Out Front: One-on-One with Annaly Capital Management CEO Wellington Denahan

When chairman and CEO Michael Farrell died in late 2012, Annaly Capital Management Inc. (NYSE: NLY) lost its public face of 15 years. However, the Mortgage REIT didn’t lose its entire foundation.

Wellington Denahan might not always have been front and center with outside audiences, but Annaly’s two co-founders worked closely overseeing the firm’s operations and fine-tuning its strategy. She quietly slid into the CEO chair, although not without a little apprehension. Farrell was not only synonymous with Annaly, he was seen as a pioneer in the field of mortgage finance and an icon of the Mortgage REIT sector.

“Mike was larger than life, and it’s difficult to step into those shoes,” Denahan says.

Denahan’s first 18 months on the job haven’t been easy. Amid concerns over the end of quantitative easing and talk of the Federal Reserve raising interest rates, total return from the FTSE NAREIT Mortgage REITs Index fell nearly 2 percent in 2013. Annaly’s total return dropped 18.4 percent for the year.

Yet, Annaly’s straight-talking CEO remains confident in the direction of the company. The first four months of 2014 showed why. The Mortgage REIT thundered back with a total return of nearly 20 percent through the end of April.

REIT magazine talked with Denahan about the challenges of following a legend, the perception of the Mortgage REIT business and her outlook on the future role of the sector in the broader economy.

REIT: The general perception of the mortgage and mortgage-related securities business seems to be that it is complex and highly specialized. Why is that?

 

DENAHAN: From my perspective, I think a lot of the complexity comes through misunderstanding or a general lack of knowledge about a market. It doesn’t necessarily mean that it’s complex—it’s just not well understood.

A lot of the uncertainty surrounding these markets has been lifted through the education coming out of the crisis.

 

The regulators, policymakers and participants understand these markets so much better than before the crisis.

 

REIT: So you think that stakeholders—investors and policymakers, most notably—have an adequate understanding of what companies such as Annaly do and what their business strategy is?

 

DENAHAN: Investors, analysts and regulators are better informed than they’ve ever been. Before the crisis hit, I would say there was a very limited understanding of the mortgage market and its interaction with the economy, quite frankly, as well as the housing market and its interaction with the economy.

We have engaged in the process of continuing to enhance our disclosures to address some of the concerns voiced by regulators, policymakers and investors. The market is so much more transparent today. There’s so much more understanding of the market than there was five years ago.

 

REIT: On a related note, do you ever worry that the public might lump Mortgage REITs in with players in the financial industry that were more involved with the “toxic” assets that precipitated the financial crisis?

 

DENAHAN:Yes, there’s always that risk of people throwing the baby out with the bathwater. You always have to engage in a process of constantly re-educating.

But post-financial crisis, the public is more versed than they have ever been. Th ey have a much better understanding of the varying degrees of risk within the mortgage market. Really, it’s a matter of distinguishing between the sizes of those markets and the types of borrowers in those markets. I do think there has been a fair amount of press to help our understanding of the diff erences and the risks that people are taking.

 

REIT: What are the big stories that you see playing into the market dynamics in the near term for Annaly and Mortgage REITs as a whole?

 

DENAHAN: For our company and the economy in general, it’s still the Fed’s tapering from its unconventional [interest-rate] policy. It’s an unprecedented situation, so there’s no history to look back on and say, “Th is is how things are going to be when you withdraw $4 trillion in stimulus from the market.” Th at’s going to be a big infl uence on asset values across a huge spectrum of investments.

I also think that the forward guidance and how [the Fed] separates its unconventional policy tool of purchasing assets and growing its balance sheet versus the guidance on forward short-term interest rates will be important. From how I look at it, it’s healthy that they are attempting to move the printing presses to the private sector. That comes through in a steeper yield curve and better interest margins for the banking system and better interest margins for companies like ours.