Annaly Capital Management, Inc. (NYSE: NLY) ("Annaly" or the
"Company") today announced its financial results for the quarter
ended September 30, 2021.
Financial Highlights
- GAAP net income of $0.34 per average common share for the
quarter
- Earnings available for distribution (“EAD”) of $0.28 per
average common share for the quarter, down $0.02
quarter-over-quarter with dividend coverage of +125%
- Economic return and tangible economic return of 2.9% for the
quarter
- Annualized GAAP return on average equity of 15.3% and
annualized EAD return on average equity of 12.8%
- Book value per common share of $8.39, up $0.02 from the prior
quarter
- GAAP leverage of 4.4x down from 4.7x in the prior quarter;
economic leverage of 5.8x unchanged from the prior quarter
- Declared quarterly common stock cash dividend of $0.22 per
share
Business Highlights
Investment and Strategy
- Total assets of $94.2 billion(1) with Agency portfolio
representing 92% of total assets
- Annaly increased its Agency portfolio by nearly $3.0 billion
during the quarter by redeploying capital from the sale of the
Commercial Real Estate Business
- The Mortgage Servicing Rights ("MSR") portfolio, which is
complementary to the Agency portfolio, increased 41%
quarter-over-quarter and represented 4% of dedicated
capital(2)
- Annaly Residential Credit Group, which represents 21% of
dedicated capital(3), has now surpassed its pre-COVID portfolio
size as the group continues to execute on its strategy
- Purchased approximately $1.4 billion of whole loans during the
quarter
- Closed inaugural private closed-end Middle Market Lending fund
subsequent to quarter end, raising $371 million of third-party
capital that has been fully deployed at nearly $450 million in
assets
- Completed the subsequent closing of previously announced $2.33
billion sale of Annaly’s Commercial Real Estate Business during the
quarter(4)
Financing and Capital
- $9.8 billion of unencumbered assets, including cash and
unencumbered Agency MBS of $5.9 billion
- Financing costs hit another record low with average GAAP cost
of interest bearing liabilities decreasing 3 basis points to 0.32%
and average economic cost of interest bearing liabilities
decreasing 17 basis points to 0.66%
- Annaly Residential Credit Group priced five residential whole
loan securitizations totaling $1.9 billion since the beginning of
the third quarter(5)
- Annaly Residential Credit Group expanded credit facility
capacity by $300 million
- Raised $471 million year-to-date of accretive common equity
through the Company’s at-the-market sales program(6)
Corporate Responsibility & Governance
- Enhanced corporate governance guidelines and Board committee
charters to reflect integrated ESG oversight across the Board and
its committees
- Publicly released 2019 and 2020 EEO-1 Reports and committed to
annual disclosure of workforce diversity statistics in line with
broader commitment to diversity and transparency
- Appointed Audrey K. Susanin, Deputy General Counsel, as Chief
Compliance Officer and Johanna Griffin as Head of Risk
“We are pleased with our third quarter results, which generated
a positive economic return for shareholders and earnings available
for distribution that continued to provide ample coverage for our
current dividend,” remarked David Finkelstein, Annaly’s Chief
Executive Officer and Chief Investment Officer. “We modestly grew
our Agency portfolio redeploying proceeds from our Commercial Real
Estate divestiture, while the market removed some event risk given
greater clarity from the Federal Reserve on its upcoming asset
taper. Our complementary credit portfolio continues to have strong
tailwinds and increased to 30% of our dedicated capital during the
quarter. In particular, we maintain a favorable outlook for
Annaly's Residential Credit Group, which priced five
securitizations since the beginning of the quarter totaling nearly
$2 billion. Further, our Middle Market Lending Group achieved a
major corporate milestone by closing its inaugural private fund
subsequent to quarter end, which will significantly enhance the
platform's long-term growth potential."
“Ultimately, we are well-poised to take advantage of
opportunities that arise as the Federal Reserve shrinks its
footprint in the mortgage market given our prudent portfolio
construction, historically low leverage and substantial liquidity.
