Annaly Capital Management Inc. has soured on investments tied to commercial real estate only a year after the real-estate investment trust jumped into the market.
Why? Partly because all the construction Chief Executive Officer Wellington J. Denahan sees casts doubt on predictions that inflated prices will be supported by limited supply.
“I always struggle with listening to people tell me, ‘Well, there’s not all this supply that there was the last time the commercial market had a problem,’” she said today on an earnings conference call. “Well, there seems to be a hell of a lot of cranes in the air all over the place, and when that supply comes on and how it starts to impact pricing remains to be seen.”
Annaly, the largest REIT focused on debt with $87 billion of assets as of June 30, last year bought CreXus Investment Corp., a commercial mortgage REIT it had managed. In May, the New York-based company announced an initiative to purchase buildings including industrial, office, retail and restaurant properties.
The Federal Reserve’s unprecedented accommodation may result in financial instability or cause a correction in asset prices when it starts reducing the size of its balance sheet, according to Denahan. Commercial property values have surpassed their 2007 peaks in the largest U.S. cities after plunging as much as 42 percent in the aftermath of the credit crisis, according to the Moody’s/RCA Commercial Property Price Index.
Annaly is sticking with its traditional focus on buying government-backed home-loan securities, mainly with borrowed money. The strategy offers returns of about 10 percent to 13 percent, compared with 7 percent to 8 percent on subordinate commercial debt of “the kind of quality you might want,” she said.
Government-backed mortgage debt is also more liquid, which “will become paramount at some point,” Denahan said. The securities may also benefit from being used as a stimulus tool by Fed officials trying to combat economic weakness or market volatility, she said.
Annaly held $1.6 billion of commercial real-estate debt and preferred equity on June 30 and $74.4 million of investments in commercial properties, both little changed from March 31, according to a statement today.