Annaly Capital Management, Inc. (NYSE:NLY) (the “Company” or
“Annaly”) today announced its financial results for the quarter
ended June 30, 2017.
Quarterly Financial
Highlights
- GAAP net income was $14.5 million,
($0.01) loss per average common share
- Core earnings (excluding PAA) were
$332.6 million, $0.30 per average common share
- GAAP return on average equity was 0.46%
and core return on average equity (excluding PAA) was 10.54%
- Book value per common share of
$11.19
- Economic leverage increased modestly to
6.4x as compared to 6.1x at March 31, 2017 and unchanged from
December 31, 2016
- Declared common stock dividend of $0.30
per share for the 15th consecutive fiscal quarter
- Year-to-date annualized economic return
of 11.3%
Recent Business
Highlights
- Successfully executed a $1.5 billion
combination common and preferred stock capital raise
- Announced redemption of 7.875% Series A
Cumulative Redeemable Preferred Stock, lowering the economic cost
of preferred capital by 30 bps
- Increased stock ownership commitments
from CEO, CIO, CLO, CCO and CFO to be achieved solely with open
market purchases
- Establishment of relationships with
dedicated third party strategic partners across our four
businesses, including Bayview Asset Management through the sale of
Pingora Holdings; as well as with Pearlmark Real Estate Partners,
through the acquisition of LP and GP interests in a Pearlmark
fund
“The second quarter of 2017 was another strong and stable
reporting period for Annaly,” commented Kevin Keyes, Chief
Executive Officer and President. “Amidst a relatively favorable
investment backdrop we delivered core earnings (excluding PAA)
equal to the $0.30 dividend we have now distributed to our
shareholders for the 15th consecutive quarter. We have also
recently made several complementary strategic and organizational
announcements including: selling Pingora Holdings to Bayview Asset
Management, initiating a new joint venture in the MSR asset class
with a premier Sovereign Wealth Fund, beginning a Commercial Real
Estate partnership, hiring several senior hires to our investment
teams and voluntarily increasing the stock purchase commitments by
all of our Named Executive Officers.
“Also, subsequent to the end of the quarter, we
opportunistically raised over $1.5 billion in two public offerings,
executing the fourth largest overnight block trade in the entire US
market this year and completing the largest non-rated preferred
offering ever,” Mr. Keyes continued. “These offerings, as well as
the announced redemption of our Series A Preferred, are accretive
to shareholder value, enhance our liquidity position, efficiently
reduce our cost of capital and further position us to capitalize on
the numerous growth opportunities for our diversified platform. The
strong demand for these sizeable and attractively priced offerings
is recognition of our market leadership and the direct result of
our comprehensive investor outreach effort, which has successfully
broadened and diversified our shareholder base.”
Financial
Performance
The following table summarizes certain key performance
indicators as of and for the quarters ended June 30, 2017, March
31, 2017, and June 30, 2016:
June 30, 2017
March 31, 2017 June 30,
2016 Book value per common share $11.19 $11.23 $11.50 Economic
leverage at period-end (1) 6.4:1 6.1:1 6.1:1 GAAP net income (loss)
per average common share (2) ($0.01) $0.41 ($0.32) Core earnings
(excluding PAA) per average common share *(2)(3) $0.30 $0.31 $0.29
Core earnings per average common share *(2)(3) $0.23 $0.29 $0.19
PAA cost (benefit) per average common share $0.07 $0.02 $0.10
Annualized return (loss) on average equity 0.46% 13.97% (9.60%)
Annualized core return on average equity (excluding PAA) * 10.54%
10.66% 9.73% Average yield on interest earning assets (4) 2.58%
2.74% 2.48% Average yield on interest earning assets (excluding
PAA) *(4) 2.93% 2.83% 2.95% Net interest margin (5) 1.23% 1.47%
1.15% Net interest margin (excluding PAA) *(5) 1.53% 1.55% 1.54%
Net interest spread 0.84% 1.15% 0.80% Net interest spread
(excluding PAA) * 1.19% 1.24% 1.27% *
Represents a non-GAAP financial measure. Please refer to the
‘Non-GAAP Financial Measures’ section for additional information.
(1) Computed as the sum of recourse debt, to-be-announced (“TBA”)
derivative notional outstanding and net forward purchases of
investments divided by total equity. Recourse debt consists of
repurchase agreements and other secured financing. Securitized
debt, participation sold and mortgages payable are non-recourse to
the Company and are excluded from this measure. (2) Net of
dividends on preferred stock. (3) Core earnings is defined as net
income (loss) excluding gains or losses on disposals of investments
and termination of interest rate swaps, unrealized gains or losses
on interest rate swaps and investments measured at fair value
through earnings, net gains and losses on trading assets,
impairment losses, net income (loss) attributable to noncontrolling
interest, corporate acquisition related expenses and certain other
non-recurring gains or losses, and inclusive of TBA dollar roll
income (a component of Net gains (losses) on trading assets) and
realized amortization of MSRs (a component of net unrealized gains
(losses) on investments measured at fair value through earnings).