Annaly is uniquely positioned to allocate capital across the
housing finance market and is committed to driving value for our
shareholders through our shared capital model.”
(1)
Total portfolio represents Annaly’s
investments that are on-balance sheet as well as investments that
are off-balance sheet in which Annaly has economic exposure. Assets
include TBA purchase contracts (market value) of $23.6 billion,
CMBX derivatives (market value) of $0.4 billion and $0.7 billion of
retained securities that are eliminated in consolidation and are
shown net of participations issued totaling $0.6 billion.
(2)
Includes limited partnership interests in
an MSR fund that is reported in Other Assets. Excludes $86 million
of legacy MSR holdings that were held for sale as of September 30,
2021 and are expected to be sold and transferred in Q4 2021.
(3)
Dedicated capital allocations as of
September 30, 2021 assume capital related to held for sale assets
will be redeployed within the Agency business.
(4)
During the third quarter 2021, the Company
completed the economic transfer and substantially all of the legal
ownership transfer of the previously announced sale of
substantially all of the assets that comprise the Commercial Real
Estate Business for $2.33 billion (the “Sale”). The remaining
assets of the Sale are expected to be legally transferred by the
end of the fourth quarter 2021 subject to regulatory approvals and
the Company intends to sell nearly all of the remaining assets that
are not included in the Sale.
(5)
Includes a $382 million residential whole
loan securitization in July 2021, a $356 million residential whole
loan securitization in August 2021, a $320 million residential
whole loan securitization in September 2021, a $454 million
residential whole loan securitization in October 2021 and a $344
million residential whole loan securitization in October 2021.
(6)
Represents $420 million raised in Q2 2021
and $51 million raised since the beginning of Q3 2021 through the
Company’s at-the-market sales program for its common stock net of
sales agent commissions and other offering expenses.
Financial Performance
The following table summarizes certain key performance
indicators as of and for the quarters ended September 30, 2021,
June 30, 2021 and September 30, 2020:
September 30, 2021
June 30, 2021
September 30, 2020
Book value per common share
$
8.39
$
8.37
$
8.70
GAAP leverage at period-end (1)
4.4:1
4.7:1
5.1:1
GAAP net income (loss) per average common
share (2)
$
0.34
$
(0.23)
$
0.70
Annualized GAAP return (loss) on average
equity
15.25
%
(8.51
%)
29.02
%
Net interest margin (3)
2.01
%
1.66
%
2.15
%
Average yield on interest earning assets
(4)
2.29
%
1.97
%
2.70
%
Average GAAP cost of interest bearing
liabilities (5)
0.32
%
0.35
%
0.60
%
Net interest spread
1.97
%
1.62
%
2.10
%
Non-GAAP metrics *
Earnings available for distribution per
average common share (2)
$
0.28
$
0.30
$
0.32
Annualized EAD return on average
equity
12.81
%
13.05
%
13.79
%
Economic leverage at period-end (1)
5.8:1
5.8:1
6.2:1
Net interest margin (excluding PAA)
(3)
2.04
%
2.09
%
2.05
%
Average yield on interest earning assets
(excluding PAA) (4)
2.63
%
2.76
%
2.86
%
Average economic cost of interest bearing
liabilities (5)
0.66
%
0.83
%
0.93
%
Net interest spread (excluding PAA)
1.97
%
1.93
%
1.93
%
* Represents a non-GAAP financial measure.
Please refer to the "Non-GAAP Financial Measures" section for
additional information.
(1)
GAAP leverage is computed as the sum of
repurchase agreements, other secured financing, debt issued by
securitization vehicles, participations issued and mortgages
payable divided by total equity. Economic leverage is 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
economic leverage.
(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.
