Annaly: Brilliant Or Desperate? Time Will Tell

| About: Annaly Capital (NLY)

A big news day for Annaly (NYSE:NLY) today. The company announced it has made a bid to purchase all outstanding shares of CreXus Investment (NYSE:CXS) giving those shareholders an unexpected "gift" today in their share price.

Here is the first Market Current from Seeking Alpha:

6:53 AM Annaly Capital announces a $12.50 bid to acquire all of the shares of CreXus Investment it does not already own. The price represents about a 5% premium to CreXus' Sept. 30 reported book value and a 12.6% premium to Friday's close. Annaly currently owns about 12.4% of the company.

The question for NLY shareholders is whether or not this is a plus for Annaly. Obviously NLY has decided to deploy funds towards other business sectors within its "playground" since they are basically saying that they cannot make sufficient profits with the Fed in the way.

Note this Market Current:

7:02 AM Annaly's bid for the rest of CreXus - a player in the CMBS market - shows the company is not going to sit on its hands as the Fed's QE obliterates returns in the Agency MBS sector. "We may allocate up to 25% of our shareholders equity to real estate assets other than Agency MBS," says Annaly CEO Wellington Denehan. CXS +12.6% premarket.

Denehan has fired another shot across the bow by basically saying that they will use a very significant amount of their available cash/equity, outside of the business that they have been in since 1997, to completely overhaul their business.

The shares of Annaly are up a bit today on this news, probably because anyone who still believes that shareholder value will be maintained is either jumping back in or adding to positions at lower prices now. After all, this is an extremely aggressive move by NLY. They have already allocated $1.5 billion for share buy backs, and their earnings are probably getting squeezed by the tight yield curve and prepayments.

This begs the question; how long can they spend down available funds, buy back shares, and maintain dividends? Any potential investor must ask themselves whether this will be a long term positive for the company, or is it an act of desperation?

Chimera (NYSE:CIM) Could Be Next

We already know that Annaly manages the back end for CIM and owns about $45 million worth of its stock. FIDAC, which is the wholly owned arm of NLY that makes money by managing other companies assets and business models, has been a money making part of the NLY family for quite some time now. It has also been rumored for several years that Annaly would buy CIM.

To this point, Annaly has been satisfied with their position through FIDAC and investments of Chimera, but now it appears that Chimera could be the next target of Annaly's game plan. It makes sense for several reasons:

  • NLY knows Chimera's business inside and out.
  • They already own a significant amount of CIM shares.
  • Owning Chimera would put them smack in the center of the non agency mREIT business.

Here is the latest Market Current:

9:42 AM Chimera Investment (CIM +6.3%) opens higher as Annaly bids for CreXus and says it will seek to allocate up to 25% of its capital outside of the Agency REIT sector. Like CreXus, Chimera resides in Annaly's family tree and - with a focus on non-Agency paper - could be the next target.

If this occurs, and there is plenty of reasons to believe it just might, what sort of financial strain would be placed on the entire company? Annaly will have spent an enormous amount of money to virtually redesign their entire business.

Brilliant Or Desperate?

At this point, we can just speculate what will unfold, however, it is quite obvious that NLY realizes that they are in a business that has had a frontal assault made by the Fed actions to continue buying MBS's for as long as they need to. Maybe the Fed could double those purchases if the next round of QE is needed.

No company can fight the Fed, nor the Government. They both have the keys to the printing presses and that means an endless supply of funds to take this business over.

While I believe that Annaly has no choice but to branch out into other areas, the flip side of that choice is the total cost and what it will mean to shareholder value. Can the company survive and thrive by taking these actions?

Time will tell, but buyer beware.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.