Annaly Capital Management, Inc. (NYSE: NLY) ("Annaly" or the
"Company") today announced its financial results for the quarter
ended March 31, 2021.
Financial Highlights
- GAAP net income of $1.23 per average common share for the
quarter, up from $0.60 in the prior quarter
- Core earnings (excluding PAA) of $0.29 per average common share
for the quarter, down $0.01 quarter-over-quarter and up $0.08
year-over-year with dividend coverage of +130%
- Economic return and tangible economic return(1) of 2.8% and
3.6%, respectively, for the first quarter
- Annualized GAAP return on average equity of 49.9% and
annualized core return on average equity (excluding PAA) of
12.5%
- Book value per common share of $8.95, up $0.03
quarter-over-quarter and reflecting a ($0.07) per share impact
primarily resulting from the writedown of goodwill related to the
Company’s 2013 acquisition of CreXus Investment Corp.
- Tangible book value per common share(1) of $8.93, up $0.10
quarter-over-quarter
- Economic leverage of 6.1x, down slightly from 6.2x the prior
quarter
- Declared quarterly common stock cash dividend of $0.22 per
share
Business Highlights
Investment and Strategy
- Total assets of $100.4 billion including $92.6 billion in
highly liquid Agency portfolio(2)
- Announced agreement to sell Commercial Real Estate business for
$2.33 billion, delivering compelling execution for shareholders
that will provide additional capacity to further expand leadership
and capabilities in residential mortgage finance(3)
- Agency portfolio activity focused on reinvestment of paydowns
into a mix of spec pools and TBAs; proactively rotated into higher
coupons given the increase in rates
- Capital allocation to residential credit business nearly
doubled to approximately 13% driven by ~$1.4 billion of accretive
securities and whole loan purchases
- Increased hedge ratio to 75% from 61%; continued to
opportunistically sell duration through Treasury future shorts and
swaptions to protect against the significant rise in long-end
yields
Financing and Capital
- $8.9 billion of unencumbered assets, including cash and
unencumbered Agency MBS of $6.2 billion
- Continued record-low financing costs with average GAAP cost of
interest bearing liabilities declining 9 basis points to 0.42% and
average economic cost of interest bearing liabilities flat at
0.87%
- Annaly Residential Credit Group priced two residential whole
loan securitizations totaling $611 million since the beginning of
the first quarter, bringing aggregate issuance to $5.5 billion over
14 transactions since the start of 2018(4)
- Annaly Middle Market Lending Group expanded credit facility
capacity by $180 million
Corporate Responsibility & Governance
- Adjusted long-term target operating expense ratio to a range of
1.45% to 1.60% following announcement of Commercial Real Estate
Business disposition to incorporate additional expected cost
savings(5)
- Expanded Board of Directors with election of new Independent
Director Eric A. Reeves
- Signed the CEO Action for Diversity and Inclusion pledge,
affirming our commitment to advancing diversity and inclusion in
the workplace
“We are pleased with our results to start the year with strong
underlying performance from our businesses and proactive portfolio
management enabling book value growth despite a rapid sell-off in
rates,” remarked David Finkelstein, Annaly’s Chief Executive
Officer and Chief Investment Officer. “Further, the sale of our
Commercial Real Estate business marks a notable strategic milestone
that will provide us with additional flexibility to focus on our
core residential mortgage finance business. We look forward to
expanding our capabilities and opportunity set within housing
finance, including increased exposure to mortgage servicing rights,
new residential whole loan acquisition channels and other
complementary products.”
“We remain constructive on the outlook for Agency MBS given
ongoing support from the Federal Reserve, robust demand from banks
and other investors, sustained low financing costs and a moderating
prepay environment. Meanwhile, credit assets should benefit from
the strengthening economy and we maintain optionality to increase
our exposure through our Middle Market Lending and CMBS portfolios.
With relatively low leverage and substantial liquidity, Annaly is
well-positioned to create value for shareholders throughout the
remainder of the year.”
(1)
Tangible economic return and
tangible book value exclude amounts related to intangible assets as
presented on the Company's Consolidated Statement of Financial
Condition.
(2)
Assets represents Annaly’s
investments that are on balance sheet, net of debt issued by
securitization vehicles, as well as investments that are
off-balance sheet in which Annaly has economic exposure. Assets
include TBA purchase contracts (market value) of $22.8bn and CMBX
derivatives (market value) of $500.5mm and are shown net of debt
issued by securitization vehicles of $5.6bn.
(3)
Annaly announced the sale of its
Commercial Real Estate Business on March 25, 2021. Subject to
customary closing conditions, including applicable regulatory
approvals, the transfer of the Commercial Real Estate business is
expected to be completed by the third quarter of 2021. For more
information, please see the 8-K filing.
