NLY Annaly Capital Management Inc

Annaly Capital Management, Inc. (NYSE:NLY) (the “Company” or “Annaly”) today announced its financial results for the quarter and year ended December 31, 2017.

Quarterly Financial Highlights

• GAAP net income of $746.8 million, $0.62 per average common share
• Core earnings (excluding PAA) were $387.0 million, $0.31 per average common share
• GAAP return on average equity was 20.58% and core return on average equity (excluding PAA) was 10.67%
• Book value per common share of $11.34
• Economic leverage of 6.6x as compared to 6.9x at September 30, 2017
• Net interest margin (excluding PAA) of 1.51%, up from 1.47% in the prior quarter
• Declared common stock dividend of $0.30 per share for the 17th consecutive fiscal quarter
• 2017 annual economic return of 12.4%

Business Highlights

• Total 2017 shareholder return of 32% is ~50% better than both the S&P 500 and the Bloomberg Mortgage REIT Index
• Raised $2.4 billion through a series of common and preferred equity offerings in 2017, along with an additional $425.0 million of preferred equity issued in January 2018
• Proceeds from preferred equity issuances used, in part, to redeem $597.8 million of outstanding preferred shares, of which $412.5 million settled in February 2018, lowering our cost of preferred capital from 7.62% to 7.05%
• Continued growth of credit businesses, representing 24% of dedicated capital at year-end 2017 compared to 20% in the prior year; corporate debt investments exceeded and residential mortgage loans approached the $1.0 billion milestone
• Appointed Chief Executive Officer and President Kevin Keyes as Chairman of the Board of Directors, effective January 1, 2018
• Appointed two new independent members to the Board of Directors effective January 1, 2018; female representation on the Board now at 36%
• Created Public Responsibility Committee to assist the Company's Board of Directors in its oversight and review of corporate social responsibility initiatives
• Recognized in the 2018 Bloomberg Gender-Equality Index, reflecting the Company’s commitment to creating a gender equal workplace
• Established joint venture with Capital Impact Partners, a prominent community development financial institution
• Senior executive team voluntarily increased their stock ownership commitments beyond applicable ownership guidelines, with such positions to be achieved solely through open market purchases by July 2020

“We concluded 2017 having made significant progress on a number of key goals and initiatives that further strengthen Annaly’s industry leading position,” commented Kevin Keyes, Chairman, Chief Executive Officer and President. “We accomplished a record breaking return to the capital markets, raising $2.8 billion in the common and preferred equity markets over the past six months and we further diversified our portfolio, growing our allocation to credit to 24% of equity while broadening our investment options. Additionally, in 2017 we expanded our institutional relationships with investment partners across our four businesses and through our continued ESG endeavors. These strategic initiatives, combined with our prudent risk management and portfolio positioning, contributed to our outperformance last year, evidenced by a total shareholder return of 32%, an economic return of 12.4% and $1.4 billion of dividends paid to our Annaly shareholders.”

Mr. Keyes continued, “Entering into 2018, we reduced leverage to enhance our liquidity in order to quickly take advantage of future market dislocations and we have increased our hedging activity within the portfolio to preserve our earnings power and protect book value as rates have risen. As we look ahead, we are confident in our seasoned investment teams, our diversification strategy and our unique ability to continue to generate attractive risk-adjusted returns in a more volatile market environment.”

Financial Performance

The following table summarizes certain key performance indicators as of and for the quarters ended December 31, 2017, September 30, 2017 and December 31, 2016:

  December 31, 2017     September 30, 2017     December 31, 2016   Book value per common share $ 11.34   $ 11.42   $ 11.16 Economic leverage at period-end (1) 6.6:1 6.9:1 6.4:1 GAAP net income (loss) per average common share (2) $ 0.62 $ 0.31 $ 1.79 Annualized GAAP return (loss) on average equity 20.58 % 10.98 % 57.23 % Net interest margin (3) 1.47 % 1.33 % 2.49 % Average yield on interest earning assets (4) 2.97 % 2.79 % 3.81 % Average cost of interest bearing liabilities (5) 1.83 % 1.82 % 1.53 % Net interest spread 1.14 % 0.97 % 2.28 %

