This will support the company’s asset generation strategy.
Shares of Annaly have gained 7% over the past six months against the industry’s decline of 3.2%.
