If you have been waiting with bated breath for a kernel of news about the offer made late last year by Annaly Capital (NYSE:NLY) to buy up the rest of CreXus Investment (UNKNOWN:CXS.DL.DL), wait no more. The news earlier today that the CreXus board had approved Annaly's offer -- sweetened by an extra $0.50 per share -- must certainly be music to the ears of CreXus investors. Whether Annaly investors will cheer as well is another matter.
Too much change?
Though the acquisition isn't a done deal -- CreXus has 45 days within which it may hunt for a better offer -- chances are good that it will go through. CreXus is currently managed through FIDAC, a subsidiary of Annaly's that also manages Chimera (NYSE:CIM), a mREIT that invests in non-agency residential mortgage-backed securities. Despite this familiarity, some investors might think the purchase is more unwanted change at the formerly stalwart company.
The untimely death of Michael Farrell last October was doubtless a blow to investors, who were used to a certain steadfastness at the company under Farrell's guidance. Though co-founder Wellington Denahan-Norris was not unknown to the Annaly family, she rather quickly set about making changes at the mREIT -- most notably, the foray into the commercial MBS arena via the CreXus offer.
The Annaly faithful needn't fear
Change can be scary, but I think Annaly is headed in the right direction. It is common knowledge that the Fed's QE3 program is squeezing yields at mortgage REITs, and I think looking for ways to get around that problem shows a management team with its eyes on the prize and consideration for its investors.
Shortly before Annaly made its initial $12.50 per share bid for CreXus, analysts from the Blackstone Group (NYSE:BX) and Morgan Stanley (NYSE:MS) had noted that the CMBS market is doing quite well, showing an increased stability last year compared with 2011. They also predicted a jump of over 40% in issuance for 2013, over that of 2012 -- the biggest leap in six years. Did Annaly do its homework, and see the opportunity in this sector? I'm betting they did.
Some analysts have shown concern that Denahan-Norris might continue to push the company to diversify in this vein, noting her comments regarding Annaly's "capacity to diversify its asset base," and her announcement that the company might expand its horizons up to 25% of that base. While 25% is quite a big change, I predict Annaly won't push the envelope that far in the CMBS arena: I believe Chimera will be Annaly's next conquest.
Of course, the thought of that purchase might make investors twitchy, too. The roguish mREIT has had its share of problems, the most high-profile of which is its inability to get its financial paperwork in order, and submitted in timely manner. These shenanigans have resulted in the stock's near delisting by the NYSE, but a last-minute reprieve by the Securities and Exchange Commission, allowing a filing extension, saved its bacon.
With all these problems, would an offer from Annaly be prudent? Certainly, any move by Annaly will wait until after the paperwork is filed, but I doubt the company, considering that it manages Chimera, is entirely in the dark. Perhaps bringing the rascally mREIT closer to the center of the Annaly family will help curb some of its erratic behavior -- and, of course, it's hard to ignore that yield.
In any case, if Annaly makes an offer, I believe it will be well-considered, and in the best interests of the company as a whole -- including its investors.