Annaly vs. Starwood: Which Mortgage REIT Offers More Resilience Now?

Core Viewpoint - Both Annaly Capital Management (NLY) and Starwood Property Trust, Inc. (STWD) are mortgage real estate investment trusts (mREITs) with different portfolio strategies and risk profiles, leading to a comparison of their investment opportunities for investors [1] Group 1: Annaly Capital Management (NLY) - NLY's investment strategy focuses on prudent asset selection and effective capital allocation, including traditional Agency MBSs for downside protection and non-agency assets for enhanced returns [2] - As of March 31, 2025, NLY's investment portfolio totaled $84.9 billion, benefiting from a low prepayment environment through a scaled mortgage servicing rights (MSR) platform [3] - The decline in mortgage rates is expected to improve NLY's book value and net interest spread, enhancing the overall yield of its portfolio [4] - By the end of Q1 2025, NLY had $7.5 billion in total assets available for financing, including $4.7 billion in unencumbered Agency MBS, providing liquidity during adverse market conditions [5] - NLY has a monthly dividend yield of 14.6% with a payout ratio of 101%, reflecting confidence in its cash flow and growth prospects [6] - NLY's diversified portfolio and growth in MSR position it for improved returns as mortgage rates decline, trading at a discount compared to the industry average [10][17] Group 2: Starwood Property Trust, Inc. (STWD) - STWD's investment strategy includes commercial mortgage-backed securities (CMBS) and related commercial real estate assets, with a diversified portfolio of $1.02 billion as of March 31, 2025 [7] - The company has engaged in acquisitions and divestitures to optimize its portfolio, including the sale of 16 retail properties for $387.1 million, recognizing a gain of $92 million [8] - STWD's liquidity position is concerning, with cash and cash equivalents of $692 million against long-term debt of $18.4 billion as of March 31, 2025 [11] - STWD pays a quarterly dividend of 48 cents, yielding 9.5% with a payout ratio of 108%, but has not increased its dividend over the last five years [11] - STWD's earnings estimates suggest a year-over-year decline of 10.9% for 2025, with downward revisions indicating a more cautious outlook from analysts [20][22] Group 3: Comparative Analysis - Over the past year, shares of STWD and NLY have risen 13.7% and 11.8%, respectively, outperforming the industry's growth of 5.2% [12] - STWD is trading at a 12-month forward P/E of 10.87X, higher than its five-year median, while NLY trades at a lower P/E of 6.65X, indicating better value for NLY [14] - NLY's earnings estimates reflect a year-over-year rise of 6.3% for 2025, with upward revisions suggesting a bullish outlook, contrasting with STWD's downward revisions [20][22] - NLY is viewed as the more resilient and better-valued option for investors seeking stable income with lower risk, while STWD's higher debt levels and exposure to commercial real estate present more risks [23]