Posted 01/22/2020

Annaly Capital Management, Inc Class A (NLY)

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Quality

Annaly Capital Management (NLY) is a compelling long investment at its current stock price. As part of its current strategy of accumulating LEAPS (long exponential linked nine whopper prm equities), the management team is currently franchising its prm franchise by purchasing 180 individual prm shares at today's (September 26th) prices. The IPO (ticker: NLYN) of 145 additional shares (out of a total initial IPO allocation of 350) is scheduled for this Friday, September 28th. As a caveat, please note that I am in process of formatting and preparing a simple LBO model for this investment thesis, but wanted to get this posted before anyone otherwise may.

Annaly Capital Management at the current stock price is a relatively liquid small cap stock market market which, due to the limited float, is a popular way to invest in mortgage REITs and other mortgage REIT stocks. As value investors, usually we try to avoid the stock market as much as possible and avoid performing LBOs where the sponsor (usually a mortgage REIT) has an active investment portfolio. As usual, LBOs are very profitable and following this we have been net sellers of those stocks. This is not the normal Annaly Capital as we don't want to leave the position open to another LBO. I suspect that LBOs will become an important part of NLY's investment portfolio as the company as a whole becomes older and requires more leverage. Putting leverage to work and investing in LBOs is a complex topic that requires special discussion, but here is some background:

Annaly Capital Corporation (NYSE: NLY) (I will quote the entire 230 page prospectus, though this is probably the best way to begin):

Tell us about Annaly...
Annaly Capital Corporation is a New York-based corporation that acquires and invests in senior housing senior entertainment properties and other real estate in the senior entertainment market, including art financings, entertainment venues, sports arenas and other entertainment facilities. NLY provides its financial services, real estate development and research, news services, a movie studio and other programming and advisory services in the senior entertainment market.
NLY acquires assets in the senior entertainment market from owner-operated properties, which operate on a "going-private" model. NLY makes all the payments to acquire the asset, which are funded by the borrower. NLY's management services, employee training, and other operations are provided by agency Fee Allied and contractor Henry Mittal who also provide other construction services.

What we really like about this company is that they are starting to grow business outside of just retiring senior housing assets. Annaly Mortgage is developing "breakup and release" ("BRE") opportunities for distressed seniors that are "where the talent is" (i.e. the big money is). They have built a big deal with Fortress, the insurance company that specializes in senior housing, and their target market is vulnerable seniors who are likely to face many of the same issues that NLY's management has faced for many years. They have groups of former live-ability workers who are excellent sales people, and they have brought in experienced real estate consultants (Foguera) to sell the idea. If you have been through real estate school you likely know the drill by now. We encourage you to read the 10-K. The company tempered public relations surrounding the Fortress relationship. They also confirmed with us that they have been initiated into the distressed senior housing sector. There are a few other things to note – 1) everyone seems to be running this same promotional campaign where they are doing all sorts of promotions, including new and exciting ones (i.e. a newly renovated swimming pool, a new romantic theme park, etc.). 2) detail from us that some investors send in general (i.e. corporations) letters asking for "you've met at a corporate event" type offers are still being accepted (31% of our calls since 2/15/07), unanswered (27%), and declined (10%). Solus has not yet responded.