Wednesday, November 14, 2012

Annaly Breaks The Agency Mortgage REIT Mold In Search Of Spread


On November 12, Annaly Capital Management (NLY), the largest mortgage REIT, announced that it plans to buy Crexus Investment Corp (CXS). Annaly is an agency mREIT that usually buys residential mortgage-backed securities that are guaranteed by government-sponsored agency entities such as Fannie Mae and Freddie Mac. Crexus is a commercial mREIT in which Annaly already holds an over 12 percent interest and it is managed by FIDAC, a wholly owned subsidiary of Annaly.

Annaly announced the bid for Crexus as part of a change to its strategy in response to continued Federal Reserve purchases of government-backed residential debt. The addition of Crexus's holdings would mean NLY will no longer be an agency-only mREIT, but instead some sort of hybrid mREIT. Annaly normally buys not only residential paper, but residential paper with an agency backing, so CXS's commercial mortgage paper is rather different. Wellington Denahan, Annaly chairman and CEO, commented that:


"Since our inception in 1997, Annaly has maintained the capacity to diversify its asset base to include real estate related assets in addition to Agency mortgage-backed securities if we determined that compelling other long-term investment opportunities exist relative to the Agency market. While we remain committed to the Agency market, given the current environment, we believe it is prudent to diversify a portion of our investment portfolio. Therefore, we may allocate up to 25% of our shareholders' equity to real estate assets other than Agency mortgage-backed securities.
A powerful step in this direction is the proposed acquisition of CreXus. We believe that wholly owning the commercial real estate platform we currently manage through FIDAC is complementary to our existing business and return profile and should provide stable and diversified risk-adjusted returns to our shareholders."

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