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Do REITs Prioritize Short-Term Gains Over Long-Term Strategic Positioning and Protection?


“We built this into company into a well-capitalized, lower-leverage scaleable and diversified platform with more options than any other to manage through the unforeseen.” So said Annaly Capital Management Inc. CEO Kevin Keyes on the firm’s Q2 2018 earnings call. “With this optionality, we face much less risk in generating our returns for shareholders. We have navigated through various cycles and types of risk. And today, as global QE slows but continues, the risk of excess leverage pervades our markets, economies, corporations and governments.”

He explained that the REIT recently revisited and analyzed the metrics measuring leverage in the system. “Aggregate global debt has now reached its highest level ever with total debt outstanding of $177 trillion equating to approximately 245% of global output, which is 13% points than the prior peak in 2009,” he said. “US corporate debt has ballooned to historical all-time highs to $9.1 trillion, an amount that equates to approximately 45% of GDP today and looks a lot like the chart of mortgage debt to GDP just over a decade ago.”

The current level of U.S. corporate debt has grown 40% from the last time it represented this share of GDP from Q4 2008 to Q2 2009, he explained. “And based on the Treasury Department’s estimate for the year, the U.S. government is now really plowing on to the debt pile with the net issuance projected to be $1.25 trillion for the year even higher than the $1.1 trillion printed amidst the financial crisis from July to December 2008.”

All of that data, he said, paints the picture of a world that “increasingly prioritized short-term gains over long-term strategic positioning and protection. Too many companies including most mortgage rates are solely relying upon or planning to add leverage in an overlevered market to generate or maintain earnings.”

In the mortgage REIT sector alone, he said, 80% of the companies have increased leverage in average of over 16% in the past year. And 90% of this sector has increased leverage again this quarter again by over 10% while ours is now 2% lower quarter-over-quarter, he said.

“When you are trading a portfolio with a short-term disposition and have limited options, by definition, leverage is the only lever to pull. Going from high leverage to higher is an increasingly dangerous and extremely limited business plan in today’s markets to state the obvious.

By contrast, Annaly remains dedicated to its conservative long-term diversification strategies. We are consistently producing competitive returns that are safer, more predictable, more durable, and was significantly less leverage.”