Slate Asset Management will spend $2.93 billion to acquire the real estate assets of Annaly Capital Management (ACREG) in the U.S. in what its top executive calls an “opportune time in the market cycle.”

The acquisition includes a portfolio of real estate properties, including loans and debt securities across a wide spectrum of asset classes including retail, office, multifamily, health care, hotels and industrial properties.

Members of the ACREG team who work in the real estate segment will be joining Slate upon closing of the transaction, which is expected in mid-2021.

The transaction includes a $490 million portfolio of grocery-anchored assets in major U.S. markets which will be purchased by Slate Grocery REIT (SGR-UN-T), Slate’s pure-play U.S. grocery-anchored investment arm.

“We believe this transaction is another example of Slate’s ability to find value for our partners and investors at an opportune time in the market cycle,” said Blair Welch, co-founding partner of Slate, in the announcement Thursday evening. “The acquisition of this platform further expands Slate’s core capabilities across the real estate capital stack.

“Combined with our investment platform, sophistication, institutional relationships and operational expertise, we are uniquely positioned to provide creative debt capital solutions in the current market environment.”

Annaly executives to join Slate

Among the Annaly executives who will join Slate are head of commercial real estate Timothy Gallagher, and Michael Quinn, its head of commercial investments.

“The commercial real estate business has been an important component of Annaly’s differentiated investment model since 2013,” said David Finkelstein, Annaly’s chief executive officer and chief investment officer, in a separate announcement.

“This transaction delivers compelling execution for our shareholders and will provide additional capacity to further expand our leadership and operational capabilities across all aspects of the residential mortgage finance market, which has been the cornerstone of Annaly’s strategy since our founding.”

Annaly’s real estate portfolio is comprised of $800 million in equity and about $1.53 billion in financing.

The retail sector comprises the largest percentage of the assets at about 31 per cent of its holdings, according to the company’s website. Office assets comprise 29 per cent, multifamily 14 per cent, health care six per cent, with hotels, industrial, and other assets such as self-storage comprising the other 20 per cent.

Its office assets range from low-rise corporate campuses to LEED-certified high-rises, including the 67.5-acre office and R&D Rancho Vista Corporate Centre in Rancho Bernardo, Calif.

Multifamily assets are focused in specific sectors including “age-restricted” apartments, student housing, affordable housing and manufactured housing. These assets include the 166-unit, newly built The Concord in Wilmington, Del., which also includes a retail component on the ground floor.

Slate Grocery to acquire retail assets

The grocery portfolio includes 25 properties comprising 3.1 million square feet in seven U.S. states, including a dozen in New York. It also includes properties in Texas, Georgia, Ohio, Florida, Indiana and California. The majority of assets are anchored by three major chains, Tops, Market 32 (Price Chopper) and Tom Thumb’s.

“This is a compelling and unique opportunity for the REIT to acquire US$390 million of quality grocery-anchored assets on an off-market basis that importantly generates immediate accretion for unitholders,” said David Dunn, CEO of Slate Grocery REIT, in a release.

“This transaction increases our exposure to America’s largest metropolitan markets at an attractive cost basis and deepens our relationships with leading omnichannel grocers whose neighbourhood stores will continue to serve as critical food distribution points for both in-store and online purchases.”

The acquisition represents a 7.8 per cent capitalization rate or $160 per square foot.

It will be financed through approximately $377 million of existing mortgage debt (4.2 per cent weighted average interest rate), the proceeds of a $133 million share offering by Slate Grocery and existing liquidity. Following the acquisition, the REIT’s leverage will rise to 60.8 per cent (its debt to GBV was at 54.9 per cent in the REIT’s Q4 2020 financial report).

The acquisition will significantly increase the size of Slate Grocery’s portfolio, which will comprise 13.0 million square feet valued at $2.13 billion.

It will also expand its exposure to the largest U.S. metropolitan statistical areas (MSAs), with 83 per cent of the acquisition portfolio’s income derived from the top-50 MSAs. Essential tenants comprise 74 per cent of the portfolio’s income including 39 per cent from grocers.

Slate Grocery will be purchasing majority interests between 85 per cent and 95 per cent ownership in each of the properties, with the remaining interests retained by three institutional operators, the trust says.

For its part, Annaly intends to use proceeds to repay its real estate loans and to purchase “targeted assets in accordance with its capital allocation policy.” Annaly does intend to maintain a limited exposure to the commercial real estate sector through its securities portfolio.

About Annaly

Annaly is a New York-based diversified capital manager which invests in and finances residential and commercial assets. It currently has about $130 billion in investments and assets under management.

Annaly’s principal business objective is to generate net income for distribution to its stockholders and to optimize its returns through prudent management of its diversified investment strategies.

Annaly is internally managed and is taxed as a REIT for federal income tax purposes.