Updates to Financial
Disclosures
Commencing with the Company’s financial results for the quarter
ended June 30, 2021 and for subsequent reporting periods, the
Company has relabeled “Core Earnings (excluding PAA)” as “Earnings
Available for Distribution” (“EAD”). Earnings Available for
Distribution, which is a non-GAAP financial measure intended to
supplement the Company’s financial results computed in accordance
with U.S. generally accepted accounting principles (“GAAP”), has
replaced the Company’s prior presentation of Core Earnings
(excluding PAA). In addition, Core Earnings (excluding PAA) results
from prior reporting periods have been relabeled Earnings Available
for Distribution. In line with evolving industry practices, the
Company believes the term Earnings Available for Distribution more
accurately reflects the principal purpose of the measure than the
term Core Earnings (excluding PAA) and serves as a useful indicator
for investors in evaluating the Company’s performance and its
ability to pay dividends.
The definition of Earnings Available for Distribution is
identical to the definition of Core Earning (excluding PAA) from
prior reporting periods. As such, Earnings Available for
Distribution is defined as the sum of (a) economic net interest
income, (b) TBA dollar roll income and CMBX coupon income, (c)
realized amortization of MSR, (d) other income (loss) (excluding
depreciation expense related to commercial real estate and
amortization of intangibles, non-EAD income allocated to equity
method investments and other non-EAD 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-EAD 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.
Earnings Available for Distribution should not be considered a
substitute for, or superior to, GAAP net income. Please refer to
the "Non-GAAP Financial Measures" section for a detailed discussion
of Earnings Available for Distribution.
In addition, beginning with the quarter ended June 30, 2021, the
Company began classifying certain portfolio activity- or
volume-related expenses (including but not limited to brokerage and
commission fees, due diligence costs and securitization expenses)
as Other income (loss) rather than Other general and administrative
expenses in the Consolidated Statements of Comprehensive Income
(Loss) to better reflect the nature of the items. As such, prior
periods have been conformed to the current presentation.
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; operational risks or
risk management failures by us or critical third parties, including
cybersecurity incidents; 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 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; and our ability to maintain our exemption from
registration under the Investment Company Act. 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 with investment
strategies across mortgage finance and corporate middle market
lending. 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
Third Quarter 2021 Investor Presentation and the Third 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 third quarter 2021 earnings conference
call on October 28, 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/10160708/ee08d0caa8.
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 10160708. 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)
September 30, 2021
June 30, 2021
March 31, 2021
December 31, 2020 (1)
September 30,
2020
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Assets
Cash and cash equivalents
$
1,046,300
$
1,380,456
$
1,122,793
$
1,243,703
$
1,239,982
Securities
65,622,352
69,032,335
71,849,437
75,652,396
76,098,985
Loans, net
3,580,521
3,563,008
2,603,343
3,083,821
2,788,341
Mortgage servicing rights
572,259
202,616
113,080
100,895
207,985
Interests in MSR
57,530
49,035
—
—
—
Assets transferred or pledged to
securitization vehicles
4,738,481
4,073,156
3,768,922
6,910,020
7,269,402
Real estate, net
—
—
—
