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Annaly Capital Management’s sale of its commercial real estate business should allow the real estate investment trust to focus on its portfolio of mortgage-backed securities, according to a BTIG report.
Ironically, Annaly had entered commercial real estate as diversification strategy when he bought Crexus investment in 2013.
The $ 2.3 billion portfolio is comprised of equity, loan assets and CMBS, and is sold primarily at face value to Slate Asset Management. Financial details of the transaction were not disclosed.
The bulk of the portfolio, $ 1.4 billion, consists of commercial real estate loans on which Annaly was earning an estimated gross leverage return of 11%, Eric Hagen, analyst at BTIG, said in the report.
The REIT is “likely to redeploy most of the capital generated by the sale into agency MBS and TBAs gaining 9-10%, and therefore we do not expect the profit power over time to change significantly. given that this is a small part of Annaly’s overall capital structure, “said Hagen.” We support the sale as we believe it allows more flexibility for the company to focus on the management of its agency premium and its exposure to duration while spreads are tight. “
The sale is expected to free up $ 800 million in capital for redeployment after Annaly repays $ 600 million in pension funds, Hagen calculated.
Annaly’s current employees, Timothy Gallagher, Head of Commercial Real Estate, and Michael Quinn, Head of Business Investments, are expected to join Slate after the deal closes.
The commercial real estate group represented only 2% of Annaly’s portfolio as of December 31, 2020, compared to 93% for the agency activity. Residential credit activity held a 3% share, while loans to middle market businesses accounted for the remaining 2%.
As a result, the sale is expected to be unimportant to Annaly’s finances, according to the company’s press release.
“The commercial real estate industry has been an important component of Annaly’s differentiated investment model since 2013,†David Finkelstein, CEO and Chief Investment Officer, said in the press release. “This transaction offers compelling execution for our shareholders and will provide additional capacity to further extend our leadership and operational capabilities in all aspects of the residential mortgage finance market.”
The most recent acquisition of Annaly was MTGE in 2018, another REIT with residential and commercial assets.
The transfer of the commercial real estate activity is expected to be completed by the third quarter, subject to regulatory approvals.
Annaly’s financial advisor is Evercore, while Ropes & Gray is legal advisor. BMO Capital Markets is financial advisor to Slate and Goodwin Procter and McCarthy Tétrault are legal advisers.
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