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Mortgage REITs – Annaly Capital to Buy CreXus

Annaly Capital Management, Inc. ( NLY ) announced that it has put forth a proposal to acquire CreXus Investment Corp ( CXS ).

The proposal states that Annaly would purchase with cash the remaining outstanding stock of CreXus that is does not already own. Annaly currently owns about 12.4% (9.5 million) of the 76.6 million outstanding shares of common stock of CreXus.

Annaly would pay $12.50 per share in the deal. That is a +12.6% premium on the $11.10 share price that CXS closed at on Friday.

The potential acquisition has been made as Annaly seeks to diversify its investments.

The deal has only been put forth to the Board of Directors of CreXus and is still subject to approval.

Wellington Denahan, Chairman and Chief Executive Officer of Annaly Capital Management, Inc., made the following statement:

“Since our inception in 1997, Annaly has maintained the capacity to diversify its asset base to include real estate related assets in addition to Agency mortgage-backed securities if we determined that compelling other long-term investment opportunities exist relative to the Agency market. While we remain committed to the Agency market, given the current environment, we believe it is prudent to diversify a portion of our investment portfolio. Therefore, we may allocate up to 25% of our shareholders’ equity to real estate assets other than Agency mortgage-backed securities.

“A powerful step in this direction is the proposed acquisition of CreXus. We believe that wholly owning the commercial real estate platform we currently manage through FIDAC is complementary to our existing business and return profile and should provide stable and diversified risk-adjusted returns to our shareholders. CreXus’ capabilities and growth may be significantly enhanced when coupled with Annaly’s broad capital base.

“Our commercial real estate expertise, as well as our expertise in a number of other asset classes, are valuable strategic tools, and we look forward to updating the market on our portfolio as it evolves.

 

Impact of Share Buyback on Annaly Capital

Annaly Capital Management, Inc. (NLY) announced that its Board of Directors has authorized the repurchase of up to $1.5 billion of its outstanding common shares over a 12 month period.  Annaly currently has 975 million shares outstanding with a market cap of $15.59 billion.  The buyback is 9.62% of the current market cap.

Based on FY 2013 earnings projections, the buyback will have an EPS accretion of 10.64%.  By adding the accretion with the current dividend yield of 12.5% the total return will be 23% without changing the PE ratio.  It will be hard to find a better high yield investment with this type of potential.

Zacks Investment has Annaly rated as neutral or hold with a 12-month price target of 18.30.  The target price is 15.6% higher than the current market price.

The current low interest rate environment has reduced potential investment returns, only partially offset by low short-term funding costs.  Prepayment rates on residential mortgages have also recently increased as agencies complete programs to repurchase delinquent mortgages and stabilize housing markets.  As a result, we expect net interest margins to narrow moderately over the next 12 months. Longer term, we think Annaly’s conservative financial posture places it in a strong position to expand its portfolio of agency mortgage backed securities once investment markets become more attractive. We think Annaly can augment investment income with higher fees from an expanding portfolio of assets under management for third parties.

Q3 earnings are expected to be announced after market hours on October 29, 2012.  Investors should hold up new purchases until the Q3 results.

Here is a link to the best mortgage REITs for the next quarter.

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