Annaly Capital (NLY) Still Rated Outperform

Annaly Capital Management (NLY) reported first quarter “core” EPS (fully diluted and after preferred dividend excluding realized and unrealized trading gains) of $0.44, in line with our estimate. Leverage increased during the quarter, but still remains below peers. Book value ended the quarter at $16.18, up 1% from the fourth quarter and 1% better than our estimate.

Estimates: We are raising our 2012 through 2014 core EPS estimates to $1.84 (from $1.80), $1.95 (from $1.85), and $1.95 (from $1.85) to reflect the higher ending period leverage. Our estimates assume that Annaly takes leverage to 6.5x by the end of 2012.

Valuation: Annaly is currently trading at a 1% premium to current book value and is yielding 13.5% on the current dividend.

Reiterate Outperform: Annaly has the potential to increase the level of returns through returning leverage to more historical levels.

Real Estate Investment Trusts (REITs) have continued to attract investors in 2012 as the U.S. housing market has begun to show signs of a long-awaited recovery. An improving economy and record-low mortgage rates have encouraged many potential buyers. U.S. single family home prices increased for the first time in nearly a year according to a recent survey Tuesday.