Core Earnings Metrics: *

Core earnings (excluding PAA) per average common share (2)(6) $ 0.31 $ 0.30 $ 0.30 Core earnings per average common share (2)(6) $ 0.30 $ 0.26 $ 0.53 PAA cost (benefit) per average common share $ 0.01 $ 0.04 $ (0.23 ) Annualized core return on average equity (excluding PAA) 10.67 % 10.57 % 10.13 % Net interest margin (excluding PAA) (3) 1.51 % 1.47 % 1.53 % Average yield on interest earning assets (excluding PAA) (4) 3.02 % 2.97 % 2.68 % Net interest spread (excluding PAA) 1.19 % 1.15 % 1.15 %

*

 

Represents non-GAAP financial measures. 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. The quarter ended December 31, 2017 excludes, and the quarter ended September 30, 2017 includes, cumulative and undeclared dividends of $8.3 million on the Company's Series F Preferred Stock as of September 30, 2017. (3) 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. (4) Average 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. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA). (5) Includes interest expense on interest rate swaps used to hedge cost of funds. (6) 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 mortgage servicing rights ("MSR") (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.  

Other Information

The Company continues to analyze the overall effects of tax reform legislation, the Tax Cuts and Jobs Act, to our operations, our industry and the economy in general. While we do not expect to see a material impact on our operations, we anticipate certain of our individual taxable shareholders may benefit by receiving a 20% deduction on the portion of our dividends characterized as ordinary income. The Company has posted 'Tax Cuts and Jobs Act Treatment of REIT Dividends' on its website (www.annaly.com) in the Investors section under Tax Information. The Company also advises its shareholders to contact their individual tax advisor to determine how their individual tax profile is affected.

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,” 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 financing; changes in the market value of our assets; changes in business conditions and the general economy; our ability to grow our commercial real estate business; our ability to grow our residential mortgage credit business; our ability to grow our middle market lending 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; our ability to consummate any contemplated investment opportunities; changes in government regulations and policy 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 and to preserve capital through 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 Fourth Quarter 2017 Investor Presentation and the Fourth 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 fourth quarter 2017 earnings conference call on February 15, 2018 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 5565471. 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 10115830. 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)

   

December 31, 2017

 

September 30, 2017

 

June 30, 2017

 

March 31, 2017

 

December 31, 2016 (1)

(Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)     ASSETS Cash and cash equivalents (2) $ 706,589 $ 867,840 $ 700,692 $ 819,421 $ 1,539,746 Investments, at fair value: Agency mortgage-backed securities 90,551,763 85,889,131 73,963,998 72,708,490 75,589,873 Credit risk transfer securities 651,764 582,938 605,826 686,943 724,722 Non-Agency mortgage-backed securities 1,097,294 1,227,235 1,234,053 1,409,093 1,401,307 Residential mortgage loans (3) 1,438,322 895,919 779,685 682,416 342,289 Mortgage servicing rights 580,860 570,218 605,653 632,166 652,216 Commercial real estate debt investments (4) 3,089,108 3,869,110 3,972,560 4,102,613 4,321,739 Commercial real estate debt and preferred equity, held for investment 1,029,327 981,748 928,181 985,091 970,505 Commercial loans held for sale, net — — — — 114,425 Investments in commercial real estate 485,953 470,928 474,510 462,760 474,567 Corporate debt 1,011,275 856,110 773,957 841,265 773,274 Interest rate swaps, at fair value (2) 30,272 12,250 10,472 19,195 68,194 Other derivatives, at fair value 283,613 266,249 154,004 196,935 171,266 Receivable for investments sold 1,232 340,033 9,784 354,126 51,461 Accrued interest and dividends receivable 323,526 293,207 263,217 266,887 270,400 Other assets 384,117 353,708 399,456 388,224 333,063 Goodwill 71,815 71,815 71,815 71,815 71,815 Intangible assets, net 23,220     25,742     28,715     31,517     34,184   Total assets $ 101,760,050     $ 97,574,181     $ 84,976,578     $ 84,658,957     $ 87,905,046   LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Repurchase agreements $ 77,696,343 $ 69,430,268 $ 62,497,400 $ 62,719,087 $ 65,215,810 Other secured financing 3,837,528 3,713,256 3,785,543 3,876,150 3,884,708 Securitized debt of consolidated VIEs (5) 2,971,771 3,357,929 3,438,675 3,477,059 3,655,802 Participation sold — — — 12,760 12,869 Mortgages payable 309,686 311,886 311,810 311,707 311,636 Interest rate swaps, at fair value (2) 569,129 606,960 614,589 572,419 1,443,765 Other derivatives, at fair value 38,725 75,529 99,380 52,496 86,437 Dividends payable 347,876 326,425 305,709 305,691 305,674 Payable for investments purchased 656,581 5,243,868 1,043,379 340,383 65,041 Accrued interest payable 253,068 231,611 185,720 182,478 163,013 Accounts payable and other liabilities 207,770     121,231     84,948     161,378     184,319   Total liabilities 86,888,477     83,418,963     72,367,153     72,011,608     75,329,074   Stockholders’ Equity: 7.875% Series A Cumulative Redeemable Preferred Stock (6) — — 177,088 177,088 177,088 7.625% Series C Cumulative Redeemable Preferred Stock (7) 290,514 290,514 290,514 290,514 290,514 7.50% Series D Cumulative Redeemable Preferred Stock (8) 445,457 445,457 445,457 445,457 445,457 7.625% Series E Cumulative Redeemable Preferred Stock (9) 287,500 287,500 287,500 287,500 287,500 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (10) 696,910 696,910 — — — Common stock, par value $0.01 per share (11) 11,596 10,881 10,190 10,190 10,189 Additional paid-in capital 17,221,265 16,377,805 15,581,760 15,580,038 15,579,342 Accumulated other comprehensive income (loss) (1,126,020 ) (640,149 ) (850,767 ) (1,126,091 ) (1,085,893 ) Accumulated deficit (2,961,749 )   (3,320,160 )   (3,339,228 )   (3,024,670 )   (3,136,017 ) Total stockholders’ equity 14,865,473 14,148,758 12,602,514 12,640,026 12,568,180 Noncontrolling interest 6,100     6,460     6,911     7,323     7,792   Total equity 14,871,573     14,155,218     12,609,425     12,647,349     12,575,972   Total liabilities and equity $ 101,760,050     $ 97,574,181     $ 84,976,578     $ 84,658,957     $ 87,905,046   (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 $478.8 million, $139.8 million, $150.9 million, $155.6 million and $165.9 million at December 31, 2017, September 30, 2017, June 30, 2017, March 31, 2017 and December 31, 2016, respectively. (4) Includes senior securitized commercial mortgage loans of consolidated VIEs with a carrying value of $2.8 billion, $3.6 billion, $3.7 billion, $3.7 billion and $3.9 billion at December 31, 2017, September 30, 2017, June 30, 2017, March 31, 2017 and December 31, 2016, respectively. (5) Includes securitized debt of consolidated VIEs carried at fair value of $3.0 billion, $3.4 billion, $3.4 billion, $3.5 billion and $3.7 billion at December 31, 2017, September 30, 2017, June 30, 2017, March 31, 2017 and December 31, 2016, respectively. (6) Includes 0 shares authorized, issued and outstanding at December 31, 2017. Includes 7,412,500 authorized shares and 0 shares issued and outstanding at September 30, 2017. Includes 7,412,500 shares authorized, issued and outstanding at each of June 30, 2017, March 31, 2017 and December 31, 2016. (7) Includes 12,000,000 shares authorized, issued and outstanding at December 31, 2017. Includes 12,650,00 shares authorized and 12,000,000 shares issued and outstanding at each of September 30, 2017, June 30, 2017, March 31, 2017 and December 31, 2016. (8) Includes 18,400,000 shares authorized, issued and outstanding. (9) Includes 11,500,000 shares authorized, issued and outstanding. (10) Includes 28,800,000 shares authorized, issued and outstanding at December 31, 2017. Includes 32,200,000 shares authorized and 28,800,000 shares issued and outstanding at September 30, 2017. Includes 0 shares authorized, issued and outstanding at each of June 30, 2017, March 31, 2017 and December 31, 2016. (11) Includes 1,929,300,000 shares authorized and 1,159,585,078 issued and outstanding at December 31, 2017. Includes 1,917,837,500 shares authorized and 1,088,083,794 issued and outstanding at September 30, 2017. Includes 1,945,437,500 shares authorized and 1,019,027,880 shares issued and outstanding at June 30, 2017. Includes 1,945,437,500 shares authorized and 1,018,971,441 shares issued and outstanding at March 31, 2017. Includes 1,945,437,500 shares authorized and 1,018,913,249 shares issued and outstanding at December 31, 2016.    

