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Annaly’s Diversification Increases Stability of Its Returns

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On Annaly Capital Management Inc.’s recent Q3 call, Kevin Keyes, chairman, president and CEO talked about the firm’s future plan, Annaly 2020, and how and why the company has grown and evolved over the past few years. And rather than regurgitate market themes and events and how the company’s strategies are uniquely positioned to capitalize on opportunities in this volatile environment, instead, he focused on empirically framing the output of over strategies.

In terms of measures of Annaly’s growth, he said that “since the initiation of our five year plan in 2016, Annaly has grown its market capital over 50% or $4.4 billion while distributing over $3.8 billion in dividends to our shareholders. Over this time period, our increase in market cap is 4x the average agency mortgage REIT’s growth and our dividend payments are 25% more than the entire agency mortgage REIT sector combined.”

He also notes that “We have executed on our diversification strategy, investing in nearly $14 billion of assets in our three credit businesses over the past three years, increasing the allocation of our total capital from 12% to 30% into lower-levered floating rate credit assets in order to reduce our sensitivity to interest rates. We have increased the number of our available investment options to 37, which is 3x more than Annaly had prior to diversification and over 4x more than the current mortgage REIT average.”

The growth of the portfolio, he said, has been supported by the expansion of the company’s financing sources and capacity as well. “Since 2015, we have procured nearly $6.5 billion of dedicated financing for our businesses through five credit facilities, three securitizations and a five year FHLB line, while also expanding our direct repo relationships to 42% of our portfolio.”

He also pointed to the various measures of Annaly’s stability and capital efficiency. “Our diversification strategy positions us to continue to deliver high-quality, stable earnings, while producing a durable total return in various market environments. Since 2014, there have been 57 dividend cuts by 18 mortgage REITs, while we have paid the same stable dividend of $0.30 per share for 20 consecutive quarters. However, in measuring stability and durability of return, there’s a lot more that can be analyzed than just dividend distributions.”

He also explained that the extremely low beta of the company’s stock needs to be stressed in markets like this. “Our diversification, liquidity and risk management practices have increased not only the stability of our returns but also decreased our correlation with the broader market. We have increased the liquidity of both our balance sheet and common stock.”