The 3 Biggest Risks to Annaly Capital Management

Dave Koppenheffer: Low RatesRising interest rates are bad for Annaly. It lowers the market value of currently held securities, decrease book value, increase borrowing costs, and cause myriad other problems.

So it might sound odd, but one of the greatest risks to Annaly is interest rates staying lower for longer than expected, or beyond mid-2015.

Dave Koppenheffer: Low RatesAnnaly is about as prepared for rising interest rates as they can be, and it's costing them a ton in potential earnings to stay that way.

Annaly has deleveraged, meaning the company is borrowing less. While this reduces the impact rising interest rates has on their equity, it also means holding fewer securities and making less money.

Dave Koppenheffer: Low RatesThe longer Janet Yellen and the Federal Reserve wait to increase rates, the longer Annaly needs to stay ultra conservative, and the longer it will take before Annaly sees another advantageous investing environment.

John Maxfield: Its ExecutivesInterest rate risk and prepayment risks are real concerns that deserve the attention of investors, I don’t believe either of them is the biggest risk. To me, the company’s management team is a risk.

The team has a history of…

John Maxfield: Its Executives

…enriching themselves at the expense of shareholders…

John Maxfield: Its Executives

…hiring relatives and them paying them seven-figure salaries….

John Maxfield: Its Executives

…expressly contradicting shareholder votes on multiple occasions….

John Maxfield: Its Executives

…and eliminating transparency by outsourcing management to a private company that’s owned and operated by Annaly’s now-former executives…

Jordan Wathen: DivergingThe biggest risk I see with Annaly Capital today is its willingness to diverge from its core business.

In the first quarter, the company signaled its desire to break into commercial real estate.

For a long time Annaly has played a part in funding commercial real estate via its commercial loan exposure, though agency securities (residential mortgages) made up the bulk of its business.

Jordan Wathen: DivergingThere is a very big difference between investing in commercial real estate loans and managing a hard asset like a portfolio of commercial property.

There are new risks to understand and price, rent checks to collect and cash, and leases to sign. It requires just as much operational expertise as it does asset management experience.

Jordan Wathen: DivergingWhere is Annaly’s true competitive advantage in managing commercial real estate assets. Although Annaly is big, much of its balance sheet scale comes from repurchase agreements and short-term funding sources. Obviously no bank will entertain the idea of financing long-term investments with these fleeting funding sources. Scale won't be a benefit in commercial real estate.

Jordan Wathen: DivergingShareholders need to pay particularly close attention to how this strategy develops over time, as commercial real estate investments -- debt or equity -- don't have the full backing of the U.S. government like agency securities do.

It's a riskier strategy made only riskier by the fact the company has much less experience in it than its traditional "bread and butter" loan book.

Dividend investors, are you taking advantage

of this little-known tax loophole?