For Annaly Capital Management (NLY 0.81%), the past few weeks have been tough. The Fed's open-ended QE3 program has compressed already shrinking interest spreads upon which mortgage REITs depend upon for investment funds, and has made agency-backed mortgage-backed securities scarcer than ever. Then, the untimely death of Annaly's co-founder and charismatic leader, Michael Farrell, necessitated top management changes during uncertain times for the industry.
But Annaly is moving forward, just recently announcing a bid to purchase all shares of CreXus Investment (NYSE: CXS) not already in Annaly's portfolio. Is the new CEO, co-founder Wellington Denahan-Norris, pushing the mREIT in an entirely new direction?
Primarily a buyer of agency MBSes
Throughout its history, Annaly has essentially been a purchaser of MBSes backed by government-sponsored entities such as Fannie Mae and Freddie Mac. This investment strategy has served the company and its investors well, but times are changing, and the new reality calls for changes within the company, as well.
Annaly currently owns 12.4% of CreXus, a mortgage REIT that invests in commercial mortgages and other types of commercial real estate debt, so the company is no stranger to Annaly. In addition, a subsidiary of Annaly, Fixed Income Discount Advisory Company, manages the CMBS company, just as FIDAC also oversees another mREIT within the Annaly family, Chimera Investment (CIM 11.09%).
Indeed, Denahan-Norris notes in the company's comments on the proposal that Annaly has always maintained the flexibility to diversify its holdings as it sees fit, depending upon the business climate. Though she states that Annaly will continue to invest in GSE-backed MBS products, the company is considering investing up to 25% of stockholder equity in assets other than agency paper.
Still, Annaly will not move outside of its comfort zone. Denahan-Norris has stated that the company won't be increasing leverage just to keep up dividend payments. And, unlike management at Ellington Financial (EFC 0.68%), Annaly doesn't expect to use its balance sheet to create trading income, reiterating the company's traditionally conservative view.
One Fool's take
While Annaly is definitely moving forward with new ideas and exploring different paths, it is making calculated moves while holding onto its conservative business principles. Its purchase of CreXus, a known quantity, shows that management considers the acquisition a good fit with Annaly's diversification program. Farrell, I believe, would approve.
Undoubtedly, new buyouts are in the cards, at least as long as the current business environment exists. From the way its stock has behaved since the CreXus announcement, it appears that Chimera investors are hoping that the troubled hybrid mREIT will be next. Stay tuned.