656,314
790,597
Assets of disposal group held for sale
238,042
3,302,001
4,400,723
—
—
Derivative assets
331,395
181,889
891,474
171,134
103,245
Receivable for unsettled trades
42,482
14,336
144,918
15,912
54,200
Principal and interest receivable
234,810
250,210
259,655
268,073
281,009
Goodwill and intangible assets, net
25,371
26,502
37,337
127,341
136,900
Other assets
172,890
300,761
177,907
225,494
221,765
Total assets
$
76,662,433
$
82,376,305
$
85,369,589
$
88,455,103
$
89,192,411
Liabilities and stockholders’
equity
Liabilities
Repurchase agreements
$
55,475,420
$
60,221,067
$
61,202,477
$
64,825,239
$
64,633,447
Other secured financing
729,555
909,655
922,605
917,876
861,373
Debt issued by securitization vehicles
3,935,410
3,315,087
3,044,725
5,652,982
6,027,576
Participations issued
641,006
315,810
180,527
39,198
—
Mortgages payable
—
—
—
426,256
507,934
Liabilities of disposal group held for
sale
159,508
2,362,690
3,319,414
—
—
Derivative liabilities
912,134
900,259
939,622
1,033,345
1,182,681
Payable for unsettled trades
571,540
154,405
1,070,080
884,069
1,176,001
Interest payable
109,586
173,721
100,949
191,116
155,338
Dividends payable
318,986
317,714
307,671
307,613
308,644
Other liabilities
91,421
66,721
213,924
155,613
144,745
Total liabilities
62,944,566
68,737,129
71,301,994
74,433,307
74,997,739
Stockholders’ equity
Preferred stock, par value $0.01 per share
(2)
1,536,569
1,536,569
1,536,569
1,536,569
1,982,026
Common stock, par value $0.01 per share
(3)
14,499
14,442
13,985
13,982
14,029
Additional paid-in capital
20,228,366
20,178,692
19,754,826
19,750,818
19,798,032
Accumulated other comprehensive income
(loss)
1,638,638
1,780,275
2,002,231
3,374,335
3,589,056
Accumulated deficit
(9,720,270
)
(9,892,863
)
(9,251,804
)
(10,667,388
)
(11,200,937
)
Total stockholders’ equity
13,697,802
13,617,115
14,055,807
14,008,316
14,182,206
Noncontrolling interests
20,065
22,061
11,788
13,480
12,466
Total equity
13,717,867
13,639,176
14,067,595
14,021,796
14,194,672
Total liabilities and equity
$
76,662,433
$
82,376,305
$
85,369,589
$
88,455,103
$
89,192,411
(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 September 30, 2021, June 30, 2021 and 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. 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 September 30, 2021, June 30, 2021 and
March 31, 2021. Includes 19,550,000 shares authorized and
17,000,000 shares issued and outstanding at December 31, 2020 and
September 30, 2020. 6.75% Series I Preferred Stock - Includes
17,700,000 shares authorized, issued and outstanding at September
30, 2021, June 30, 2021 and March 31, 2021. Includes 18,400,000
shares authorized and 17,700,000 issued and outstanding at December
31, 2020 and September 30, 2020.
(3)
Includes 2,936,500,000 shares authorized
at September 30, 2021, June 30, 2021 and March 31, 2021;
2,914,850,000 shares authorized at December 31, 2020 and September
30, 2020. Includes 1,449,935,017 shares issued and outstanding at
September 30, 2021; 1,444,156,029 shares issued and outstanding at
June 30, 2021; 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.
ANNALY CAPITAL MANAGEMENT,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except
per share data)
(Unaudited)
For the quarters ended
September 30, 2021
June 30, 2021
March 31, 2021
December 31,
2020
September 30,
2020
Net interest income
Interest income
$
412,972
$
383,906
$
763,378
$
527,344
$
562,443
Interest expense
50,438
61,047
75,973
94,481
115,126
Net interest income
362,534
322,859
687,405
432,863
447,317
Realized and unrealized gains
(losses)
Net interest component of interest rate
swaps
(54,411
)
(83,087
)
(79,747
)
(66,807
)
(62,529
)
Realized gains (losses) on termination or
maturity of interest rate swaps
(1,196,417
)
—
—
2,092
(427
)
Unrealized gains (losses) on interest rate
swaps
1,380,946
(141,067
)
772,262
258,236
170,327
Subtotal
130,118
(224,154
)
692,515
193,521
107,371
