The preferred shares from Annaly Capital Management (NYSE:NLY) have been underperforming the preferred shares from AGNC Investment Corp. (NASDAQ:AGNC). We consider these preferred shares to be fairly comparable. This is particularly true when it comes to AGNCO (AGNCO) and NLY-I (NLY.PI).

We discussed the recent price disparity in a REIT Forum exclusive series: Preferred Shares Week 220.

Index Card

The index cards are shown below:

Source: The REIT Forum

Source: The REIT Forum

You can see that AGNCO is a bit outside the target buy-under price, but NLY-I was inside by more than 2%.


We wanted to capture the increase in dividend income, and the additional upside to call value doesn’t hurt:

Source: The REIT Forum

You can see the new position offers us an additional 7.8% in income. The total call value is higher by 3.81%, but the shares of NLY-I trade at a much larger discount. Consequently, the upside to call value on this position is $2,115.55 rather than the $1,361.51 in upside we had on the shares of AGNCO.

This is a pretty simple swap between two very similar shares, so we can lock in a bit more income and a bit more upside.

Open Preferred Share Positions

All our open positions in the sector are shown below:

Source: The REIT Forum

The position we closed is shown below:

Trade Confirmation

Our execution is shown below:

Source: Schwab

Source: Schwab

We continued to buy small positions so we could reach a very similar total amount.

Since we don’t know the exact price we will get on sale or the exact price on purchasing, we entered a few orders. Do a final 4 shares of NLY-I really make a difference in the investment? No, not really. So, why bother? Because we wanted to have the dollar values be extremely close.

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Why does that matter? Because I’m not just trading for our accounts. I’m also demonstrating precisely how to do these comparisons and make the choices. By keeping those total values extremely similar, I can give investors a clear picture in terms that are easy to understand.

For instance, it is easy for investors to understand that this trade results in an additional 7.8% income. They don’t need to consider how that offsets a change in dollars on hand today. The difference in total prices was only a few dollars, equal to 0.02% of the total value.

Likewise, it is easy to evaluate the additional 3.81% in total call value. If both series of stocks were called in the future, the amount paid on the call date for NLY-I would be higher because we have 3.81% more shares.

So long as all the shares have a call value at $25.00 (extremely common), the difference in share count and the difference in total call value must be identical (3.81% in this case).

Common Shares

We own common shares in both AGNC and NLY. Since we’re comfortable investing in the common (though with shorter target holding periods), it should be no surprise we are comfortable investing in the preferred shares as well.

AGNCO vs other AGNC Preferred Shares

The first batch of index cards is from 9/24/2020, the same time we placed the trade. The next batch is from 9/27/2020:

Source: The REIT Forum

AGNCO is only slightly outside the target buy-under price, carrying a larger discount than the others. It remains a much better deal compared to AGNCN (AGNCN). Investors may see the higher yield on AGNCN (7.23% vs 7.10% on AGNCO), but the fixed rate on AGNCN’s coupon will end on 10/15/2020. If short-term rates haven’t increased, the coupon rate will fall significantly lower.

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Some investors may assume that shares become less valuable on that date. The market might even be inefficient enough to let it happen. However, we can see the issue coming. On the other hand, if shares of AGNCN were fixed rate forever (no floating rate), they would probably trade at a premium to call value.


AGNCO is a better deal than the other preferred shares. However, as of 9/24/2020, NLY-I was still a superior deal. The shares are very comparable to AGNCO on a fundamental basis, but had a materially cheaper price tag.

Comparing AGNCO directly to AGNCN, we can see that AGNCO is offering a better deal. The fixed rate for AGNCN is coming “too soon” and reduces the expected value. Investors in AGNCN may want to switch for AGNCO or switch for one of the NLY preferred shares.

Our method works. We know because we buy the same shares we recommend. We track our results on a real portfolio and we compare our returns with the major ETFs for our sector:

Those four ETFs are:

  • MORT – Major mortgage REIT ETF
  • PFF – The largest preferred share ETF
  • VNQ – The largest equity REIT ETF
  • KBWY – The high-yield equity REIT ETF

Sign up now. Take advantage of our September sale!

Disclosure: I am/we are long NLY-I, NLY-G, NLY-F, AGNCO, NLY, AGNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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