(4)
Includes a $257mm residential
whole loan securitization in March 2021 and a $354mm residential
whole securitization in April 2021.
(5)
Represents management’s estimates
of long-term operating expense projections for the Company's
management internalization, which was completed on June 30, 2020,
and the planned divestiture of the Commercial Real Estate business,
announced March 25, 2021, based on historical experience and other
factors, including expectations of future operational events and
obligations, that are believed to be reasonable. The Company’s
actual operating expenses and timeframe for achieving any operating
expense savings may differ materially from management’s
projections. Management’s projections are based on a number of
factors and uncertainties and actual results may vary based on
changes to our expected general and administrative expenses,
changes to the Company’s equity base, changes to the Company’s
business composition and strategy, and other circumstances which
may be out of management’s control.
Financial Performance
The following table summarizes certain key performance
indicators as of and for the quarters ended March 31, 2021,
December 31, 2020 and March 31, 2020:
March 31, 2021
December 31, 2020
March 31, 2020
Book value per common share
$
8.95
$
8.92
$
7.50
Economic leverage at period-end (1)
6.1:1
6.2:1
6.8:1
GAAP net income (loss) per average common
share (2)
$
1.23
$
0.60
$
(2.57
)
Annualized GAAP return (loss) on average
equity
49.87
%
24.91
%
(102.17
%)
Net interest margin (3)
3.39
%
2.14
%
0.18
%
Average yield on interest earning assets
(4)
3.76
%
2.61
%
1.91
%
Average GAAP cost of interest bearing
liabilities (5)
0.42
%
0.51
%
1.86
%
Net interest spread
3.34
%
2.10
%
0.05
%
Non-GAAP metrics *
Core earnings (excluding PAA) per average
common share (2)
$
0.29
$
0.30
$
0.21
Annualized core return on average equity
(excluding PAA)
12.53
%
13.03
%
9.27
%
Net interest margin (excluding PAA)
(3)
1.91
%
1.98
%
1.18
%
Average yield on interest earning assets
(excluding PAA) (4)
2.71
%
2.80
%
2.91
%
Average economic cost of interest bearing
liabilities (5)
0.87
%
0.87
%
1.91
%
Net interest spread (excluding PAA)
1.84
%
1.93
%
1.00
%
*
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, cost basis of to-be-announced ("TBA") and CMBX derivatives
outstanding, and net forward purchases (sales) of investments
divided by total equity. Recourse debt consists of repurchase
agreements and other secured financing (excluding certain
non-recourse credit facilities). Certain credit facilities
(included within other secured financing), debt issued by
securitization vehicles, participations issued, and mortgages
payable are non-recourse to the Company and are excluded from this
measure.
(2)
Net of dividends on preferred
stock.
(3)
Net interest margin represents
interest income less interest expense divided by average Interest
Earning Assets. Net interest margin (excluding PAA) represents the
sum of interest income (excluding PAA) plus TBA dollar roll income
and CMBX coupon income less interest expense and the net interest
component of interest rate swaps divided by the sum of average
Interest Earning Assets plus average outstanding TBA contract and
CMBX balances. PAA represents 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)
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)
Average GAAP cost of interest
bearing liabilities represents annualized interest expense divided
by average interest bearing liabilities. Average interest bearing
liabilities reflects the average balances during the period.
Average economic cost of interest bearing liabilities represents
annualized economic interest expense divided by average interest
bearing liabilities. Economic interest expense is comprised of GAAP
interest expense and the net interest component of interest rate
swaps.
Divestiture of Commercial Real Estate
Business
On March 25, 2021, the Company announced the sale of
substantially all of the assets that comprise its commercial real
estate business to Slate Asset Management for $2.33 billion, which
is expected to be completed by the third quarter of 2021. The
Company also intends to sell nearly all of the remaining assets
that are not included in the sale to Slate. As of March 31, 2021,
the Company met the conditions for held-for sale accounting which
requires that assets be carried at the lower of amortized cost or
fair value less costs to sell. Assets and liabilities associated
with the commercial real estate business are reported separately in
the Company’s Consolidated Statement of Financial Condition as
Assets and Liabilities of Disposal Group Held for Sale,
respectively. The Company’s Consolidated Statement of Comprehensive
Income (Loss) reflects a reversal of previously recognized loan
loss provisions as well as business divestiture-related gains
(losses), which include valuation allowances on commercial real
estate assets, impairment of goodwill and estimated transaction
costs. Revenues and expenses associated with the commercial real
estate business will be reflected in the Company’s results of
operations and key financial metrics through closing.
