Annaly Capital Management’s sale of its commercial real estate business should allow the REIT to focus on its portfolio of agency mortgage-backed securities, according to a BTIG report.

Ironically, Annaly had entered commercial real estate as a diversification strategy when he bought Crexus investment in 2013.

The $ 2.3 billion portfolio consists of equity, loan assets and CMBS, and is sold primarily at face value to Slate Asset Management. Financial details of the transaction were not disclosed.

The bulk of the portfolio, $ 1.4 billion, is commercial real estate loans on which Annaly was achieving an estimated gross leverage return of 11%, Eric Hagen, analyst at BTIG, said in the report.

The REIT is “likely to redeploy most of the capital generated by the sale into MBS and agency TBAs gaining 9-10%, so we don’t expect the power of future earnings to change significantly. given that it only represents a small part of Annaly’s overall capital structure, ”Hagen says. “We are supporting the sale because we believe it allows the company more flexibility to focus on managing its exposure to premiums and agency duration when spreads are tight.”

The sale is expected to free up $ 800 million in capital for redeployment after Annaly pays $ 600 million in repo funding, Hagen calculated.

Annaly’s current employees, Timothy Gallagher, Head of Commercial Real Estate, and Michael Quinn, Head of Business Investments, are expected to move to Slate after the deal closes.

The commercial real estate group represented only 2% of Annaly’s portfolio as of December 31, 2020, against 93% for the agency activity. Residential credit activities held a 3% share while loans to middle market businesses accounted for the remaining 2%.

As a result, the sale is expected to be unimportant to Annaly’s finances, according to the company’s press release.

“The commercial real estate business has been an important component of Annaly’s differentiated investment model since 2013,” David Finkelstein, CEO and Chief Investment Officer, said in the press release. “This transaction offers compelling execution for our shareholders and will provide additional capacity to further extend our leadership and operational capabilities in all aspects of the residential mortgage finance market.”

Annaly’s most recent acquisition was MTGE in 2018, another REIT with both residential and commercial assets.

The transfer of the commercial real estate activity is expected to be completed by the third quarter, subject to regulatory approvals.

Annaly’s financial advisor is Evercore, while Ropes & Gray is legal advisor. BMO Capital Markets is financial advisor to Slate and Goodwin Procter and McCarthy Tétrault are legal advisers.