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Annaly (NLY) Exits Commercial Real Estate Business for $2.33B

In an effort to reduce exposure to the commercial real estate sector, Annaly Capital Management, Inc. NLY has entered a definitive agreement with Slate Asset Management L.P. to sell its commercial real estate business in a transaction valued at $2.33 billion.

The sale comprises substantially all assets included in the company’s commercial real estate business, like equity interests, loan assets and commercial mortgage-backed securities. Moreover, certain employees involved in Annaly’s commercial real estate business are expected to join Slate upon the completion of the sale.

Conditional to customary closing norms, including applicable regulatory approvals, the commercial real estate business disposition is expected to conclude by third-quarter 2021.

While commercial real estate “has been an important component of Annaly’s differentiated investment model since 2013”, the company aims to maintain a limited exposure to the sector on the back of opportunistic strategies within the securities portfolio.

Also, the sale will provide additional capital, facilitating the company to further increase its investments in the residential mortgage finance market. In fact, as of the fourth-quarter end, $0.8 billion was allocated to Annaly’s commercial real estate group.

Specifically, sale proceeds will be used to pay down financing facilities related to the commercial real estate assets that will be sold. Further, proceeds are expected to be used to buy targeted assets as per its capital allocation policy, which might include investments in Agency, residential and corporate credit assets.

Notably, as of the fourth-quarter end, 78% of the company’s capital was allocated in the Agency business, while 10%, 7% and 5% of the capital were allocated in the middle market lending business, residential credit business and commercial real estate business, respectively.

Encouragingly, the company expects the transaction to not have a material impact on any key financial metric, including its book value, core earnings and dividend.

While such efforts to refocus capital are strategic fits, the prevailing low mortgage rates, strong origination and refinance demand are elevating the generic market prepayment trends. This is likely to affect the performance of mortgage real estate investment trusts with notable residential agency exposure, including Annaly, AGNC Investment AGNC, Two Harbors Investment Corp. TWO and ARMOUR Residential REIT, Inc. ARR.

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