Annaly Capital Management's sale of its commercial real estate business should allow the real estate investment trust to focus on its agency mortgage-backed securities portfolio, a BTIG report said.
Ironically, Annaly had entered commercial real estate as a
The $2.3 billion portfolio consists of equity interests, loan assets and CMBS, and is being sold essentially at its par value to Slate Asset Management. Financial details of the transaction were not disclosed.
Most of the portfolio, $1.4 billion, consists of commercial real estate loans on which Annaly was earning an estimated 11% gross levered return, said Eric Hagen, an analyst with BTIG, in the report.
The REIT is "likely to redeploy the bulk of capital generated from the sale into Agency MBS and TBAs earning 9-10%, and so we don't expect forward earnings power to change meaningfully given it's a small portion of Annaly's overall capital structure," Hagen said. "We support the sale because we think it allows more flexibility for the company to focus on managing its agency premium and duration exposure while spreads are tight."
The sale should release $800 million in capital to be redeployed after Annaly pays down $600 million in repo funding, Hagen calculated.
Current Annaly employees Timothy Gallagher, head of commercial real estate, and Michael Quinn, head of commercial investments, are expected to move over to Slate after the deal is completed.
The commercial real estate group made up just 2% of Annaly's portfolio as of Dec. 31, 2020, compared with 93% for the agency business. The residential credit business had a 3% share while middle market business lending made up the remaining 2%.
As a result, the sale is expected to be immaterial to Annaly's financials, the company's press release said.
"The commercial real estate business 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 delivers compelling execution for our shareholders and will provide additional capacity to further expand our leadership and operational capabilities across all aspects of the residential mortgage finance market."
Annaly’s most recent acquisition was
The transfer of the commercial real estate business is expected to be completed by the third quarter, subject to regulatory approvals.
Annaly's financial adviser is Evercore, while Ropes & Gray is the legal adviser. BMO Capital Markets is Slate's financial adviser and Goodwin Procter and McCarthy Tétrault are the legal advisers.