Core earnings (excluding PAA) excludes the premium amortization
adjustment (“PAA”) representing the cumulative impact on prior
periods, but not the current period, of quarter-over-quarter
changes in estimated long-term prepayment speeds related to the
Company’s Agency mortgage-backed securities. (4) Annualized yield
on interest earning assets represents annualized interest income
divided by average interest earning assets. Average interest
earning assets reflects the average amortized cost of our
investments during the period. Annualized yield on interest earning
assets (excluding PAA) is calculated using annualized interest
income (excluding PAA). (5) Represents the sum of the Company’s
annualized economic net interest income (inclusive of interest
expense on interest rate swaps used to hedge cost of funds) plus
TBA dollar roll income (less interest expense on swaps used to
hedge TBA dollar roll transactions) divided by the sum of its
average interest earning assets plus average outstanding TBA
derivative balances.
Other
Information
This news release and our public documents to which we refer
contain or incorporate by reference certain forward-looking
statements which are based on various assumptions (some of which
are beyond our control) and may be identified by reference to a
future period or periods or by the use of forward-looking
terminology, such as “may,” “will,” “believe,” “expect,”
“anticipate,” “continue,” “think,” or similar terms or variations
on those terms or the negative of those terms. Actual results could
differ materially from those set forth in forward-looking
statements due to a variety of factors, including, but not limited
to, changes in interest rates; changes in the yield curve; changes
in prepayment rates; the availability of mortgage-backed securities
and other securities for purchase; the availability of financing
and, if available, the terms of any financings; changes in the
market value of our assets; changes in business conditions and the
general economy; our ability to grow our commercial business; our
ability to grow our residential mortgage credit business; credit
risks related to our investments in credit risk transfer
securities, residential mortgage-backed securities and related
residential mortgage credit assets, commercial real estate assets
and corporate debt; risks related to investments in mortgage
servicing rights and ownership of a servicer; our ability to
consummate any contemplated investment opportunities; changes in
government regulations affecting our business; our ability to
maintain our qualification as a REIT for U.S. federal income tax
purposes; and our ability to maintain our exemption from
registration under the Investment Company Act of 1940, as amended.
For a discussion of the risks and uncertainties which could cause
actual results to differ from those contained in the
forward-looking statements, see “Risk Factors” in our most recent
Annual Report on Form 10-K and any subsequent Quarterly Reports on
Form 10-Q. We do not undertake, and specifically disclaim any
obligation, to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances
after the date of such statements, except as required by law.
Annaly is a leading diversified capital manager that invests in
and finances residential and commercial assets. Annaly’s principal
business objective is to generate net income for distribution to
its stockholders through capital preservation, prudent selection of
investments, and continuous management of its portfolio. Annaly has
elected to be taxed as a real estate investment trust, or REIT, for
federal income tax purposes. Annaly is externally managed by Annaly
Management Company LLC. Additional information on the company can
be found at www.annaly.com.
The Company prepares a supplemental investor presentation and a
financial summary for the benefit of its shareholders. Both the
Second Quarter 2017 Investor Presentation and the Second Quarter
2017 Financial Summary can be found at the Company’s website
(www.annaly.com) in the Investors section under Investor
Presentations.
Conference
Call
The Company will hold the second quarter 2017 earnings
conference call on August 3, 2017 at 10:00 a.m. Eastern Time. The
number to call is 888-317-6003 for domestic calls and 412-317-6061
for international calls. The conference passcode is 8632226. There
will also be an audio webcast of the call on www.annaly.com. The
replay of the call will be available for one week following the
conference call. The replay number is 877-344-7529 for domestic
calls and 412-317-0088 for international calls and the conference
passcode is 10110276. If you would like to be added to the e-mail
distribution list, please visit www.annaly.com, click on Investors,
then select Email Alerts and complete the email notification
form.