Net gains (losses) on disposal of
investments and other
12,002
16,223
(65,786
)
9,363
198,888
Net gains (losses) on other derivatives
and financial instruments
(45,168
)
(357,808
)
476,868
209,647
169,316
Net unrealized gains (losses) on
instruments measured at fair value through earnings
90,817
3,984
104,191
51,109
121,255
Loan loss (provision) reversal
6,134
(494
)
139,620
(1,497
)
21,993
Business divestiture-related gains
(losses)
(14,009
)
1,527
(249,563
)
—
—
Subtotal
49,776
(336,568
)
405,330
268,622
511,452
Total realized and unrealized gains
(losses)
179,894
(560,722
)
1,097,845
462,143
618,823
Other income (loss)
16,221
1,675
13,468
13,107
3,714
General and administrative
expenses
Compensation and management fee
27,859
32,013
31,518
24,628
29,196
Other general and administrative
expenses
16,023
21,513
16,387
18,345
15,391
Total general and administrative
expenses
43,882
53,526
47,905
42,973
44,587
Income (loss) before income
taxes
514,767
(289,714
)
1,750,813
865,140
1,025,267
Income taxes
(6,767
)
5,134
(321
)
(13,495
)
9,719
Net income (loss)
521,534
(294,848
)
1,751,134
878,635
1,015,548
Net income (loss) attributable to
noncontrolling interests
2,290
794
321
1,419
(126
)
Net income (loss) attributable to
Annaly
519,244
(295,642
)
1,750,813
877,216
1,015,674
Dividends on preferred stock
26,883
26,883
26,883
35,509
35,509
Net income (loss) available (related)
to common stockholders
$
492,361
$
(322,525
)
$
1,723,930
$
841,707
$
980,165
Net income (loss) per share available
(related) to common stockholders
Basic
$
0.34
$
(0.23
)
$
1.23
$
0.60
$
0.70
Diluted
$
0.34
$
(0.23
)
$
1.23
$
0.60
$
0.70
Weighted average number of common
shares outstanding
Basic
1,445,315,914
1,410,239,138
1,399,210,925
1,399,809,722
1,404,202,695
Diluted
1,446,357,867
1,410,239,138
1,400,000,727
1,400,228,777
1,404,368,300
Other comprehensive income
(loss)
Net income (loss)
$
521,534
$
(294,848
)
$
1,751,134
$
878,635
$
1,015,548
Unrealized gains (losses) on
available-for-sale securities
(113,451
)
(191,541
)
(1,428,927
)
(207,393
)
(140,671
)
Reclassification adjustment for net
(gains) losses included in net income (loss)
(28,186
)
(30,415
)
56,823
(7,328
)
(112,347
)
Other comprehensive income
(loss)
(141,637
)
(221,956
)
(1,372,104
)
(214,721
)
(253,018
)
Comprehensive income (loss)
379,897
(516,804
)
379,030
663,914
762,530
Comprehensive income (loss) attributable
to noncontrolling interests
2,290
794
321
1,419
(126
)
Comprehensive income (loss)
attributable to Annaly
377,607
(517,598
)
378,709
662,495
762,656
Dividends on preferred stock
26,883
26,883
26,883
35,509
35,509
Comprehensive income (loss)
attributable to common stockholders
$
350,724
$
(544,481
)
$
351,826
$
626,986
$
727,147
ANNALY CAPITAL MANAGEMENT,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except
per share data)
For the nine months
ended
September 30, 2021
September 30, 2020
Net interest income
Interest income
$
1,560,256
$
1,702,281
Interest expense
187,458
804,631
Net interest income
1,372,798
897,650
Realized and unrealized gains
(losses)
Net interest component of interest rate
swaps
(217,245
)
(141,070
)
Realized gains (losses) on termination or
maturity of interest rate swaps
(1,196,417
)
(1,919,720
)
Unrealized gains (losses) on interest rate
swaps
2,012,141
(1,162,768
)
Subtotal
598,479
(3,223,558
)
Net gains (losses) on disposal of
investments and other
(37,561
)
652,150
Net gains (losses) on other
derivatives
73,892
546,658
Net unrealized gains (losses) on
instruments measured at fair value through earnings
198,992
(354,133
)
Loan loss (provision) reversal
145,260
(146,084
)
Business divestiture-related (losses)
gains
(262,045
)
—
Subtotal
118,538
698,591
Total realized and unrealized gains
(losses)
717,017
(2,524,967
)
Other income (loss)
31,364
23,204
General and administrative
expenses
Compensation and management fee
91,390
107,057
Other general and administrative
expenses
53,923
72,165
Total general and administrative