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(dollars in thousands, except per share data)

    For the quarters ended

December 31, 2017

 

September 30, 2017

 

June 30,2017

 

March 31, 2017

 

December 31, 2016

Net interest income:         Interest income $ 745,423 $ 622,550 $ 537,426 $ 587,727 $ 807,022 Interest expense 318,711     268,937     222,281     198,425     183,396   Net interest income 426,712     353,613     315,145     389,302     623,626     Realized and unrealized gains (losses): Realized gains (losses) on interest rate swaps (1) (82,271 ) (88,211 ) (96,470 ) (104,156 ) (103,872 ) Realized gains (losses) on termination of interest rate swaps (160,075 ) — (58 ) — (55,214 ) Unrealized gains (losses) on interest rate swaps 484,447     56,854     (177,567 )   149,184     1,430,668   Subtotal 242,101     (31,357 )   (274,095 )   45,028     1,271,582   Net gains (losses) on disposal of investments 7,895 (11,552 ) (5,516 ) 5,235 7,782 Net gains (losses) on trading assets 121,334 154,208 (14,423 ) 319 (139,470 ) Net unrealized gains (losses) on investments measured at fair value through earnings (12,115 )   (67,492 )   16,240     23,683     110,742   Subtotal 117,114     75,164     (3,699 )   29,237     (20,946 ) Total realized and unrealized gains (losses) 359,215     43,807     (277,794 )   74,265     1,250,636   Other income (loss) 25,064 28,282 30,865 31,646 30,918 General and administrative expenses: Compensation and management fee 44,129 41,993 38,938 39,262 39,845 Other general and administrative expenses 15,128     15,023     15,085     14,566     15,608   Total general and administrative expenses 59,257     57,016     54,023     53,828     55,453   Income (loss) before income taxes 751,734 368,686 14,193 441,385 1,849,727 Income taxes 4,963     1,371     (329 )   977     1,244   Net income (loss) 746,771 367,315 14,522 440,408 1,848,483 Net income (loss) attributable to noncontrolling interest (151 )   (232 )   (102 )   (103 )   (87 ) Net income (loss) attributable to Annaly 746,922 367,547 14,624 440,511 1,848,570 Dividends on preferred stock (2) 32,334     30,355     23,473     23,473     23,473   Net income (loss) available (related) to common stockholders $ 714,588     $ 337,192     $ (8,849 )   $ 417,038     $ 1,825,097     Net income (loss) per share available (related) to common stockholders: Basic $ 0.62     $ 0.31     $ (0.01 )   $ 0.41     $ 1.79   Diluted $ 0.62     $ 0.31     $ (0.01 )   $ 0.41     $ 1.79     Weighted average number of common shares outstanding: Basic 1,151,653,296     1,072,566,395     1,019,000,817     1,018,942,746     1,018,886,380   Diluted 1,152,138,887     1,073,040,637     1,019,000,817     1,019,307,379     1,019,251,111     Net income (loss) $ 746,771     $ 367,315     $ 14,522     $ 440,408     $ 1,848,483   Other comprehensive income (loss): Unrealized gains (losses) on available-for-sale securities (487,597 ) 195,251 261,964 (59,615 ) (2,206,288 ) Reclassification adjustment for net (gains) losses included in net income (loss) 1,726     15,367     13,360     19,417     718   Other comprehensive income (loss) (485,871 )   210,618     275,324     (40,198 )   (2,205,570 ) Comprehensive income (loss) 260,900 577,933 289,846 400,210 (357,087 ) Comprehensive income (loss) attributable to noncontrolling interest (151 )   (232 )   (102 )   (103 )   (87 ) Comprehensive income (loss) attributable to Annaly 261,051 578,165 289,948 400,313 (357,000 ) Dividends on preferred stock 32,334     30,355     23,473     23,473     23,473   Comprehensive income (loss) attributable to common stockholders $ 228,717     $ 547,810     $ 266,475     $ 376,840     $ (380,473 ) (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. (2) The quarter ended December 31, 2017 excludes, and the quarter ended September 30, 2017 includes, cumulative and undeclared dividends of $8.3 million on the Company's Series F Preferred Stock as of September 30, 2017.    

