Along with understanding the basics, if you are interested in Annaly Capital Management (NYSE:NLY) it helps to know what's going on. Here is a look into five of Annaly's most important stories to follow from 2015.
1. The Federal Reserve raises rates
On Wednesday, Dec. 16th, the Federal Reserve officially decided to increase interest rates. This will be the first increase in rates by the Fed in nearly a decade.
As a mortgage REIT, Annaly is vulnerable to swings in interest rates. In fact, the company borrows based on short-term interest rates and then invests in residential mortgage-backed securities, which change in market value depending on longer-term interest rates. In short, a rise in rates can make it more expensive for Annaly to borrow, and reduce the market value of the securities they currently own.
You can find a more detailed look into on how Annaly has prepared for rising rates here, but this was biggest story of the year, and will continue to be an important story for years to come.
2. Annaly's $592 million commercial loan
One of the many ways mortgage REITs have prepared for rising rates is by thinking outside the box. On Sept. 16th, Annaly took a giant leap outside the box when the company announced it had made a $592 million loan to Blackstone and Fairstead Capital for the acquisition of 24 apartment buildings in New York City.
Historically, Annaly has focused exclusively on plain-vanilla fixed-income securities backed by residential mortgages. But these types of assets perform poorly when rates rise. The beauty of commercial loans is that they often come with a floating interest rate. Similar to most credit cards, when interest rates rise, the rate that borrowers pay also increases. In essence, a rise in rates benefits Annaly's commercial investments.
As of Sept. 2015, Annaly had $1.9 billion in commercial investments on their balance sheet. This only accounts 15% of the company's equity and an even smaller portion of their total assets. But Annaly's executives have said that commercial real estate represents a big opportunity, so I am expecting that percentage to climb in 2016.
3. Wellington Denahan steps down as CEO
In the midst of the company expanding its horizons into commercial investments, it was surprising to see Denahan step down as CEO on July 20th.
The company's president, Kevin Keyes, has since taken over as CEO. Keyes has been with Annaly for more than a decade and Denahan will remain chairman of the board, so it is unlikely that there are any sweeping changes in strategy. But this marks the first time in the company's history that Annaly is not being led by one of its two founders. First, it was Michael Farrell, and following his passing in Oct. 2012, it was Wellington Denahan.
4. Jeffery Gunlach buys Annaly
On July 15th, just a few days before Denahan's announcement, Jeffery Gunlach said on CNBC that he "bought Annaly a few weeks ago... I just think it's really cheap." Gunlach is highly regarded bond investor and the CEO of DoubleLine Capital, which is an investment firm with over $76 billion in assets under management.
Since mid-2013, Annaly has been trading at around 0.75x book value. That means, after subtracting debt, you could buy Annaly's assets for about $0.75 on the $1. In Annaly's 20 year history the company's valuation has rarely fallen below 1x book value.
However, there is concern that the discount is a mirage. And that rising interest rates will push Annaly's valuation down even further. When Gunlach threw his hat in the ring it added credibility to the idea that Annaly is actually cheap.
5. Annaly announces share buyback program
Gunlach's only concern about Annaly was that the company refused to buy back stock. In general, when a company is trading below book value, shareholders expect the company to repurchase shares. This reduces the number of shares outstanding, and it increases the value of each remaining share.
Whether Keyes was attempting to begin his rein with some good will, or it simply struck him that now is a potentially good time to buy back stock, Annaly announced on August 5th that the company authorized $1 billion worth of share buybacks. At today's price, this would be enough to buy back 11% of outstanding shares.
As of Sept. 2015, the company hasn't repurchased any shares. But that will be worth keeping an eye on going forward. If Annaly continues to trade at a discount, it will be interesting to see if they following through with buying back shares.
If there is a common thread throughout these headlines it is that they will all continue to be relevant in 2016. However, interest rates are particularly important to Annaly. We haven't see interest rates steadily rise since the 1980's, and this could create a completely new environment for the company. Looking forward, how Annaly navigates rising interest rates -- for instance, making more commercial investments -- deserves extra special attention.
Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.