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," 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, risks and
uncertainties related to the COVID-19 pandemic, including as
related to adverse economic conditions on real estate-related
assets and financing conditions; 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 residential 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 or policy affecting our business; our ability to
maintain our qualification as a REIT for U.S. federal income tax
purposes; our ability to maintain our exemption from registration
under the Investment Company Act; and the timing and ultimate
completion of the sale of our commercial real estate business. 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. The Company does not undertake, and specifically
disclaims 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 optimize its returns through prudent
management of its diversified investment strategies. Annaly is
internally managed and has elected to be taxed as a real estate
investment trust, or REIT, for federal income tax purposes.
Additional information on the company can be found at
www.annaly.com.
Annaly routinely posts important information for investors on
the Company’s website, www.annaly.com. Annaly intends to use this
webpage as a means of disclosing material, non-public information,
for complying with the Company’s disclosure obligations under
Regulation FD and to post and update investor presentations and
similar materials on a regular basis. Annaly encourages investors,
analysts, the media and others interested in Annaly to monitor the
Company’s website, in addition to following Annaly’s press
releases, SEC filings, public conference calls, presentations,
webcasts and other information it posts from time to time on its
website. To sign-up for email-notifications, please visit the
"Investors" section of our website, www.annaly.com, then click on
"Investor Resources" and select "Email Alerts" to complete the
email notification form. The information contained on, or that may
be accessed through, the Company’s webpage is not incorporated by
reference into, and is not a part of, this document.
The Company prepares a supplemental investor presentation and a
financial summary for the benefit of its shareholders. Both the
First Quarter 2021 Investor Presentation and the First Quarter 2021
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 first quarter 2021 earnings conference
call on April 29, 2021 at 9:00 a.m. Eastern Time. Participants are
encouraged to pre-register for the conference call to receive a
unique PIN to gain immediate access to the call and bypass the live
operator. Pre-registration may be completed by accessing the
pre-registration link found on the homepage or "Investors" section
of the Company's website at www.annaly.com, or by using the
following link: https://dpregister.com/sreg/10154708/e6b12fa9d0.
Pre-registration may be completed at any time, including up to and
after the call start time.
For participants who would like to join the call but have not
pre-registered, access is available by dialing 844-735-3317 within
the U.S., or 412-317-5703 internationally, and requesting the
"Annaly Earnings Call."
There will also be an audio webcast of the call on
www.annaly.com. A 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 10154708. 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)
March 31, 2021
December 31, 2020 (1)
September 30, 2020
June 30, 2020
March 31, 2020
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Assets
Cash and cash equivalents
$
1,122,793
$
1,243,703
$
1,239,982
$
1,393,910
$
2,823,521
Securities
71,849,437
75,652,396
76,098,985
77,805,743
79,357,596
Loans, net
2,603,343
3,083,821
2,788,341
3,972,671
4,068,189
Mortgage servicing rights
113,080
100,895
207,985
227,400
280,558
Assets transferred or pledged to
securitization vehicles
3,768,922
6,910,020
7,269,402
7,690,451
7,671,662
Real estate, net
—
656,314
790,597
746,067
751,738
Assets of disposal group held for sale
4,400,723
—
—
—
—
Derivative assets
891,474
171,134
103,245
165,642
238,776
Receivable for unsettled trades
144,918
15,912
54,200
747,082
1,006,853
Principal and interest receivable
259,655
268,073
281,009
300,089
335,170
Goodwill and intangible assets, net
37,337
127,341
136,900
137,680
98,293
Other assets
177,907
225,494
221,765
271,918
284,918
Total assets
$
85,369,589
$
88,455,103
$
89,192,411
$
93,458,653
$
96,917,274
Liabilities and stockholders’
equity
Liabilities
Repurchase agreements
$
61,202,477
$
64,825,239
$
64,633,447
$
67,163,598
$
72,580,183
Other secured financing
922,605
917,876
861,373
1,538,996
1,805,428
Debt issued by securitization vehicles
3,044,725
5,652,982
6,027,576
6,458,130
6,364,949
Participations issued
180,527
39,198
—
—
—
Mortgages payable
—
426,256
507,934
508,565
484,762
Liabilities of disposal group held for
sale
3,319,414
—
—
—
—
Derivative liabilities
939,622
1,033,345
1,182,681
1,257,038
1,331,188
Payable for unsettled trades
1,070,080
884,069
1,176,001
2,122,735
923,552
Interest payable
100,949
191,116
155,338
180,943
261,304
Dividends payable
307,671
307,613
308,644
309,686
357,606
Other liabilities
213,924
155,613
144,745
121,359
100,772
Total liabilities
71,301,994
74,433,307
74,997,739
79,661,050
84,209,744
Stockholders’ equity
Preferred stock, par value $0.01 per share
(2)
1,536,569
1,536,569
1,982,026
1,982,026
1,982,026
Common stock, par value $0.01 per share
(3)
13,985
13,982
14,029
14,077
14,304
Additional paid-in capital
19,754,826
19,750,818
19,798,032
19,827,216
19,968,372
Accumulated other comprehensive income
(loss)
2,002,231
3,374,335
3,589,056
3,842,074
3,121,371
Accumulated deficit
(9,251,804
)
(10,667,388
)
(11,200,937
)
(11,871,927
)
(12,382,648
)
Total stockholders’ equity
14,055,807
14,008,316
14,182,206
13,793,466
12,703,425
Noncontrolling interests
11,788
13,480
12,466
4,137
4,105
Total equity
14,067,595
14,021,796
14,194,672
13,797,603
12,707,530
Total liabilities and equity
$
85,369,589
$
88,455,103
$
89,192,411
$
93,458,653
$
96,917,274
(1)
Derived from the audited
consolidated financial statements at December 31, 2020.
