Annaly Capital Management Inc. is no mood to give shareholders an easy boost by buying back stock, according to Chief Executive Officer Wellington Denahan.
The firm -- the largest real-estate investment trust that buys mortgage debt -- is facing questions about repurchases with its shares trading below a measure of the net value of its assets, Denahan said Thursday on an earnings call. As a REIT, it pays out its profits each quarter as dividends, so buybacks would come out of the capital it uses to invest, she said.
“I equate it to Apple closing down the very factories that produced the cash flow that they used to buy back their stock,” she said. Historically, “periods of relative cheapness in our stock have been the same periods that presented long-term-minded investors with attractive value propositions.”
Mortgage REIT shares are trading at discounts as investors fret about challenges including the Federal Reserve nearing a decision to raise interest rates, which would boost the companies’ borrowing costs. Annaly Capital trades at about 77 percent of its book value, Keefe, Bruyette & Woods analyst Michael Widner wrote in a report earlier Thursday, saying his view of the stock was “neutral.”
Selling all of its assets and buying back all of its equity at that valuation would in theory produce an immediate gain of more than 20 percent for holders.
UBS Group AG analyst Matthew Howlett in a April 29 report told investors to sell Annaly and American Capital Agency Corp., its biggest competitor, saying the firms should be repurchasing stock. Instead, the REITs’ contracts with the outside firms that oversee them, which offer larger fees when the companies are bigger, may prevent such a step because they “potentially misalign manager and shareholders’ interests.”
Annaly’s long-term performance has easily topped the market, Denahan said on the call. From its first month of trading in October 1997 through April, it offered returns including dividends of 552 percent, compared with 214 percent for the Standard & Poor’s 500 stock index, according to data compiled by Bloomberg.
Annaly, which is managed by closely held Annaly Management Company LLC, has fallen 4.1 percent this year, while American Capital Agency dropped 2.5 percent and the S&P 500 gained 2.3 percent.
American Capital Agency President Gary Kain said on an earnings call last week that, while it repurchased a significant amount stock about a year and a half ago when its shares were trading at a discount, today’s “environment is somewhat different than the environment” then.
Kain said in a 2014 interview that his REIT took steps -- such as selling assets to reposition its investments -- that lowered the fees earned by its manager, American Capital Ltd., showing it would act in shareholders’ best interests.