Financial
Statements
ANNALY CAPITAL MANAGEMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars
in thousands, except per share data)
June 30,
March 31, December 31, September 30, June
30, 2017 2017
2016 (1)
2016 2016 (Unaudited)
(Unaudited) (Unaudited)
(Unaudited) ASSETS Cash and cash equivalents (2) $
700,692 $ 819,421 $ 1,539,746 $ 2,382,188 $
2,735,250 Investments, at fair value: Agency mortgage-backed
securities 73,963,998 72,708,490 75,589,873 73,476,105 64,862,992
Credit risk transfer securities 605,826 686,943 724,722 669,295
520,321 Non-Agency mortgage-backed securities 1,234,053 1,409,093
1,401,307 1,460,261 1,197,549 Residential mortgage loans (3)
779,685 682,416 342,289 310,148 - Mortgage servicing rights 605,653
632,166 652,216 492,169 - Commercial real estate debt investments
(4) 3,972,560 4,102,613 4,321,739 4,319,077 4,361,972 Commercial
real estate debt and preferred equity, held for investment (5)
928,181 985,091 970,505 1,070,197 1,137,971 Commercial loans held
for sale, net - - 114,425 144,275 164,175 Investments in commercial
real estate 474,510 462,760 474,567 500,027 504,605 Corporate debt
773,957 841,265 773,274 716,831 669,612 Interest rate swaps, at
fair value (2) 10,472 19,195 68,194 113,253 146,285 Other
derivatives, at fair value 154,004 196,935 171,266 87,921 137,490
Receivable for investments sold 9,784 354,126 51,461 493,839
697,943 Accrued interest and dividends receivable 263,217 266,887
270,400 260,583 227,225 Other assets 399,456 388,224 333,063
301,419 237,959 Goodwill 71,815 71,815 71,815 71,815 71,815
Intangible assets, net 28,715
31,517 34,184
39,903 43,306 Total
assets $ 84,976,578 $ 84,658,957
$ 87,905,046 $ 86,909,306
$ 77,716,470
LIABILITIES AND STOCKHOLDERS’
EQUITY Liabilities: Repurchase agreements $ 62,497,400 $
62,719,087 $ 65,215,810 $ 61,784,121 $ 53,868,385 Other secured
financing 3,785,543 3,876,150 3,884,708 3,804,742 3,588,326
Securitized debt of consolidated VIEs (6) 3,438,675 3,477,059
3,655,802 3,712,821 3,748,289 Participation sold - 12,760 12,869
12,976 13,079 Mortgages payable 311,810 311,707 311,636 327,632
327,643 Interest rate swaps, at fair value (2) 614,589 572,419
1,443,765 2,919,492 3,208,986 Other derivatives, at fair value
99,380 52,496 86,437 73,445 154,017 Dividends payable 305,709
305,691 305,674 269,111 277,479 Payable for investments purchased
1,043,379 340,383 65,041 454,237 746,090 Accrued interest payable
185,720 182,478 163,013 173,320 159,435 Accounts payable and other
liabilities 84,948
161,378 184,319
115,606 62,868 Total liabilities
72,367,153 72,011,608
75,329,074
73,647,503 66,154,597
Stockholders’ Equity: 7.875% Series A Cumulative Redeemable
Preferred Stock:
7,412,500 authorized, issued and
outstanding
177,088 177,088 177,088 177,088 177,088 7.625% Series C Cumulative
Redeemable Preferred Stock
12,650,000 authorized, 12,000,000 issued
and outstanding
290,514 290,514 290,514 290,514 290,514 7.50% Series D Cumulative
Redeemable Preferred Stock:
18,400,000 authorized, issued and
outstanding
445,457 445,457 445,457 445,457 445,457 7.625% Series E Cumulative
Redeemable Preferred Stock:
11,500,000 authorized, issued and
outstanding
287,500 287,500 287,500 287,500 - Common stock, par value $0.01 per
share, 1,945,437,500, 1,945,437,500, 1,945,437,500, 1,945,437,500
and 1,956,937,500 authorized, 1,019,027,880, 1,018,971,441,
1,018,913,249, 1,018,857,866 and 924,929,607 issued and
outstanding, respectively 10,190 10,190 10,189 10,189 9,249
Additional paid-in capital 15,581,760 15,580,038 15,579,342
15,578,677 14,575,426 Accumulated other comprehensive income (loss)
(850,767 ) (1,126,091 ) (1,085,893 ) 1,119,677 1,117,046
Accumulated deficit (3,339,228 )
(3,024,670 ) (3,136,017 )
(4,655,440 ) (5,061,565 ) Total stockholders’
equity 12,602,514 12,640,026 12,568,180 13,253,662 11,553,215
Noncontrolling interest 6,911
7,323 7,792
8,141 8,658 Total equity
12,609,425 12,647,349
12,575,972 13,261,803
11,561,873 Total liabilities and
equity $ 84,976,578 $ 84,658,957
$ 87,905,046 $ 86,909,306
$ 77,716,470 (1) Derived from
the audited consolidated financial statements at December 31, 2016.
(2) As a result of a change to a clearing organization’s rulebook
effective January 3, 2017, beginning with the first quarter 2017
and in subsequent periods the Company is presenting the fair value
of centrally cleared interest rate swaps net of variation margin
pledged under such transactions. The variation margin was
previously reported under cash and cash equivalents and is
currently reported as a reduction to interest rate swaps, at fair
value. Balances reported prior to the effective date will not be
adjusted. (3) Includes securitized residential mortgage loans of a
consolidated variable interest entity (“VIE”) carried at fair value
of $150.9 million, $155.6 million, $165.9 million and $176.7
million at June 30, 2017, March 31, 2017, December 31, 2016 and
September 30, 2016, respectively. (4) Includes senior securitized
commercial mortgage loans of consolidated VIEs with a carrying
value of $3.7 billion, $3.7 billion, $3.9 billion, $4.0 billion and
$4.0 billion at June 30, 2017, March 31, 2017, December 31, 2016,
September 30, 2016 and June 30, 2016, respectively. (5) Includes
senior securitized commercial mortgage loans of a consolidated VIE
with a carrying value of $0, $0, $0, $128.9 million and $187.2
million at June 30, 2017, March 31, 2017, December 31, 2016,
September 30, 2016 and June 30, 2016, respectively. (6) Includes
securitized debt of consolidated VIEs carried at fair value of $3.4
billion, $3.5 billion, $3.7 billion, $3.7 billion and $3.7 billion
at June 30, 2017, March 31, 2017, December 31, 2016, September 30,
2016 and June 30, 2016, respectively.
