Annaly Re-Values Its Equity Through Another Secondary Offering

Includes: AGNC, ANH, CMO, HTS, NLY
by: Zvi Bar

Yesterday, Annaly Capital Management, Inc. (NYSE:NLY) announced and priced a secondary public offering of 120 million shares of its common stock. This secondary will be priced at $17.70 per share. The shares should adjust lower immediately, as the market price reacts to the secondary price.

Annaly is expected to primarily use the proceeds to purchase agency mortgage-backed securities for its investment portfolio and also for repayment of any short-term indebtedness. Annaly expects gross proceeds of approximately $2.1 billion before expenses.

Annaly also granted the underwriters a 30-day option to purchase up to an additional 18 million shares of common stock to cover demand, which is expected to be strong. The offering was initially announced as 100 million shares with a 15 million-share option, and the increase in both is indicative of that demand.

Annaly is an agency mREIT, and purchases mortgage paper from federal agencies. Other examples of large, pure-agency mREITs include American Capital Agency Corp. (NASDAQ:AGNC), Anworth Mortgage Asset Corp. (NYSE:ANH), Capstead Mortgage Corp. (NYSE:CMO) and Hatteras Financial Corp. (NYSE:HTS). These companies provide above average dividends by leveraging the mortgages that federal agencies guarantee.

REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. Because these REITs must give away so much income, they cannot grow through retaining and re-deploying earnings.

These agency mREITs often choose to place secondary offerings in order to raise capital. Such actions can be either dilutive or accretive to actual share value depending on how productive the REIT is at using the acquired funds. Initially, the value of the REIT’s shares is reduced due to the discount provided to the secondary purchasers and the underwriting expenses. This effect is usually immediate, following such secondary pricing announcements.

The dividends these REITs produce are taxed as ordinary income to investors, and not at the normal dividend rate. Many income investors hold such income investments in tax-sheltered accounts like an IRA. In a tax-sheltered account the higher tax-rate is less of a concern.

Disclaimer: This article should not be construed as personalized investment advice as it does not take into account your specific situation or objectives.

Disclosure: I am long NLY.