expenses
145,313
179,222
Income (loss) before income
taxes
1,975,866
(1,783,335
)
Income taxes
(1,954
)
(14,928
)
Net income (loss)
1,977,820
(1,768,407
)
Net income (loss) attributable to
noncontrolling interests
3,405
(28
)
Net income (loss) attributable to
Annaly
1,974,415
(1,768,379
)
Dividends on preferred stock
80,649
106,527
Net income (loss) available (related)
to common stockholders
$
1,893,766
$
(1,874,906
)
Net income (loss) per share available
(related) to common stockholders
Basic
$
1.34
$
(1.32
)
Diluted
$
1.33
$
(1.32
)
Weighted average number of common
shares outstanding
Basic
1,418,424,208
1,419,645,475
Diluted
1,419,502,205
1,419,645,475
Other comprehensive income
(loss)
Net income (loss)
$
1,977,820
$
(1,768,407
)
Unrealized gains (losses) on
available-for-sale securities
(1,733,919
)
2,220,271
Reclassification adjustment for net
(gains) losses included in net income (loss)
(1,778
)
(769,406
)
Other comprehensive income
(loss)
(1,735,697
)
1,450,865
Comprehensive income (loss)
242,123
(317,542
)
Comprehensive income (loss) attributable
to noncontrolling interests
3,405
(28
)
Comprehensive income (loss)
attributable to Annaly
238,718
(317,514
)
Dividends on preferred stock
80,649
106,527
Comprehensive income (loss)
attributable to common stockholders
$
158,069
$
(424,041
)
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 September 30, 2021, June 30, 2021, and
September 30, 2020:
September 30, 2021
June 30, 2021
September 30, 2020
Portfolio related metrics
Fixed-rate Residential Securities as a
percentage of total Residential Securities
98
%
98
%
98
%
Adjustable-rate and floating-rate
Residential Securities as a percentage of total Residential
Securities
2
%
2
%
2
%
Weighted average experienced CPR for the
period
23.1
%
26.4
%
22.9
%
Weighted average projected long-term CPR
at period-end
12.7
%
12.9
%
17.1
%
Liabilities and hedging metrics
Weighted average days to maturity on
repurchase agreements outstanding at period-end
75
88
72
Hedge ratio (1)
80
%
75
%
48
%
Weighted average pay rate on interest rate
swaps at period-end (2)
0.60
%
0.81
%
0.91
%
Weighted average receive rate on interest
rate swaps at period-end (2)
0.07
%
0.34
%
0.48
%
Weighted average net rate on interest rate
swaps at period-end (2)
0.53
%
0.47
%
0.43
%
GAAP leverage at period-end (3)
4.4:1
4.7:1
5.1:1
GAAP capital ratio at period-end (4)
17.9
%
16.6
%
15.9
%
Performance related metrics
Book value per common share
$
8.39
$
8.37
$
8.70
GAAP net income (loss) per average common
share (5)
$
0.34
$
(0.23)
$
0.70
Annualized GAAP return (loss) on average
equity
15.25
%
(8.51
%)
29.02
%
Net interest margin (6)
2.01
%
1.66
%
2.15
%
Average yield on interest earning assets
(7)
2.29
%
1.97
%
2.70
%
Average GAAP cost of interest bearing
liabilities (8)
0.32
%
0.35
%
0.60
%
Net interest spread
1.97
%
1.62
%
2.10
%
Dividend declared per common share
$
0.22
$
0.22
$
0.22
Annualized dividend yield (9)
10.45
%
9.91
%
12.36
%
Non-GAAP metrics *
Earnings available for distribution per
average common share (5)
$
0.28
$
0.30
$
0.32
Annualized EAD return on average equity
(excluding PAA)
12.81
%
13.05
%
13.79
%
Economic leverage at period-end (3)
5.8:1
5.8:1
6.2:1
Economic capital ratio at period end
(4)
14.2
%
14.3
%
13.6
%
Net interest margin (excluding PAA)
(6)
2.04
%
2.09
%
2.05
%
Average yield on interest earning assets
(excluding PAA) (7)
2.63
%
2.76
%
2.86
%
Average economic cost of interest bearing
liabilities (8)
0.66
%
0.83
%
0.93
%
Net interest spread (excluding PAA)
1.97
%
1.93
%
1.93
%
* 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 MSR 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)
GAAP leverage is computed as the sum of
repurchase agreements, other secured financing, debt issued by
securitization vehicles, participations issued and mortgages
payable divided by total equity. Economic leverage is 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
economic leverage.