ANNALY CAPITAL MANAGEMENT, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS) (UNAUDITED) (dollars in thousands, except per
share data) For the quarters ended June
30, March 31, December 31, September 30,
June 30, 2017 2017
2016 2016
2016 Net interest income:
Interest income $ 537,426 $ 587,727 $ 807,022 $ 558,668 $ 457,118
Interest expense 222,281 198,425
183,396 174,154
152,755
Net interest income
315,145 389,302
623,626 384,514 304,363
Realized and unrealized gains (losses): Realized
gains (losses) on interest rate swaps(1) (96,470 ) (104,156 )
(103,872 ) (124,572 ) (130,762 ) Realized gains (losses) on
termination of interest rate swaps (58 ) - (55,214 ) 1,337 (60,064
) Unrealized gains (losses) on interest rate swaps (177,567
) 149,184 1,430,668
256,462 (373,220 )
Subtotal (274,095 ) 45,028
1,271,582 133,227
(564,046 ) Net gains (losses) on disposal of investments
(5,516 ) 5,235 7,782 14,447 12,535 Net gains (losses) on trading
assets (14,423 ) 319 (139,470 ) 162,981 81,880 Net unrealized gains
(losses) on investments measured at fair value through earnings
16,240 23,683 110,742 29,675 (54,154 ) Bargain purchase gain
- - -
72,576 -
Subtotal
(3,699 ) 29,237 (20,946 )
279,679 40,261
Total realized
and unrealized gains (losses) (277,794 )
74,265 1,250,636 412,906
(523,785 )
Other income (loss) 30,865
31,646 30,918 29,271 (9,930 )
General and administrative
expenses: Compensation and management fee 38,938 39,262 39,845
38,709 36,048 Other general and administrative expenses
15,085 14,566 15,608
59,028 13,173
Total general and administrative expenses 54,023
53,828 55,453
97,737 49,221
Income
(loss) before income taxes 14,193 441,385 1,849,727 728,954
(278,573 )
Income taxes (329 ) 977
1,244 (1,926 )
(76 )
Net income (loss) 14,522 440,408 1,848,483
730,880 (278,497 )
Net income (loss) attributable to
noncontrolling interest (102 ) (103 )
(87 ) (336 ) (385 )
Net income (loss) attributable to Annaly 14,624 440,511
1,848,570 731,216 (278,112 )
Dividends on preferred stock
23,473 23,473
23,473 22,803 17,992
Net income (loss) available (related) to common
stockholders $ (8,849 ) $ 417,038 $
1,825,097 $ 708,413 $ (296,104 )
Net
income (loss) per share available (related) to common
stockholders: Basic $ (0.01 ) $ 0.41 $
1.79 $ 0.70 $ (0.32 ) Diluted $ (0.01 )
$ 0.41 $ 1.79 $ 0.70
$ (0.32 )
Weighted average number of common shares
outstanding: Basic 1,019,000,817
1,018,942,746 1,018,886,380
1,007,607,893 924,887,316
Diluted 1,019,000,817 1,019,307,379
1,019,251,111
1,007,963,406 924,887,316
Net income
(loss) $ 14,522 $ 440,408 $
1,848,483 $ 730,880 $ (278,497 )
Other comprehensive income (loss): Unrealized gains (losses)
on available-for-sale securities 261,964 (59,615 ) (2,206,288 )
18,237 483,930 Reclassification adjustment for net (gains) losses
included in net income (loss) 13,360
19,417 718 (15,606 )
(7,250 ) Other comprehensive income (loss)
275,324 (40,198 ) (2,205,570 )
2,631 476,680
Comprehensive income (loss) 289,846 400,210 (357,087 ) 733,511
198,183 Comprehensive income (loss) attributable to noncontrolling
interest (102 ) (103 ) (87 )
(336 ) (385 )
Comprehensive income
(loss) attributable to Annaly $ 289,948 $ 400,313
$ (357,000 ) $ 733,847 $ 198,568
(1) Interest expense related to the
Company’s interest rate swaps is recorded in Realized gains
(losses) on interest rate swaps on the Consolidated Statements of
Comprehensive Income.