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except per share data)

(Unaudited)

    For the years ended

December 31, 2017

 

December 31, 2016

Net interest income:   Interest income $ 2,493,126 $ 2,210,951 Interest expense 1,008,354     657,752   Net interest income 1,484,772     1,553,199   Realized and unrealized gains (losses): Realized gains (losses) on interest rate swaps (1) (371,108 ) (506,681 ) Realized gains (losses) on termination of interest rate swaps (160,133 ) (113,941 ) Unrealized gains (losses) on interest rate swaps 512,918     282,190   Subtotal (18,323 )   (338,432 ) Net gains (losses) on disposal of investments (3,938 ) 33,089 Net gains (losses) on trading assets 261,438 230,580 Net unrealized gains (losses) on investments measured at fair value through earnings (39,684 ) 86,391 Bargain purchase gain —     72,576   Subtotal 217,816     422,636   Total realized and unrealized gains (losses) 199,493     84,204   Other income (loss) 115,857 44,144 General and administrative expenses: Compensation and management fee 164,322 151,599 Other general and administrative expenses 59,802     98,757   Total general and administrative expenses 224,124     250,356   Income (loss) before income taxes 1,575,998 1,431,191 Income taxes 6,982     (1,595 ) Net income (loss) 1,569,016 1,432,786 Net income (loss) attributable to noncontrolling interest (588 )   (970 ) Net income (loss) attributable to Annaly 1,569,604 1,433,756 Dividends on preferred stock 109,635     82,260   Net income (loss) available (related) to common stockholders $ 1,459,969     $ 1,351,496     Net income (loss) per share available (related) to common stockholders: Basic $ 1.37     $ 1.39   Diluted $ 1.37     $ 1.39     Weighted average number of common shares outstanding: Basic 1,065,923,652   969,787,583   Diluted 1,066,351,616   970,102,353     Net income (loss) $ 1,569,016     $ 1,432,786   Other comprehensive income (loss): Unrealized gains (losses) on available-for-sale securities (89,997 ) (686,414 ) Reclassification adjustment for net (gains) losses included in net income (loss) 49,870     (21,883 ) Other comprehensive income (loss) (40,127 )   (708,297 ) Comprehensive income (loss) 1,528,889 724,489 Comprehensive income (loss) attributable to noncontrolling interest (588 )   (970 ) Comprehensive income (loss) attributable to Annaly 1,529,477 725,459 Dividends on preferred stock 109,635     82,260   Comprehensive income (loss) attributable to common stockholders $ 1,419,842     $ 643,199   (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 December 31, 2017, September 30, 2017, and December 31, 2016:

  December 31, 2017   September 30,2017   December 31, 2016

Portfolio Related Metrics:

    Fixed-rate Residential Investment Securities as a percentage of total Residential Investment Securities 90 % 89 % 83 % Adjustable-rate and floating-rate Residential Investment Securities as a percentage of total Residential Investment Securities 10 % 11 % 17 % Weighted average experienced CPR for the period 9.8 % 10.3 % 15.6 % Weighted average projected long-term CPR at period-end 10.4 %   10.4 %   10.1 %  

Liabilities and Hedging Metrics:

Weighted average days to maturity on repurchase agreements outstanding at period-end 58 65 96 Hedge ratio (1) 70 % 67 % 56 % Weighted average pay rate on interest rate swaps at period-end (2) 2.22 % 2.27 % 2.22 % Weighted average receive rate on interest rate swaps at period-end (2) 1.58 % 1.35 % 1.02 % Weighted average net rate on interest rate swaps at period-end (2) 0.64 % 0.92 % 1.20 % Leverage at period-end (3) 5.7:1 5.4:1 5.8:1 Economic leverage at period-end (4) 6.6:1 6.9:1 6.4:1 Capital ratio at period-end 12.9 %   12.3 %   13.1 %  

Performance Related Metrics:

Book value per common share $ 11.34 $ 11.42 $ 11.16 GAAP net income (loss) per average common share (5) $ 0.62 $ 0.31 $ 1.79 Annualized GAAP return (loss) on average equity 20.58 % 10.98 % 57.23 % Net interest margin 1.47 % 1.33 % 2.49 % Average yield on interest earning assets (6) 2.97 % 2.79 % 3.81 % Average cost of interest bearing liabilities (7) 1.83 % 1.82 % 1.53 % Net interest spread 1.14 % 0.97 % 2.28 % Dividend declared per common share $ 0.30 $ 0.30 $ 0.30 Annualized dividend yield (8) 10.09 % 9.84 % 12.04 % Core Earnings Metrics * Core earnings (excluding PAA) per average common share (5) $ 0.31 $ 0.30 $ 0.30 Core earnings per average common share (5) $ 0.30 $ 0.26 $ 0.53 PAA cost (benefit) per average common share $ 0.01 $ 0.04 $ (0.23 ) Annualized core return on average equity (excluding PAA) 10.67 % 10.57 % 10.13 % Net interest margin (excluding PAA) 1.51 % 1.47 % 1.53 % Average yield on interest earning assets (excluding PAA) (6) 3.02 % 2.97 % 2.68 % Net interest spread (excluding PAA) 1.19 %   1.15 %   1.15 % *   Represents non-GAAP financial measures. 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; excludes MSRs and the effects of term financing, both of which serve to reduce interest rate risk. Additionally, the hedge ratio does not take into consideration differences in duration between assets and liabilities. (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. The quarter ended December 31, 2017 excludes, and the quarter ended September 30, 2017 includes, the cumulative and undeclared dividends as of September 30, 2017 on the Company's Series F Preferred Stock of $8.3 million. (6) Average 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. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA). (7) Included interest expense on interest rate swaps used to hedge cost of funds. (8) Based on the closing price of the Company’s common stock of $11.89, $12.19 and $9.97 at December 31, 2017, September 30, 2017 and December 31, 2016, respectively.  

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 December 31, 2017, September 30, 2017, and December 31, 2016:

  For the quarters ended December 31, 2017   September 30,2017   December 31, 2016 (dollars in thousands) Premium amortization expense (accretion) $ 203,951   $ 220,636   $ (19,812 ) Less: PAA cost (benefit) 11,367     39,899     (238,941 ) Premium amortization expense exclusive of PAA $ 192,584     $ 180,737     $ 219,129     For the quarters ended December 31, 2017   September 30,2017   December 31, 2016 (per average common share) Premium amortization expense (accretion) $ 0.18 $ 0.21 $ (0.02 ) Less: PAA Cost (Benefit) 0.01     0.04     (0.23 ) Premium amortization expense exclusive of PAA $ 0.17     $ 0.17     $ 0.21    

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.

The following table presents a reconciliation of GAAP financial results to non-GAAP core earnings for the periods presented.