(2)
7.50% Series D Cumulative
Redeemable Preferred Stock - Includes 0 shares authorized, issued
and outstanding at March 31, 2021. Includes 18,400,000 shares
authorized and 0 shares issued and outstanding at December 31,
2020. Includes 18,400,000 shares authorized, issued and outstanding
at September 30, 2020, June 30, 2020 and March 31, 2020,
respectively.
6.95% Series F Fixed-to-Floating
Rate Cumulative Redeemable Preferred Stock - Includes 28,800,000
shares authorized, issued and outstanding.
6.50% Series G Fixed-to-Floating
Rate Cumulative Redeemable Preferred Stock - Includes 17,000,000
shares authorized, issued and outstanding at March 31, 2021.
Includes 19,550,000 shares authorized and 17,000,000 shares issued
and outstanding at December 31, 2020, September 30, 2020, June 30,
2020 and March 31, 2020, respectively.
6.75% Series I Preferred Stock -
Includes 17,700,000 shares authorized, issued and outstanding at
March 31, 2021. Includes 18,400,000 shares authorized and
17,700,000 issued and outstanding at December 31, 2020, September
30, 2020, June 30, 2020 and March 31, 2020, respectively.
(3)
Includes 2,936,500,000 shares
authorized at March 31, 2021; 2,914,850,000 shares authorized at
December 31, 2020, September 30, 2020, June 30, 2020 and March 31,
2020. Includes 1,398,502,906 shares issued and outstanding at March
31, 2021; 1,398,240,618 shares issued and outstanding at December
31, 2020; 1,402,928,317 shares issued and outstanding at September
30, 2020; 1,407,662,483 shares issued and outstanding at June 30,
2020; and 1,430,424,398 shares issued and outstanding at March 31,
2020.
ANNALY CAPITAL MANAGEMENT,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except
per share data)
(Unaudited)
For the quarters ended
March 31, 2021
December 31, 2020
September 30, 2020
June 30, 2020
March 31, 2020
Net interest income
Interest income
$
763,378
$
527,344
$
562,443
$
584,812
$
555,026
Interest expense
75,973
94,481
115,126
186,032
503,473
Net interest income
687,405
432,863
447,317
398,780
51,553
Realized and unrealized gains
(losses)
Net interest component of interest rate
swaps
(79,747
)
(66,807
)
(62,529
)
(64,561
)
(13,980
)
Realized gains (losses) on termination or
maturity of interest rate swaps
—
2,092
(427
)
(1,521,732
)
(397,561
)
Unrealized gains (losses) on interest rate
swaps
772,262
258,236
170,327
1,494,628
(2,827,723
)
Subtotal
692,515
193,521
107,371
(91,665
)
(3,239,264
)
Net gains (losses) on disposal of
investments and other
(65,786
)
9,363
198,888
246,679
206,583
Net gains (losses) on other derivatives
and financial instruments
476,868
209,647
169,316
170,916
206,426
Net unrealized gains (losses) on
instruments measured at fair value through earnings
104,191
51,109
121,255
254,772
(730,160
)
Loan loss provision
139,620
(1,497
)
21,993
(68,751
)
(99,326
)
Business divestiture-related gains
(losses)
(249,563
)
—
—
—
—
Subtotal
405,330
268,622
511,452
603,616
(416,477
)
Total realized and unrealized gains
(losses)
1,097,845
462,143
618,823
511,951
(3,655,741
)
Other income (loss)
15,258
15,205
7,959
15,224
14,926
General and administrative
expenses
Compensation and management fee
31,518
24,628
29,196
37,036
40,825
Other general and administrative
expenses
18,177
20,443
19,636
30,630
36,804
Total general and administrative
expenses
49,695
45,071
48,832
67,666
77,629
Income (loss) before income
taxes
1,750,813
865,140
1,025,267
858,289
(3,666,891
)
Income taxes
(321
)
(13,495
)
9,719
2,055
(26,702
)
Net income (loss)
1,751,134
878,635
1,015,548
856,234
(3,640,189
)
Net income (loss) attributable to
noncontrolling interests
321
1,419
(126
)
32
66
Net income (loss) attributable to
Annaly
1,750,813
877,216
1,015,674
856,202
(3,640,255
)
Dividends on preferred stock
26,883
35,509
35,509
35,509
35,509
Net income (loss) available (related)
to common stockholders
$
1,723,930
$
841,707
$
980,165
$
820,693
$
(3,675,764
)
Net income (loss) per share available
(related) to common stockholders
