Annaly Capital's Diversification Out Of Agency MBS

 On the 12th of November 2012, Annaly Capital (NLY), one of the large cap US Agency mortgage REITs, announced the proposed acquisition of CreXus Investment (CXS) for a price of $12.5 per share. CreXus is a commercial mortgage REIT that does not only invest in agency residential mortgage backed securities but also in commercial mortgage loans and other commercial real estate debt. It also invests in commercial real estate property, commercial mortgage-backed securities and other commercial real estate-related assets.

The acquisition signifies Annaly Capital's attempts to diversify its asset base in a challenging environment where the Fed is committed to buying Agency mortgage backed securities. This has resulted in a decline in the yields for these securities. In several of our previous reports, we favored mortgage REITs with significant holdings of non-agency mortgage backed securities as opposed to agency mortgage backed securities. Annaly Capital is committed to allocating up to one fourth of its equity to assets other than agency residential mortgage backed securities. The company is also committed to restructuring its capital by buying back convertible notes worth $441 million, extending the duration of its short-term borrowings (repurchase agreements) by another 93 days to 220 days, and lowering the company's cost of capital by issuing preferred shares and convertible notes worth $1.5 billion.
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