Anworth is in trouble. For the past few years, the real estate investment trust has traded well under book value. And even when it traded at a premium, that happened only briefly and still at multiples lower than its peers.
Understandably, Anworth's investors aren't happy. One activist has suggested that the company needs a management shakeup or, failing that, it should just liquidate. Yes, go out of business and return capital to shareholders.
What the two have in common
Anworth Mortgage Asset isn't completely mellow to the idea that it's worth more dead than alive. Insiders say they have made several management changes that should benefit shareholders, and that the company should live on.
Even as it debates with activists and shareholders, the company is embarking on a new strategy to invest in single-family homes.
Some think the strategy is really for the benefit of management. Single-family homes are especially expensive and difficult to sell and value. In the next year, Anworth's single-family home portfolio could become a significant portion of the company balance sheet. At that point, liquidating Anworth would be much harder than it would be today.
I bring this all up because of Annaly Capital's recent announcement that it, too, will join the ranks of mortgage REITs that buy physical property. The only difference is that Annaly Capital is going after the commercial property market, not single-family homes.
The risks of illiquidity
I'm not here to debate the merits of a liquidation event. Though if I were an Anworth shareholder, liquidation and instant capital gain would look rather tempting.
Rather, I want investors to consider the risks that come along with illiquid investments. As Anworth piles into single-family homes and Annaly Capital moves into commercial real estate, their portfolios have a new sense of permanency. They're here to stay.
That means the ultimate trump card for investors -- forcing liquidation -- becomes more challenging. If, at any point in the future, shareholders want to simply cash out at book value, they may be faced with a bigger haircut to the assets' stated value.
If you think this is a long-tail risk you're unlikely to encounter, think again. As recently as last year, when Annaly Capital shares lost nearly 30% of their value, analysts began asking if it was time to simply close up shop and cash out.
Like any option, the ability to liquidate doesn't appear to have much value. That is, until it comes time to exercise it.