Basic
$
1.23
$
0.60
$
0.70
$
0.58
$
(2.57
)
Diluted
$
1.23
$
0.60
$
0.70
$
0.58
$
(2.57
)
Weighted average number of common
shares outstanding
Basic
1,399,210,925
1,399,809,722
1,404,202,695
1,423,909,112
1,430,994,319
Diluted
1,400,000,727
1,400,228,777
1,404,368,300
1,423,909,112
1,430,994,319
Other comprehensive income
(loss)
Net income (loss)
$
1,751,134
$
878,635
$
1,015,548
$
856,234
$
(3,640,189
)
Unrealized gains (losses) on
available-for-sale securities
(1,428,927
)
(207,393
)
(140,671
)
986,146
1,374,796
Reclassification adjustment for net
(gains) losses included in net income (loss)
56,823
(7,328
)
(112,347
)
(265,443
)
(391,616
)
Other comprehensive income (loss)
(1,372,104
)
(214,721
)
(253,018
)
720,703
983,180
Comprehensive income (loss)
379,030
663,914
762,530
1,576,937
(2,657,009
)
Comprehensive income (loss) attributable
to noncontrolling interests
321
1,419
(126
)
32
66
Comprehensive income (loss) attributable
to Annaly
378,709
662,495
762,656
1,576,905
(2,657,075
)
Dividends on preferred stock
26,883
35,509
35,509
35,509
35,509
Comprehensive income (loss)
attributable to common stockholders
$
351,826
$
626,986
$
727,147
$
1,541,396
$
(2,692,584
)
Key Financial Data
The following table presents key metrics of the Company’s
portfolio, liabilities and hedging positions, and performance as of
and for the quarters ended March 31, 2021, December 31, 2020, and
March 31, 2020:
March 31, 2021
December 31, 2020
March 31, 2020
Portfolio related metrics
Fixed-rate Residential Securities as a
percentage of total Residential Securities
97
%
98
%
99
%
Adjustable-rate and floating-rate
Residential Securities as a percentage of total Residential
Securities
3
%
2
%
1
%
Weighted average experienced CPR for the
period
23.9
%
24.7
%
13.6
%
Weighted average projected long-term CPR
at period-end
11.8
%
16.4
%
17.7
%
Liabilities and hedging metrics
Weighted average days to maturity on
repurchase agreements outstanding at period-end
88
64
48
Hedge ratio (1)
75
%
61
%
19
%
Weighted average pay rate on interest rate
swaps at period-end (2)
0.80
%
0.92
%
1.63
%
Weighted average receive rate on interest
rate swaps at period-end (2)
0.34
%
0.37
%
1.16
%
Weighted average net rate on interest rate
swaps at period-end (2)
0.46
%
0.55
%
0.47
%
Leverage at period-end (3)
4.6:1
5.1:1
6.4:1
Economic leverage at period-end (4)
6.1:1
6.2:1
6.8:1
Capital ratio at period-end
13.7
%
13.6
%
12.3
%
Performance related metrics
Book value per common share
$
8.95
$
8.92
$
7.50
GAAP net income (loss) per average common
share (5)
$
1.23
$
0.60
$
(2.57
)
Annualized GAAP return (loss) on average
equity
49.87
%
24.91
%
(102.17
%)
Net interest margin (6)
3.39
%
2.14
%
0.18
%
Average yield on interest earning assets
(7)
3.76
%
2.61
%
1.91
%
Average GAAP cost of interest bearing
liabilities (8)
0.42
%
0.51
%
1.86
%
Net interest spread
3.34
%
2.10
%
0.05
%
Dividend declared per common share
$
0.22
$
0.22
$
0.25
Annualized dividend yield (9)
10.23
%
10.41
%
19.72
%
Non-GAAP metrics *
Core earnings (excluding PAA) per average
common share (5)
$
0.29
$
0.30
$
0.21
Annualized core return on average equity
(excluding PAA)
12.53
%
13.03
%
9.27
%
Net interest margin (excluding PAA)
(6)
1.91
%
1.98
%
1.18
%
Average yield on interest earning assets
(excluding PAA) (7)
2.71
%
2.80
%
2.91
%
Average economic cost of interest bearing
liabilities (8)
0.87
%
0.87
%
1.91
%
Net interest spread (excluding PAA)
1.84
%
1.93
%
1.00
%
*
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 (excluding receiver
swaptions) and futures relative to repurchase agreements, other
secured financing and cost basis of TBA derivatives 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, debt issued by securitization
vehicles, participations issued and mortgages payable. Certain
credit facilities (included within other secured financing), debt
issued by securitization vehicles, participations issued and
mortgages payable are non-recourse to the Company.
