REITs -- What Percentage?

[hendi_alex]

Why is NLY usually considered the best of the breed of mREITs? First, over the years, the company has tended to be fairly nimble, decreasing leverage in a timely way and going into semi hibernation when spreads collapsed or inverted. Secondly, the company only deals in agency paper, loans with implied government guarantee. During the financial crisis, when Alt-A and sub prime became almost totally illiquid, driving the mark to market down to pennies on the dollar. Many or most companies holding those kinds of mortgage paper either went broke or very nearly went broke. The market for agency paper remained vigorous, and that allowed NLY to navigate the crisis quite well. They still took a terrible hit, but business continued with cash flow and dividends continuing without interruption. More importantly, mark to market held up, so there was no breach loan covenants. Still, NLY remains a spread play, and one only has to look at the last year's price action to see what the market anticipates for when short term rates move up and NLY's margins get compressed. IMO, this is no time to be holding such securities. That said, we could have a prolonged period of years where the Fed's hands are tied wrt rate increases. In that case, NLY should be able to continue generating a substantial amount of cash flow. But keep in mind, that low short term rates are not what NLY is about. It is about the spread. With loan rates at historic lows, NLY and other mREITs have been seriously squeezed over the past year or two. That is why NLY's distributions have been cut by over 50% during the period. I'm not saying to avoid NLY, but am saying that if you choose to buy shares, do so very cautiously and always keep the trigger finger close to the sell button.