ANNALY CAPITAL
MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except
per share data) (Unaudited) For the six months
ended June 30, June 30, 2017 2016
Net interest income: Interest income $
1,125,153 $ 845,261 Interest expense 420,706
300,202
Net interest income 704,447
545,059
Realized and unrealized
gains (losses): Realized gains (losses) on interest rate
swaps(1) (200,626 ) (278,237 ) Realized gains (losses) on
termination of interest rate swaps (58 ) (60,064 ) Unrealized gains
(losses) on interest rate swaps (28,383 )
(1,404,940 )
Subtotal
(229,067 ) (1,743,241 ) Net gains (losses) on
disposal of investments (281 ) 10,860 Net gains (losses) on trading
assets (14,104 ) 207,069 Net unrealized gains (losses) on
investments measured at fair value through earnings 39,923
(54,026 )
Subtotal 25,538
163,903
Total realized and unrealized gains
(losses) (203,529 ) (1,579,338 )
Other
income (loss) 62,511 (16,045 )
General and administrative
expenses: Compensation and management fee 78,200 73,045 Other
general and administrative expenses 29,651
24,121
Total general and administrative
expenses 107,851 97,166
Income (loss) before income taxes 455,578 (1,147,490 )
Income taxes 648 (913 )
Net
income (loss) 454,930 (1,146,577 )
Net income (loss)
attributable to noncontrolling interest (205 )
(547 )
Net income (loss) attributable to Annaly
455,135 (1,146,030 )
Dividends on preferred stock
46,946 35,984
Net income
(loss) available (related) to common stockholders $ 408,189
$ (1,182,014 )
Net income (loss) per share
available (related) to common stockholders: Basic $ 0.40
$ (1.28 ) Diluted $ 0.40 $ (1.28 )
Weighted
average number of common shares outstanding: Basic
1,018,971,942 925,850,452 Diluted
1,019,357,697 925,850,452
Net
income (loss) $ 454,930 $ (1,146,577 )
Other
comprehensive income (loss): Unrealized gains (losses) on
available-for-sale securities 202,349 1,501,637 Reclassification
adjustment for net (gains) losses included in net income (loss)
32,777 (6,995 ) Other comprehensive
income (loss) 235,126 1,494,642
Comprehensive income (loss) 690,056 348,065 Comprehensive income
(loss) attributable to noncontrolling interest (205 )
(547 )
Comprehensive income (loss) attributable to
Annaly $ 690,261 $ 348,612 (1)
Interest expense related to the Company’s interest rate swaps is
recorded in Realized gains (losses) on interest rate swaps on the
Consolidated Statements of Comprehensive Income.
Key
Metrics
The following table presents key metrics of the Company’s
portfolio, liabilities and hedging positions, and performance as of
and for the quarters ended June 30, 2017, March 31, 2017, and June
30, 2016:
June 30, 2017
March 31, 2017 June 30,
2016
Portfolio Related
Metrics:
Fixed-rate Residential Investment Securities as a percentage of
total Residential Investment Securities 86% 85% 92% Adjustable-rate
and floating-rate Residential Investment Securities as a percentage
of total Residential Investment Securities 14% 15% 8% Weighted
average experienced CPR for the period 10.9% 11.5% 12.7% Weighted
average projected long-term CPR at period-end 10.6%
10.0% 13.0%
Liabilities and
Hedging Metrics:
Weighted average days to maturity on repurchase agreements
outstanding at period-end 88 88 129 Hedge ratio (1) 67% 63% 49%
Weighted average pay rate on interest rate swaps at period-end (2)
2.26% 2.25% 2.28% Weighted average receive rate on interest rate
swaps at period-end (2) 1.28% 1.15% 0.74% Weighted average net rate
on interest rate swaps at period-end (2) 0.98% 1.10% 1.54% Leverage
at period-end (3) 5.6:1 5.6:1 5.3:1 Economic leverage at period-end
(4) 6.4:1 6.1:1 6.1:1 Capital ratio at period-end 13.2%
13.8% 13.2%
Performance
Related Metrics:
Book value per common share $11.19 $11.23 $11.50 GAAP net income
(loss) per average common share (5) ($0.01) $0.41 ($0.32) Core
earnings (excluding PAA) per average common share *(5) $0.30 $0.31
$0.29 Core earnings per average common share *(5) $0.23 $0.29 $0.19
PAA cost (benefit) per average common share $0.07 $0.02 $0.10
Dividend declared per common share $0.30 $0.30 $0.30 Annualized
dividend yield (6) 9.96% 10.80% 10.84% Annualized return (loss) on
average equity 0.46% 13.97% (9.60%) Annualized core return on
average equity (excluding PAA) * 10.54% 10.66% 9.73% Net interest
margin 1.23% 1.47% 1.15% Net interest margin (excluding PAA) *
1.53% 1.55% 1.54% Average yield on interest earning assets (7)
2.58% 2.74% 2.48% Average yield on interest earning assets
(excluding PAA) *(7) 2.93% 2.83% 2.95% Average cost of interest
bearing liabilities (8) 1.74% 1.59% 1.68% Net interest spread 0.84%
1.15% 0.80% Net interest spread (excluding PAA) * 1.19%
1.24% 1.27% * Represents
a non-GAAP financial measure. Please refer to the ‘Non-GAAP
Financial Measures’ section for additional information. (1)
Measures total notional balances of interest rate swaps, interest
rate swaptions and futures relative to repurchase agreements, other
secured financing and TBA notional outstanding. (2) Excludes
forward starting swaps. (3) Debt consists of repurchase agreements,
other secured financing, securitized debt, participation sold and
mortgages payable. Securitized debt, participation sold and
mortgages payable are non-recourse to the Company. (4) Computed as
the sum of recourse debt, TBA derivative notional outstanding and
net forward purchases of investments divided by total equity. (5)
Net of dividends on preferred stock. (6) Based on the closing price
of the Company’s common stock of $12.05, $11.11 and $11.07 at June
30, 2017, March 31, 2017 and June 30, 2016, respectively. (7)
Average interest earning assets reflects the average amortized cost
of our investments during the period. (8) Includes interest expense
on interest rate swaps used to hedge cost of funds.
