Annaly's Book Value Likely To Continue Increasing In The Third Quarter

• Annaly just reported Q2 results, and it increased its book value by about 7.5% due to gains in agency-backed RMBSs.
• Annaly reduced its hedging and slightly increased leverage in anticipation of strong agency-backed RMBS performance. The strength continues into Q3, which means the strategy should continue to benefit Annaly.
• Annaly's valuation has underperformed government debt ETFs so far in Q3, despite being leveraged to the rates moving those ETFs up, indicating Annaly's equity needs to catch up.

Last week, Annaly Capital Management Inc. (NYSE:NLY) filed its report for the second quarter of 2014. Annaly reported core earnings of $300.4 million, or $0.30 per share, while book value increased to $13.23 per share from $12.30. This $0.93 book value increase is about 7.5 percent, or over three times the dividend Annaly paid out in the quarter. The mREIT is now priced at around a 13 percent discount to this stated book value at the end of the second quarter, with it appearing likely that book value increased further so far in the third quarter.

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Annaly Completes Acquisition of CreXus, Making Annaly a Hybrid mREIT

Annaly Capital Management, Inc. (NYSE: NLY) (“Annaly”) has completed its acquisition of CreXus Investment Corp. (NYSE: CXS) (“CreXus”). Annaly’s commercial real estate business will be operated under the name Annaly Commercial Real Estate Group. This acquisition now makes Annaly a hybrid REIT. Annaly was formerly the poster-child for the agency only mREIT model.

Annaly acquired CreXus pursuant to an Agreement and Plan of Merger dated January 30, 2013. As a result of the merger and related transactions, the New York Stock Exchange terminated trading in CreXus shares following the close of trading on May 23, 2013. In accordance with that agreement, CreXus was merged with a newly formed CreXus subsidiary in a transaction in which Annaly became the sole stockholder of CreXus and the persons who owned CreXus common stock immediately before the merger became entitled to receive cash equal to $13.05206 for each share of CreXus common stock that they owned immediately prior to the merger.

American Capital Agency's Unamortized Net Premium Prepayment Risk Finally Kicks In

Last week, American Capital Agency Corp. (AGNC), the second-largest mortgage real estate investment trust, or mREIT, declined after reporting first quarter earnings that included an 8.6 percent drop in its book value at the end of Q1 of 2012 compared to the end Q4 of 2012. The mREIT's book value declined by $2.71 to $28.93 per share. This is the second consecutive quarter where AGNC's book value declined after increasing substantially in mid-2012. See a recent book value performance chart for AGNC.

AGNC's President and Chief Investment Officer, Gary Kain, noted during the company's conference call that the securities that it acquired in order to protect itself from refinancing and prepayment risk performed "considerably worse than we anticipated." In the second quarter of 2012, Kain noted that AGNC had "repositioned the portfolio during the quarter into lower coupon MBS and lower loan balance and HARP securities, which are less susceptible to prepayment risk, reducing the impact of the decline in long-term interest rates on the Company's prepayment forecast." 

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Annaly, Chimera And CreXus May Soon Combine Into One Diversified Mortgage REIT

Annaly Capital Management Inc. recently agreed to purchase the shares of CreXus Investment Corp. (CXS) it doesn't already own for about $872 million, valuing the company at $996 million. Annaly owns 12.4 percent of CreXus and the commercial mREIT is managed by FIDAC, a wholly-owned subsidiary of Annaly. Chimera is similarly managed by FIDAC and Annaly has a similar ownership interest in it. Crexus was to continue pursuing other deals until March 16, so it should update the public on the status of Annaly's bid this week.

Also, last week Chimera Investment Corp. (CIM) filed its 2011 10-K annual report. The mortgage REIT had not filed any reports in several quarters, and in February, the New York Stock Exchange (NYSE) gave the company a third and final extension for continued listing and trading of the company's stock on its exchange. Chimera is yet to file any results for 2012, but is expected to do so within the next two months. After those reports are filed, and provided Annaly successfully acquires CreXus, a bid for Chimera appears of ever growing probability.

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American Capital Agency's Issues Another Secondary: 1st of 2013 (2 in 2012 & 4 in 2011)

Last week, American Capital Agency Corp. (AGNC) announced and priced a secondary stock offering of 50 million shares. The offering should raise about $1.58 billion, before expenses. Additionally, the Company granted the underwriters an option for 30 days to acquire up to an additional 7.5 millions shares, which they will likely do. The offering is expected to close on March 5, 2013.

Last year, AGNC had two secondary stock offerings, and the company had four in 2011. These secondaries have helped AGNC balloon in size. It is now the second largest publicly traded mREIT, and after this secondary is completed it will have a market valuation of around $12.3 billion, making it around ten percent smaller than Annaly Capital Management (NLY), the largest mREIT. If AGNC continues to issue secondaries and/or outperforms Annaly from here, it may become the largest mREIT some time this year.

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