(4)
Computed as the sum of recourse
debt, cost basis of TBA and CMBX derivatives outstanding, and net
forward purchases (sales) of investments divided by total
equity.
(5)
Net of dividends on preferred
stock.
(6)
Net interest margin represents
interest income less interest expense divided by average interest
earning assets. Net interest margin (excluding PAA) represents the
sum of interest income (excluding PAA) plus TBA dollar roll income
and CMBX coupon income less interest expense and the net interest
component of interest rate swaps divided by the sum of average
interest earning assets plus average TBA contract and CMBX
balances.
(7)
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).
(8)
Average GAAP cost of interest
bearing liabilities represents annualized interest expense divided
by average interest bearing liabilities. Average interest bearing
liabilities reflects the average balances during the period.
Average economic cost of interest bearing liabilities represents
annualized economic interest expense divided by average interest
bearing liabilities. Economic interest expense is comprised of GAAP
interest expense and the net interest component of interest rate
swaps.
(9)
Based on the closing price of the
Company’s common stock of $8.60, $8.45 and $5.07 at March 31, 2021,
December 31, 2020 and March 31, 2020, respectively.
The following table contains additional information on our
residential and commercial investments as of the dates
presented:
For the quarters ended
March 31, 2021
December 31, 2020
March 31, 2020
Agency mortgage-backed securities
$
69,637,229
$
74,067,059
$
78,456,846
Residential credit risk transfer
securities
930,983
532,403
Non-agency mortgage-backed securities
1,277,104
972,192
585,954
Commercial mortgage-backed securities
4,121
80,742
91,925
Total securities
$
71,849,437
$
75,652,396
$
79,357,596
Residential mortgage loans
$
528,868
$
345,810
$
1,268,083
Commercial real estate debt and preferred
equity
—
498,081
649,843
Corporate debt
2,074,475
2,239,930
2,150,263
Total loans, net
$
2,603,343
$
3,083,821
$
4,068,189
Mortgage servicing rights
$
113,080
$
100,895
$
280,558
Agency mortgage-backed securities
transferred or pledged to securitization vehicles
$
598,118
$
620,347
$
1,803,608
Residential mortgage loans transferred or
pledged to securitization vehicles
3,170,804
3,249,251
3,027,188
Commercial real estate debt investments
transferred or pledged to securitization vehicles
—
2,166,073
1,927,575
Commercial real estate debt and preferred
equity transferred or pledged to securitization vehicles
—
874,349
913,291
Assets transferred or pledged to
securitization vehicles
$
3,768,922
$
6,910,020
$
7,671,662
Real estate, net
$
—
$
656,314
$
751,738
Assets of disposal group held for
sale
$
4,400,723
$
—
$
—
Total residential and commercial
investments
$
82,735,505
$
86,403,446
$
92,129,743
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 (excluding PAA);
- core earnings (excluding PAA) attributable to common
stockholders;
- 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);
- average economic cost of interest bearing liabilities;
- 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 (excluding PAA), 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
may be useful to investors, and reconciliations to their most
directly comparable GAAP results are provided below.
Core earnings (excluding PAA), core earnings (excluding PAA)
attributable to common stockholders, core earnings (excluding PAA)
per average common share and annualized core return on average
equity (excluding PAA)
The Company'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. The Company generates net income by earning a net
interest spread on its investment portfolio, which is a function of
interest income from its investment portfolio less financing,
hedging and operating costs. Core earnings (excluding PAA), which
is defined as the sum of (a) economic net interest income, (b) TBA
dollar roll income and CMBX coupon income, (c) realized
amortization of MSRs, (d) other income (loss) (excluding
depreciation expense related to commercial real estate and
amortization of intangibles, non-core income allocated to equity
method investments and other non-core components of other income
(loss)), (e) general and administrative expenses (excluding
transaction expenses and non-recurring items), and (f) income taxes
(excluding the income tax effect of non-core income (loss) items)
and excludes (g) 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 is used by the Company's management and,
the Company believes, used by analysts and investors to measure its
progress in achieving its principal business objective.