Non-GAAP Financial
Measures
To supplement its consolidated financial statements, which are
prepared and presented in accordance with U.S. generally accepted
accounting principles (“GAAP”), the Company provides the following
non-GAAP measures.
- core earnings and core earnings
(excluding PAA);
- core earnings and core earnings
(excluding PAA) per average common share;
- annualized core return on average
equity (excluding PAA);
- interest income (excluding PAA);
- economic interest expense;
- economic net interest income (excluding
PAA);
- average yield on interest earning
assets (excluding PAA);
- net interest margin (excluding PAA)
and
- net interest spread (excluding
PAA).
These measures should not be considered a substitute for, or
superior to, financial measures computed in accordance with GAAP.
While intended to offer a fuller understanding of the Company’s
results and operations, non-GAAP financial measures also have
limitations. For example, the Company may calculate its non-GAAP
metrics, such as core earnings or the PAA, differently than its
peers making comparative analysis difficult. Additionally, in the
case of non-GAAP measures that exclude the PAA, the amount of
amortization expense excluding the PAA is not necessarily
representative of the amount of future periodic amortization nor is
it indicative of the term over which the Company will amortize the
remaining unamortized premium. Changes to actual and estimated
prepayments will impact the timing and amount of premium
amortization and, as such, both GAAP and non-GAAP results.
These non-GAAP measures provide additional detail to enhance
investor understanding of the Company’s period-over-period
operating performance and business trends, as well as for assessing
the Company’s performance versus that of industry peers. Additional
information pertaining to the Company’s use of these non-GAAP
financial measures, including discussion of how each such measure
is useful to investors, and reconciliations to their most directly
comparable GAAP results are provided below.
Amortization
In accordance with GAAP, the Company amortizes or accretes
premiums or discounts into interest income for its Agency
mortgage-backed securities, excluding interest-only securities,
taking into account estimates of future principal prepayments in
the calculation of the effective yield. The Company recalculates
the effective yield as differences between anticipated and actual
prepayments occur. Using third-party model and market information
to project future cash flows and expected remaining lives of
securities, the effective interest rate determined for each
security is applied as if it had been in place from the date of the
security’s acquisition. The amortized cost of the security is then
adjusted to the amount that would have existed had the new
effective yield been applied since the acquisition date. The
adjustment to amortized cost is offset with a charge or credit to
interest income. Changes in interest rates and other market factors
will impact prepayment speed projections and the amount of premium
amortization recognized in any given period.
The Company’s GAAP metrics include the unadjusted impact of
amortization and accretion associated with this method. Certain of
the Company’s non-GAAP metrics exclude the effect of the PAA, which
quantifies the component of premium amortization representing the
cumulative impact on prior periods, but not the current period, of
quarter-over-quarter changes in estimated long-term CPR.
The following table illustrates the impact of the PAA on premium
amortization expense for the Company’s Residential Investment
Securities portfolio for the quarters ended June 30, 2017, March
31, 2017, and June 30, 2016:
For the quarters ended June
30, 2017 March 31, 2017 June 30,
2016 (dollars in thousands) Premium amortization expense
(accretion) $ 251,084 $ 203,634 $ 265,475 Less: PAA cost (benefit)
72,700 17,870 85,583 Premium
amortization expense exclusive of PAA $ 178,384 $ 185,764
$ 179,892
For the quarters ended June 30,
2017 March 31, 2017 June 30, 2016
(per average common share) Premium amortization expense
(accretion) $ 0.25 $ 0.20 $ 0.29 Less: PAA cost (benefit)
0.07 0.02 0.10 Premium amortization
expense exclusive of PAA $ 0.18 $ 0.18 $ 0.19
Core earnings and core earnings (excluding PAA), core
earnings and core earnings (excluding PAA) per average common share
and annualized core return on average equity (excluding
PAA)
One of the Company’s principal business objectives is to
generate net income by earning a net interest spread on its
investment portfolio, which is a function of the Company’s interest
income from its investment portfolio less financing, hedging and
operating costs. Core earnings, which is comprised of interest
income plus TBA dollar roll incomei, less financing and hedging
costsii and general and administrative expenses, and core earnings
(excluding PAA), are used by management and, we believe, used by
our analysts and investors, to measure its progress in achieving
this objective.
