Today I’m going to analyze and compare two promising mortgage REITs, Ready Capital Corporation (RC) and Annaly Capital Management, Inc. (NLY), to determine which one currently presents a better buying opportunity.
Ready Capital is a real estate finance company that acquires, originates, manages, services, and finances different types of real estate-related loans. Annaly Capital is a diversified capital manager REIT that invests in various mortgage assets, including mortgage-backed securities, mortgage servicing rights, agency commercial mortgage-backed securities, and others.
Year-To-Date (YTD), shares of Ready Capital have dipped 4.6%, and NLY has plunged 12.4% over the same period.
Recent Developments
On March 15th, Ready Capital announced that its shareholders had approved the issuance of RC’s common stock to purchase Mosaic funds, a series of funds managed by MREC Management. The deal allows Ready Capital to further expand its portfolio of construction assets, with a post-merger pro forma equity capital base of over $1.8 billion. The acquisition also will have a positive impact on its earnings and leverage profile.
On April 5th, Piper Sandler analyst Kevin Barker lowered Annaly Capital Management's price target from $8 to $7. However, the firm maintained the "Neutral" rating on NLY stock.
Recent Quarterly Performance & Analysts’ Estimates
On February 24th, Ready Capital announced its fourth-quarter earnings report. In Q4, the company's revenue was up 22.7% on a year-over-year basis to $131.14 million, beating Wall Street revenue estimates by $20.22 million. Its net interest income came in 232.07% higher YoY at $70.7 million. As a result, the company reported a Non-GAAP EPS of $0.67, topping Wall Street expectations by $0.16.
The company’s adjusted net book value stood at $15.35 per share of common stock as of December 31st, 2021, up 2.5% compared to the year-ago quarter. Besides, the mortgage REIT's current annualized dividend rate is $1.68 a share, which translates to a forward dividend yield of 10.99%. Also, the REIT has a payout ratio of 74.11%, still leaving some room to run.
A $0.59 consensus EPS estimate for the first quarter, ending March 31st, 2022, indicates a 44.39% growth compared to a year prior. Also, a $140.91 million consensus revenue estimate for FQ1 of 2022 represents a solid 92.05% YoY growth.
On February 9th, Annaly Capital Management reported earnings for the fourth quarter of 2021. The company delivered a net interest income of about $361 million in Q4, representing a 16.6% year-over-year decrease. Also, NLY revealed an EAD of $0.28, surpassing the Wall Street consensus by $0.01.
It is also important to note that the company's book value per common share has been reported at $7.97, down from $8.92 as of 4Q2020. Notably, Annaly's forward annual dividend payout currently stands at $0.88, which translates into a dividend yield of 12.52%. However, it has a negative 5-year dividend growth rate of (6.01%).
Wall Street expects NLY's earnings to drop 13.24% YoY in the first quarter of 2022 to $0.25 per share. Moreover, analysts forecast that its FQ1 revenue will decrease 39.81% YoY to $365.75 million.
Comparative Valuation
In terms of Forward Non-GAAP P/E, RC is currently trading at 7.43x, which is slightly higher than NLY, whose multiple is presently standing at 7.20x. However, both REITs trade with a discount compared to the sector's median threshold of 11.22x.
When it comes to the Forward Price/Sales multiple, RC's P/S multiple of 1.00x is about 13.63% higher than NLY's 0.88x but still looks undervalued compared to the sector's median of 1.21x.
Conclusion
I believe that Ready Capital is a better investment than Annaly Capital at current levels. RC’s recently announced acquisition of Mosaic funds is expected to improve its operating metrics even further. Also, the company has superior financials and forward growth rates. Finally, Ready Capital's discounted valuation should provide investors with an additional margin of safety.
RC shares were trading at $14.88 per share on Wednesday morning, down $0.03 (-0.20%). Year-to-date, RC has declined -2.19%, versus a -5.60% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
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