Annaly Capital Management, Inc. (NLY)’s Incredible Shrinking Spread

Annaly Capital (NYSE:NLY)Annaly Capital Management, Inc. (NYSE:NLY) reported first-quarter earnings yesterday afternoon, and the results are mixed, to say the least. While the megatrust beat analysts’ earnings per share estimates by $0.13, the $0.47 EPS number edged up from the fourth quarter’s $0.46 by only one penny and is still far below the year-ago figure of $0.54.

But the real meat of the report lies in the all-important net interest spread, upon which mortgage REITs make their money. For Annaly Capital Management, Inc. (NYSE:NLY), it was a disappointing 91 basis points, down four basis points from the last quarter — and a jaw-dropping 80 basis points year over year.

A common affliction for mREITs these days
As mortgage REIT fans well know, contracting spreads have been a real bugaboo for the industry lately as the Federal Reserve continues on with its bond-buying spree. For pure-agency players like Annaly Capital Management, Inc. (NYSE:NLY), American Capital Agency Corp. (NASDAQ:AGNC), and CYS Investments Inc (NYSE:CYS), the effects have been especially harrowing, since the Fed buys only securities guaranteed by Fannie and Freddie in its effort to prop up the economy and goose employment.

Nevertheless, it is a problem that is becoming chronic, particularly for Annaly Capital Management, Inc. (NYSE:NLY), whose spread just keeps dropping. But the giant REIT isn’t alone. Just a couple of weeks ago, CYS Investments Inc (NYSE:CYS) noted a drop in its spread as well. The company reported a spread of 1.16% for the first quarter, compared to its fourth-quarter value of 1.31%, and a year-ago rate spread of 1.88%. American Capital Agency Corp. (NASDAQ:AGNC) reports later today, but at the year-end quarter, it had Annaly Capital Management, Inc. (NYSE:NLY) beat with a spread of 1.63% versus Annaly’s 0.95% — a rate that actually increased from the previous quarter.

Annaly is not sitting still for this onslaught of insults. It is moving forward with its purchase of all shares of Crexus Investment Corp (NYSE:CXS), the buyer of commercial mortgage-backed securities whose portfolio Annaly hopes will buoy its own. With the closing date for the deal on track for May 23, Annaly has been busily adding to its ranks, bringing on board some tried-and-true executives to help ramp up the commercial end of its real estate platform. Heading things up will be Robert Restrick, Annaly Capital Management, Inc. (NYSE:NLY)’s Managing Director, Executive VP of FIDAC, Annaly’s management company, and current COO of Crexus Investment Corp (NYSE:CXS).

Will Crexus Investment Corp (NYSE:CXS) be the cure for what’s ailing Annaly? Time will tell, but I’m betting that future quarterly results will be a more exciting read for this mREIT’s investors.

The article Annaly’s Incredible Shrinking Spread originally appeared on and is written by Amanda Alix.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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