The Company defines “core earnings”, a non-GAAP measure, as net
income (loss) excluding gains or losses on disposals of investments
and termination of interest rate swaps, unrealized gains or losses
on interest rate swaps and investments measured at fair value
through earnings, net gains and losses on trading assets,
impairment losses, net income (loss) attributable to noncontrolling
interest, corporate acquisition related expenses and certain other
non-recurring gains or losses, and inclusive of TBA dollar roll
income (a component of Net gains (losses) on trading assets) and
realized amortization of MSRs (a component of net unrealized gains
(losses) on investments measured at fair value through earnings).
Core earnings (excluding PAA) excludes the premium amortization
adjustment representing the cumulative impact on prior periods, but
not the current period, of quarter-over-quarter changes in
estimated long-term prepayment speeds related to the Company’s
Agency mortgage-backed securities.
The Company believes these non-GAAP measures provide management
and investors with additional details regarding the Company’s
underlying operating results and investment portfolio trends by (i)
making adjustments to account for the disparate reporting of
changes in fair value where certain instruments are reflected in
GAAP net income (loss) while others are reflected in other
comprehensive income (loss), and (ii) by excluding certain
unrealized, non-cash or episodic components of GAAP net income
(loss) in order to provide additional transparency into the
operating performance of the Company’s portfolio. Annualized core
return on average equity (excluding PAA), which is calculated by
dividing core earnings (excluding PAA) over average stockholders’
equity, provides investors with additional detail on the core
earnings generated by the Company’s invested equity capital.
i TBA dollar roll transactions are accounted for as derivatives,
with gains and losses reflected as a component of Net gains
(losses) on trading assets in the Company’s Consolidated Statements
of Comprehensive Income (Loss). TBA dollar roll income represents
the economic equivalent of interest income on the underlying
security less the implied cost of financing.
ii The interest component of hedging costs are reported as
realized gains (losses) on interest rate swaps in the Company’s
Consolidated Statements of Comprehensive Income (Loss).
The following table presents a reconciliation of GAAP financial
results to non-GAAP core earnings for the periods presented.
For the quarters ended June
30, 2017 March 31, 2017 June 30,
2016 (dollars in thousands, except per share data) GAAP
net income (loss) $ 14,522 $ 440,408 $ (278,497 ) Less: Realized
(gains) losses on termination of interest rate swaps 58 - 60,064
Unrealized (gains) losses on interest rate swaps 177,567 (149,184 )
373,220 Net (gains) losses on disposal of investments 5,516 (5,235
) (12,535 ) Net (gains) losses on trading assets 14,423 (319 )
(81,880 ) Net unrealized (gains) losses on investments measured at
fair value through earnings (16,240 ) (23,683 ) 54,154 Corporate
acquisition related expenses (1) - - 2,163 Net (income) loss
attributable to noncontrolling interest 102 103 385 Plus: TBA
dollar roll income (2) 81,051 69,968 79,519 MSR amortization (3)
(17,098 ) (14,030 ) -
Core earnings * 259,901 318,028 196,593 Less: Premium amortization
adjustment cost (benefit) 72,700 17,870
85,583 Core earnings (excluding PAA) *
$ 332,601 $ 335,898 $ 282,176
GAAP net income (loss) per average common share (4) $ (0.01 )
$ 0.41 $ (0.32 ) Core earnings per average
common share *(4) $ 0.23 $ 0.29 $ 0.19
Core earnings (excluding PAA) per average common share *(4)
$ 0.30 $ 0.31 $ 0.29 Annualized
GAAP return (loss) on average equity 0.46 %
13.97 % (9.60 %) Annualized core return on average
equity (excluding PAA) * 10.54 % 10.66 %
9.73 % * Represents a non-GAAP
financial measure. (1) Represents transaction costs incurred in
connection with the Company’s acquisition of Hatteras Financial
Corp. (2) Represents a component of Net gains (losses) on trading
assets. (3) Represents the portion of changes in fair value that is
attributable to the realization of estimated cash flows on the
Company’s MSR portfolio and is reported as a component of Net
unrealized gains (losses) on investments measured at fair value.
(4) Net of dividends on preferred stock.
From time to time, the Company enters into TBA forward contracts
as an alternate means of investing in and financing Agency
mortgage-backed securities. A TBA contract is an agreement to
purchase or sell, for future delivery, an Agency mortgage-backed
security with a specified issuer, term and coupon. A TBA dollar
roll represents a transaction where TBA contracts with the same
terms but different settlement dates are simultaneously bought and
sold. The TBA contract settling in the later month typically prices
at a discount to the earlier month contract with the difference in
price commonly referred to as the “drop”. The drop is a reflection
of the expected net interest income from an investment in similar
Agency mortgage-backed securities, net of an implied financing
cost, that would be foregone as a result of settling the contract
in the later month rather than in the earlier month. The drop
between the current settlement month price and the forward
settlement month price occurs because in the TBA dollar roll
market, the party providing the financing is the party that would
retain all principal and interest payments accrued during the
financing period. Accordingly, TBA dollar roll income generally
represents the economic equivalent of the net interest income
earned on the underlying Agency mortgage-backed security less an
implied financing cost.
