Annaly Capital Management vs. Granite Point: Which Mortgage REIT is a Better Choice?

Mortgage real estate investment trust (REIT) Annaly Capital Management, Inc. (NLY) invests in various types of agency mortgage-backed securities, non-agency residential mortgage assets, and residential mortgage loans. In comparison, Granite Point Mortgage Trust Inc. (GPMT) is an internally managed real estate finance company. It originates, invests in, and manages senior floating-rate commercial mortgage loans and other debt and debt-like commercial real estate investments in the United States.

With key interest rates held at near zero, income investors' interest in mortgage REITs has been growing because they distribute most of their profits as dividends. Furthermore, mortgage REITs are expected to be even more in focus because U.S. Treasury yields fell yesterday, following poor consumer sentiment. According to a CNBC report, the University of Michigan’s consumer sentiment index fell to 70.2 in its preliminary August reading, its lowest level since 2011. As a result, NLY and GPMT could witness increased investor attention in the near term.

NLY has gained 14.5% over the past year, while GPMT has returned 78.8%. Also, GPMT’s 50.3% gains over the past nine months are significantly higher than NLY’s 11.2% returns. And, in terms of their past six months’ performance, GPMT is the clear winner with 25.1% gains versus NLY’s 0.6% returns.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

Under the terms of NLY’s 6.95% Series F fixed-to-floating rate cumulative redeemable preferred stock, the Board has declared a $0.43cash dividend for the third quarter of 2021 per share of Series F preferred stock, among others. The dividend  is payable on September 30.

Also, on March 26, 2021, NLY announced that it had agreed to sell its commercial real estate business to Slate Asset Management L.P., a global investment and asset management firm focused on real estate.

GPMT paid a $0.25  quarterly dividend  per share on July 29. Its $0.90 annual dividend translates into a 6.71% dividend yield. It  has consistently paid dividends for the past three years.

On May 15, GPMT announced the closing of GPMT 2021-FL3, an $824 million commercial real estate collateralized loan obligation, in a private offering to qualified institutional buyers.

Recent Financial Results

NLY’s net interest income decreased 19% year-over-year to $322.86 million for its second fiscal quarter, which ended June 30, 2021. The company’s net loss for the quarter came in at $294.85 million, versus $856.23 million in net income in the prior-year quarter. Its loss per share came in at $0.23 compared to a $0.58  EPS  in the year-ago period.

For the second quarter, ended June 30, 2021, GPMT’s net interest income decreased 33.7% year-over-year to $22.78 million. The company’s net income came in at $14.27 million versus a $1.73 million  loss in the year-ago period. Its EPS was  $0.24 compared to a $0.03 loss per share in the prior quarter.

Past and Expected Financial Performance

NLY’s revenue has grown at a 3.1% CAGR over the past three years. However, the company’s revenue is expected to decline 0.8% in the current year and 2.4% next year. Its EPS is expected to decline 0.9% in its fiscal year 2021 and 5.4% in fiscal 2022. Also, its EPS is expected to decrease at a 3.3% rate  per annum over the next five years.

In comparison, GPMT’s revenue has grown  at a 17% CAGR  over the past three years. Analysts expect the company’s revenue to decrease 17.1% in its fiscal year 2021 and 1.8% in fiscal 2022. However, its EPS is expected to grow 8.5% in the current year and 2.4% next year.  GPMT’s EPS is expected to grow at a 2.1% rate  per annum over the next five years.

Profitability

NLY’s $3.79 billion trailing-12-month revenue is higher than GPMT’s $135.50 million. And NLY is slightly more profitable, with a 100% gross profit margin versus  GPMT’s 96.76%.

Furthermore, NLY’s 24.42% and 3.81% respective ROE and ROA compare with GPMT’s 4.26% and 0.99%.

Valuation

In terms of trailing-12-month P/S, GPMT is currently trading at 5.45x, which is higher than NLY’s 3.20x. However, NLY’s 1.03x trailing-12-month P/B  is 32.1% higher than GPMT’s 0.78x.

POWR Ratings

NLY has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. In contrast,  GPMT has an overall B rating, which translates to Buy. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Both NLY and GPMT are rated B for Quality. This is justified in terms of their trailing-12-month non-GAAP dividend payout ratios. NLY’s 72.73% and GPMT’s 70.87% are higher than the 28.75% industry average.

NLY has an F grade for Growth, which is consistent with analysts’ expectation that its EPS will decline in the coming quarters. On the other hand, GPMT has a C grade for Growth, which is in sync with analysts’ expectations that its revenue will decrease in the near term, but its EPS will grow.

Of the 30 REITs – Mortgage industry stocks, NLY is ranked #15 while GPMT is ranked #2.

Beyond what I’ve stated above, we have also rated both stocks for Momentum, Stability, Sentiment, and Value. Click here to view all the NLY ratings. Also, get all the GPMT ratings here.

The Winner

Mortgage REITs NLY and GPMT could witness increased investors’ attention in the coming months because income investors are looking to benefit from high dividend yields at a time when Treasury yields are falling. Against this backdrop, we think it is wise to wait for a better entry point in NLY and instead bet on GPMT now because of its superior financials and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the REITs - Mortgage industry here.

GPMT shares were trading at $13.25 per share on Tuesday morning, down $0.16 (-1.19%). Year-to-date, GPMT has gained 37.64%, versus a 19.51% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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