How well do you know Annaly Capital Management (NLY +1.16%), really? Sure, Annaly is a mortgage REIT, it invests in fixed-income securities, and it sports a massive 11.5% yield, but there's a lot more hidden beneath the surface.
Here are seven interesting facts and figures about Annaly.
1. What is the deal with Annaly's name?
The Annaly name pays homage to the Irish heritage of the late founder and former CEO, Michael Farrell. His ancestry traces back to the O'Farrell clan, which ruled over Anghaile (Annaly), a vast territory in middle Ireland.
The territory was referred to as the "Longphort Ui-Fhearghail," or the Fortress of O'Farrell. Annaly's logo is the crest of O'Farrell, and the motto translates to "Proceed without fear."
2. Meeting Wellington Denahan
Annaly was co-founded by Farrell and Wellington Denahan in 1994, and in Farrell's 2008 annual shareholder letter, he touched on how the two met while working at investment firm Wertheim Schroder & Co.:
She came into my office one day for an interview and was offered a job as a trading assistant, and true to form, she worked her way up to trading in short order. She became a portfolio manager at the relatively young age of 28 years old and has firmly established herself as a leading voice in the traditionally male-dominated profession of bond trading and investment.
Denahan took over as CEO when Farrell passed away in 2012. Over Annaly's 21-year history, Denahan and Farrell have been the company's only two CEOs.
3. Why choose to be a REIT?
In an interview with Wake Forest Magazine, Farrell suggested that being a REIT and investing in mortgage bonds represented a "perfect marriage between asset class and vehicle structure." This is because, unlike hedge funds, where investor money can be withdrawn, REIT shares are sold between investors, allowing Annaly to invest with permanent capital.
Because Annaly's securities can gain and lose value, if it operated similarly to a hedge fund, and money could be pulled from the fund, it might need to sell assets at inopportune times. However, because its capital is permanent, Annaly has the flexibility to hold its mortgage bonds to maturity and not worry about money flowing in and out of the company.
4. Annaly has subsidiaries
In recent conference calls, investors have been hearing more and more about one of Annaly's subsidiaries: Annaly Commercial Real Estate Group (formerly Crexus), which it acquired in the second quarter of 2013. The company invests in commercial equity (physical properties) and commercial debt.
But there are also a number of subsidiaries you won't hear about, such as:
- Annaly Middle Market Lending -- makes corporate loans to mid-size companies.
- Shannon Funding -- acquires residential mortgage loans and provides financing to residential mortgage originators.
- Fixed Income Discount Advisory Company (FIDAC) -- investment advisor.
- RCap Securities -- broker-dealer (buys and sells securities).
Corporate loans and individual residential loans do not play a significant role in Annaly's business today, but with the subsidiaries Annaly has in place, it's not out of the question that they could in the future.
5. Annaly has a significant stake in Chimera
Chimera, like Annaly, is a mortgage REIT that invests in fixed-income securities and real estate-related assets. The major difference is that Chimera invests in a wider array of assets, about 50% of which are exposed to credit risk -- or the risk that assets could default. By comparison, 2% of Annaly's assets have credit risk.
Chimera is managed by FIDAC, which, as you saw above, is one of Annaly's subsidiaries. In 2014, Annaly earned $31.3 million in fee income from Chimera. Annaly also owns 45 million shares of Chimera. This represents a 4% ownership position in Chimera, which, at today's stock price, is valued at $145 million.
6. Annaly is the top holding
There are only a handful of funds that focus on mortgage REITs, but iShares FTSE NAREIT Mortgage REIT ETF (REM +1.03%) is one of them. The fund was opened in 2007, and while many companies have fallen in and out of the portfolio, Annaly has been its top holding every year.
What's even more impressive is that while the mortgage market (and the economy) was melting down in February 2009, Annaly accounted for a whopping 30% of the fund's portfolio. This says a lot about the perceived stability of Annaly during crises.
7. Now might be a good time to buy
Among legendary investor Peter Lynch's many famous sayings, one of my favorites is, "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise."
In August 2014, CEO Denahan bought 86,837 shares of Annaly's common stock. This brings her total holdings to over 1.3 million shares, which means Denahan owns roughly 0.14% of the company. Even more interesting, Denahan's most recent purchase was at $11.52 per share, and with Annaly's stock currently trading at $10.72, you would imagine that if she thought the stock was a good buy then, it's probably a better buy now.