TBA dollar roll transactions are accounted for under GAAP as a
series of derivatives transactions. The fair value of TBA
derivatives is based on methods similar to those used to value
Agency mortgage-backed securities. The Company records TBA
derivatives at fair value on its Consolidated Statements of
Financial Condition and recognizes periodic changes in fair value
as Net gains (losses) on trading assets in the Consolidated
Statements of Comprehensive Income (Loss), which includes both
unrealized and realized gains and losses on derivatives (excluding
interest rate swaps).
TBA dollar roll income is calculated as the difference in price
between two TBA contracts with the same terms but different
settlement dates multiplied by the notional amount of the TBA
contract. Although accounted for as derivatives, TBA dollar rolls
capture the economic equivalent of net interest income, or carry,
on the underlying Agency mortgage-backed security (interest income
less an implied cost of financing). TBA dollar roll income is
reported as a component of Net gains (losses) on trading assets in
the Consolidated Statements of Comprehensive Income (Loss).
Interest income (excluding PAA), economic interest expense
and economic net interest income (excluding PAA)
Interest income (excluding PAA) represents interest income
excluding the effect of the PAA, and serves as the basis for
deriving average yield on interest earning assets (excluding PAA),
net interest spread (excluding PAA) and net interest margin
(excluding PAA), which are discussed below. The Company believes
this measure provides management and investors with additional
detail to enhance their understanding of the Company’s operating
results and trends by excluding the component of premium
amortization expense representing the cumulative impact on prior
periods, but not the current period, of quarter-over-quarter
changes in estimated long-term prepayment speeds related to the
Company’s Agency mortgage-backed securities (other than
interest-only securities), which can obscure underlying trends in
the performance of the portfolio.
Economic interest expense is comprised of interest expense, as
computed in accordance with GAAP, plus interest expense on interest
rate swaps used to hedge cost of funds, which is a component of
Realized gains (losses) on interest rate swaps in the Company’s
Consolidated Statements of Comprehensive Income (Loss). The Company
uses interest rate swaps to manage its exposure to changing
interest rates on its repurchase agreements by economically hedging
cash flows associated with these borrowings. Accordingly, adding
the contractual interest payments on interest rate swaps to
interest expense, as computed in accordance with GAAP, reflects the
total contractual interest expense and thus, provides investors
with additional information about the cost of our financing
strategy.
Similarly, economic net interest income (excluding PAA), as
computed below, provides investors with additional information to
enhance their understanding of the net economics of our primary
business operations.
For the quarters ended June
30, 2017 March 31, 2017 June 30,
2016 (dollars in thousands)
Interest Income
(Excluding PAA) Reconciliation
GAAP interest income $ 537,426 $ 587,727 $ 457,118 Premium
amortization adjustment 72,700 17,870
85,583 Interest income (excluding PAA) * $ 610,126 $
605,597 $ 542,701
Economic Interest
Expense Reconciliation
GAAP interest expense $ 222,281 $ 198,425 $ 152,755 Add: Interest
expense on interest rate swaps used to hedge cost of funds
84,252 88,966 108,301 Economic interest
expense * $ 306,533 $ 287,391 $ 261,056
Economic Net
Interest Income (Excluding PAA) Reconciliation
Interest income (excluding PAA) * $ 610,126 $ 605,597 $ 542,701
Less: Economic interest expense * 306,533
287,391 261,056 Economic net interest income
(excluding PAA) * $ 303,593 $ 318,206 $ 281,645 *
Represents a non-GAAP financial measure.
Average yield on interest earning assets (excluding PAA), net
interest spread (excluding PAA) and net interest margin (excluding
PAA)
Net interest spread (excluding PAA), which is the difference
between the average yield on interest earning assets (excluding
PAA) and the average cost of interest bearing liabilities, and net
interest margin (excluding PAA), which is calculated by dividing
the economic net interest income (excluding PAA) by average
interest earning assets, provide management with additional
measures of the Company’s profitability that management relies upon
in monitoring the performance of the business.
Disclosure of these measures, which are presented below,
provides investors with additional detail regarding how management
evaluates the Company’s performance.
For the quarters ended June 30,
2017 March 31, 2017 June 30, 2016
Economic Metrics
(Excluding PAA)
(dollars in thousands) Interest income (excluding PAA) * $
610,126 $ 605,597 $ 542,701 Average
interest earning assets $ 83,427,268 $ 85,664,151 $ 73,587,753
Average yield on interest earning assets (excluding PAA) *
2.93 % 2.83 % 2.95
% Economic interest expense * $ 306,533 $ 287,391 $ 261,056 Average
interest bearing liabilities $ 70,486,779 $ 72,422,968 $ 62,049,474
Average cost of interest bearing liabilities 1.74 %
1.59 % 1.68 % Net
interest spread (excluding PAA) * 1.19 %
1.24 % 1.27 % Net interest
margin (excluding PAA) * 1.53 %
1.55 % 1.54 % * Represents a
non-GAAP financial measure.
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version on businesswire.com: http://www.businesswire.com/news/home/20170802006244/en/
Annaly Capital Management, Inc.Investor Relations,
1-888-8Annalywww.annaly.com
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