The Company seeks to fulfill this objective through a variety of
factors including portfolio construction, the degree of market risk
exposure and related hedge profile, and the use and forms of
leverage, all while operating within the parameters of the
Company's capital allocation policy and risk governance
framework.
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 (excluding PAA) generated by the Company’s invested equity
capital.
The following table presents a reconciliation of GAAP financial
results to non-GAAP core earnings (excluding PAA) for the periods
presented:
For the quarters ended
March 31, 2021
December 31, 2020
March 31, 2020
(dollars in thousands, except
per share data)
GAAP net income (loss)
$
1,751,134
$
878,635
$
(3,640,189
)
Net income (loss) attributable to
noncontrolling interests
321
1,419
66
Net income (loss) attributable to
Annaly
1,750,813
877,216
(3,640,255
)
Adjustments to exclude reported
realized and unrealized (gains) losses
Realized (gains) losses on termination or
maturity of interest rate swaps
—
(2,092
)
397,561
Unrealized (gains) losses on interest rate
swaps
(772,262
)
(258,236
)
2,827,723
Net (gains) losses on disposal of
investments and other
65,786
(9,363
)
(206,583
)
Net (gains) losses on other derivatives
and financial instruments
(476,868
)
(209,647
)
(206,426
)
Net unrealized (gains) losses on
instruments measured at fair value through earnings
(104,191
)
(51,109
)
730,160
Loan loss provision (1)
(144,870
)
469
99,993
Business divestiture-related (gains)
losses
249,563
—
—
Other adjustments
Depreciation expense related to commercial
real estate and amortization of intangibles
7,324
11,097
7,934
Non-core (income) loss allocated to equity
method investments (2)
(9,680
)
28
19,398
Transaction expenses and non-recurring
items (3)
695
172
7,245
Income tax effect of non-core income
(loss) items
4,334
(10,984
)
(23,862
)
TBA dollar roll income and CMBX coupon
income (4)
98,933
99,027
44,904
MSR amortization (5)
(15,488
)
(26,633
)
(18,296
)
Plus:
Premium amortization adjustment cost
(benefit)
(214,570
)
39,101
290,722
Core earnings (excluding PAA) *
439,519
459,046
330,218
Dividends on preferred stock
26,883
35,509
35,509
Core earnings (excluding PAA)
attributable to common stockholders *
$
412,636
$
423,537
$
294,709
GAAP net income (loss) per average
common share
$
1.23
$
0.60
$
(2.57
)
Core earnings (excluding PAA) per
average common share *
$
0.29
$
0.30
$
0.21
Annualized GAAP return (loss) on
average equity
49.87
%
24.91
%
(102.17
%)
Annualized core return on average
equity (excluding PAA) *
12.53
%
13.03
%
9.27
%
*
Represents a non-GAAP financial
measure.
(1)
Includes ($5.3) million, ($1.0)
million and $0.7 million of loss provision (reversal) on the
Company’s unfunded loan commitments for the quarters ended March
31, 2021, December 31, 2020 and March 31, 2020, respectively, which
is reported in Other income (loss) in the Company’s Consolidated
Statements of Comprehensive Income (Loss).
(2)
The Company excludes non-core
(income) loss allocated to equity method investments, which
represents the unrealized (gains) losses allocated to equity
interests in a portfolio of MSR, which is a component of Other
income (loss).
(3)
Includes costs incurred in
connection with securitizations of residential whole loans for all
periods presented. The quarter ended March 31, 2020 also includes
costs incurred in connection with the Internalization, the CEO
search process and a securitization of Agency mortgage-backed
securities.
(4)
TBA dollar roll income and CMBX
coupon income each represent a component of Net gains (losses) on
other derivatives and financial instruments. CMBX coupon income
totaled $1.5 million, $1.5 million and $1.2 million for the
quarters ended March 31, 2021, December 31, 2020 and March 31,
2020, respectively.
(5)
MSR amortization 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
instruments measured at fair value.
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
in Net gains (losses) on other derivatives and financial
instruments 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 other derivatives
and financial instruments in the Consolidated Statements of
Comprehensive Income (Loss).
The CMBX index is a synthetic tradable index referencing a
basket of 25 commercial mortgage-backed securities ("CMBS") of a
particular rating and vintage. The CMBX index allows investors to
take a long exposure (referred to as selling protection) or short
exposure (referred to as buying protection) on the respective
basket of CMBS securities and is structured as a "pay-as-you-go"
contract whereby the protection buyer pays to the protection seller
a standardized running coupon on the contracted notional amount.
