Annaly Capital Gets New Outperform From FBR's mREIT Analyst: What It Means

FBR's Jessica Levi-Ribner has upgraded the rating on Annaly Capital Management, Inc. NLY from Market Perform to Outperform, while raising the price target from $11 to $12.

Analyst Jessica Levi-Ribner explained that the upgrade was based on the company's "defensive asset portfolio with a heavier skew toward non-credit/more-liquid agency MBS, and an attractive valuation at 83 percent of BV, on top of share buybacks, which likely commenced in 4Q15 and may continue past 1Q16."

The analyst believes that Annaly Capital is ready to regain the leadership position in the industry by being more transparent and vocal with investors in order to facilitate an understanding of the company's competitive positioning as the largest mREIT.

"In a world where repo financing costs seem to be going higher, we think NLY is likely best positioned to maintain counter-party relationships and funding whereas smaller names face more challenges," Levi-Ribner elaborated.

Following various regulatory changes, Levi-Ribner believes that there would a "tiering of relationships" in the repo financing space, where larger clients who have stronger ties to the Street would be better positioned that smaller ones with "monoline" relationships.

This is what sets Annaly Capital apart from its peers and is expected to be one of the main drivers of "rationalization" in this space.

While management expects consolidation to occur in the segment, the analyst believes that the company "continues to review a substantial amount of (acquisition) opportunities and could potentially serve as a consolidator in the industry."

"While we can't be sure that Annaly will be successful on this front, the financial arbitrage could be compelling, particularly as the company could just use principal and interest from the rolling of MBS to make strategic acquisitions or take advantage of its near $8 billion in excess liquidity," the FBR report added.