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 is reported as realized gains (losses) on interest rate swaps in the Company’s Consolidated Statements of Comprehensive Income (Loss).     For the quarters ended December 31, 2017   September 30,2017   December 31, 2016 (dollars in thousands, except per share data) GAAP net income (loss) $ 746,771   $ 367,315   $ 1,848,483 Less: Realized (gains) losses on termination of interest rate swaps 160,075 — 55,214 Unrealized (gains) losses on interest rate swaps (484,447 ) (56,854 ) (1,430,668 ) Net (gains) losses on disposal of investments (7,895 ) 11,552 (7,782 ) Net (gains) losses on trading assets (121,334 ) (154,208 ) 139,470 Net unrealized (gains) losses on investments measured at fair value through earnings 12,115 67,492 (110,742 ) Net (income) loss attributable to noncontrolling interest 151 232 87 Plus: TBA dollar roll income (1) 89,479 94,326 98,896 MSR amortization (2) (19,331 )   (16,208 )   (27,018 ) Core earnings * 375,584 313,647 565,940 Less: Premium amortization adjustment cost (benefit) 11,367     39,899     (238,941 ) Core earnings (excluding PAA) * $ 386,951     $ 353,546     $ 326,999   GAAP net income (loss) per average common share (3) $ 0.62     $ 0.31     $ 1.79   Core earnings per average common share *(3) $ 0.30     $ 0.26     $ 0.53   Core earnings (excluding PAA) per average common share *(3) $ 0.31     $ 0.30     $ 0.30   Annualized GAAP return (loss) on average equity 20.58 %   10.98 %   57.23 % Annualized core return on average equity (excluding PAA) * 10.67 %   10.57 %   10.13 %     For the years ended December 31, 2017   December 31, 2016 (dollars in thousands, except per share data) GAAP net income (loss) $ 1,569,016   $ 1,432,786 Less: Realized (gains) losses on termination of interest rate swaps 160,133 113,941 Unrealized (gains) losses on interest rate swaps (512,918 ) (282,190 ) Net (gains) losses on disposal of investments 3,938 (33,089 ) Net (gains) losses on trading assets (261,438 ) (230,580 ) Net unrealized (gains) losses on investments measured at fair value through earnings 39,684 (86,391 ) Bargain purchase gain — (72,576 ) Corporate acquisition related expenses (4) — 48,887 Net (income) loss attributable to noncontrolling interest 588 970 Plus: TBA dollar roll income (1) 334,824 351,778 MSR amortization (2) (66,667 )   (48,652 ) Core earnings * 1,267,160 1,194,884 Less: Premium amortization adjustment cost (benefit) 141,836     18,941   Core earnings (excluding PAA) * $ 1,408,996     $ 1,213,825   GAAP net income (loss) per average common share (3) $ 1.37     $ 1.39   Core earnings per average common share *(3) $ 1.09     $ 1.15   Core earnings (excluding PAA) per average common share *(3) $ 1.22     $ 1.17   Annualized GAAP return (loss) on average equity 11.73 %   11.75 % Annualized core return on average equity (excluding PAA) * 10.54 %   9.96 % *   Represents a non-GAAP financial measure. (1) Represents a component of Net gains (losses) on trading assets. (2) 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. (3) Net of dividends on preferred stock. The quarter ended December 31, 2017 excludes, and the quarter ended September 30, 2017 includes, cumulative and undeclared dividends of $8.3 million on the Company's Series F Preferred Stock as of September 30, 2017. (4) Represents transaction costs incurred in connection with the Company’s acquisition of Hatteras Financial Corp.  

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 the Company's 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 December 31, 2017   September 30,2017   December 31, 2016 (dollars in thousands)

Interest Income (Excluding PAA) Reconciliation

    GAAP interest income $ 745,423 $ 622,550 $ 807,022 Premium amortization adjustment 11,367     39,899     (238,941 ) Interest income (excluding PAA) * $ 756,790     $ 662,449     $ 568,081    

Economic Interest Expense Reconciliation

GAAP interest expense $ 318,711 $ 268,937 $ 183,396 Add: Interest expense on interest rate swaps used to hedge cost of funds 73,957     78,564     92,841   Economic interest expense * $ 392,668     $ 347,501     $ 276,237    

Economic Net Interest Income (Excluding PAA) Reconciliation

Interest income (excluding PAA) * $ 756,790 $ 662,449 $ 568,081 Less: Economic interest expense * 392,668     347,501     276,237   Economic net interest income (excluding PAA) * $ 364,122     $ 314,948     $ 291,844   *   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 as 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, 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 December 31, 2017   September 30,2017   December 31, 2016

Economic Metrics (Excluding PAA)

(dollars in thousands) Interest income (excluding PAA) * $ 756,790   $ 662,449   $ 568,081 Average interest earning assets $ 100,247,589 $ 89,253,094 $ 84,799,222 Average yield on interest earning assets (excluding PAA) * 3.02 %   2.97 %   2.68 % Economic interest expense * $ 392,668 $ 347,501 $ 276,237 Average interest bearing liabilities $ 85,992,215 $ 76,382,315 $ 72,032,600 Average cost of interest bearing liabilities 1.83 %   1.82 %   1.53 % Net interest spread (excluding PAA) * 1.19 %   1.15 %   1.15 % Net interest margin (excluding PAA) * 1.51 %   1.47 %   1.53 % *   Represents a non-GAAP financial measure.  

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Annaly Capital Management, Inc.Investor Relations1-888-8Annalywww.annaly.com