The Company reports income (expense) on CMBX positions in Net gains
(losses) on other derivatives and financial instruments in the
Consolidated Statements of Comprehensive Income (Loss). The coupon
payments received or paid on CMBX positions are equivalent to
interest income (expense) and therefore included in core earnings
(excluding PAA).
Premium Amortization Expense
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,
multifamily and reverse mortgages, 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 Securities
portfolio and residential securities transferred or pledged to
securitization vehicles, for the quarters ended March 31, 2021,
December 31, 2020, and March 31, 2020:
For the quarters ended
March 31, 2021
December 31, 2020
March 31, 2020
(dollars in thousands)
Premium amortization expense
(accretion)
$
(11,891
)
$
239,118
$
616,937
Less: PAA cost (benefit)
(214,570
)
39,101
290,722
Premium amortization expense (excluding
PAA)
$
202,679
$
200,017
$
326,215
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, multifamily and reverse mortgages), which
can obscure underlying trends in the performance of the
portfolio.
Economic interest expense includes GAAP interest expense and the
net interest component of interest rate swaps. 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 net
interest component of 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. The
Company may use market agreed coupon (“MAC”) interest rate swaps in
which the Company may receive or make a payment at the time of
entering into such interest rate swap to compensate for the
off-market nature of such interest rate swap. In accordance with
GAAP, upfront payments associated with MAC interest rate swaps are
not reflected in the net interest component of interest rate swaps
in the Company's Consolidated Statements of Comprehensive Income
(Loss). The Company did not enter into any MAC interest rate swaps
during the quarter ended March 31, 2021.
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
March 31, 2021
December 31, 2020
March 31, 2020
Interest income (excluding PAA)
reconciliation
(dollars in thousands)
GAAP interest income
$
763,378
$
527,344
$
555,026
Premium amortization adjustment
(214,570
)
39,101
290,722
Interest income (excluding PAA)
*
$
548,808
$
566,445
$
845,748
Economic interest expense
reconciliation
GAAP interest expense
$
75,973
$
94,481
$
503,473
Add:
Net interest component of interest rate
swaps
79,747
66,807
13,980
Economic interest expense *
$
155,720
$
161,288
$
517,453
Economic net interest income (excluding
PAA) reconciliation
Interest income (excluding PAA) *
$
548,808
$
566,445
$
845,748
Less:
Economic interest expense *
155,720
161,288
517,453
Economic net interest income (excluding
PAA) *
$
393,088
$
405,157
$
328,295
* Represents a non-GAAP financial
measure.
Average yield on interest earning assets (excluding PAA), net
interest spread (excluding PAA), net interest margin (excluding
PAA) and average economic cost of interest bearing
liabilities
Net interest spread (excluding PAA), which is the difference
between the average yield on interest earning assets (excluding
PAA) and the average economic cost of interest bearing liabilities,
which represents annualized economic interest expense divided by
average interest bearing liabilities, and net interest margin
(excluding PAA), which is calculated as the sum of interest income
(excluding PAA) plus TBA dollar roll income and CMBX coupon income
less interest expense and the net interest component of interest
rate swaps divided by the sum of average interest earning assets
plus average TBA contract and CMBX 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
March 31, 2021
December 31, 2020
March 31, 2020
Economic metrics (excluding
PAA)
(dollars in thousands)
Average interest earning assets
$
81,121,340
$
80,973,433
$
116,063,895
Interest income (excluding PAA) *
$
548,808
$
566,445
$
845,748
Average yield on interest earning assets
(excluding PAA) *
2.71
%
2.80
%
2.91
%
Average interest bearing liabilities
$
72,002,031
$
72,233,239
$
107,029,466
Economic interest expense *
$
155,720
$
161,288
$
517,453
Average economic cost of interest bearing
liabilities *
0.87
%
0.87
%
1.91
%
Economic net interest income (excluding
PAA) *
$
393,088
$
405,157
$
328,295
Net interest spread (excluding PAA) *
1.84
%
1.93
%
1.00
%
Interest income (excluding PAA) *
$
548,808
$
566,445
$
845,748
TBA dollar roll income and CMBX coupon
income
98,933
99,027
44,904
Interest expense
(75,973
)
(94,481
)
(503,473
)
Net interest component of interest rate
swaps
(79,747
)
(66,807
)
(13,980
)
Subtotal
$
492,021
$
504,184
$
373,199
Average interest earnings assets
$
81,121,340
$
80,973,433
$
116,063,895
Average TBA contract and CMBX balances
21,865,969
20,744,672
9,965,142
Subtotal
$
102,987,309
$
101,718,105
$
126,029,037
Net interest margin (excluding PAA)
*
1.91
%
1.98
%
1.18
%
* Represents a non-GAAP financial
measure.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20210428006071/en/
Annaly Capital Management, Inc. Investor Relations 1-888-8Annaly
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