(4)
GAAP capital ratio is computed as total
equity divided by total assets. Economic capital ratio is computed
as total equity divided by total economic assets. Total economic
assets include the implied market value of TBA derivatives and are
net of debt issued by securitization vehicles.
(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 $8.42, $8.88 and $7.12 at September 30,
2021, June 30, 2021 and September 30, 2020, respectively.
The following table contains additional information on our
investment portfolio as of the dates presented:
For the quarters ended
September 30, 2021
June 30, 2021
September 30, 2020
Agency mortgage-backed securities
$
62,818,079
$
66,468,519
$
74,915,167
Residential credit risk transfer
securities
787,235
827,328
411,538
Non-agency mortgage-backed securities
1,747,932
1,582,323
717,602
Commercial mortgage-backed securities
269,106
154,165
54,678
Total securities
$
65,622,352
$
69,032,335
$
76,098,985
Residential mortgage loans
$
1,686,268
$
1,029,929
$
152,959
Residential mortgage loan warehouse
facility
1,431
—
—
Commercial real estate debt and preferred
equity
—
—
573,504
Corporate debt
1,890,709
2,066,709
2,061,878
Corporate debt, held for sale
2,113
466,370
—
Total loans, net
$
3,580,521
$
3,563,008
$
2,788,341
Mortgage servicing rights
$
572,259
$
202,616
$
207,985
Interests in MSR
$
57,530
$
49,035
$
—
Agency mortgage-backed securities
transferred or pledged to securitization vehicles
$
597,923
$
605,163
$
623,650
Residential mortgage loans transferred or
pledged to securitization vehicles
4,140,558
3,467,993
3,588,679
Commercial real estate debt investments
transferred or pledged to securitization vehicles
—
—
2,174,118
Commercial real estate debt and preferred
equity transferred or pledged to securitization vehicles
—
—
882,955
Assets transferred or pledged to
securitization vehicles
$
4,738,481
$
4,073,156
$
7,269,402
Real estate, net
$
—
$
—
$
790,597
Assets of disposal group held for
sale
$
238,042
$
3,302,001
$
—
Total investment portfolio
$
74,809,185
$
80,222,151
$
87,155,310
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:
- earnings available for distribution (“EAD”);
- earnings available for distribution attributable to common
stockholders;
- earnings available for distribution per average common
share;
- annualized EAD return on average equity;
- economic leverage;
- economic capital ratio;
- 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 earnings available for distribution, 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.
Earnings available for distribution, earnings available for
distribution attributable to common stockholders, earnings
available for distribution per average common share and annualized
EAD return on average equity
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. Earnings available for distribution,
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 MSR, (d) other income (loss) (excluding
depreciation expense related to commercial real estate and
amortization of intangibles, non-EAD income allocated to equity
method investments and other non-EAD 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-EAD 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. In addition, EAD
serves as a useful indicator for investors in evaluating the
Company's performance and ability to pay dividends. Annualized EAD
return on average equity, which is calculated by dividing earnings
available for distribution over average stockholders’ equity,
provides investors with additional detail on the earnings available
for distribution generated by the Company’s invested equity
capital.
The following table presents a reconciliation of GAAP financial
results to non-GAAP earnings available for distribution for the
periods presented:
For the quarters ended
September 30, 2021
June 30, 2021
September 30, 2020
(dollars in thousands, except
per share data)
GAAP net income (loss)
$
521,534
$
(294,848
)
$
1,015,548
Net income (loss) attributable to
noncontrolling interests
2,290
794
(126
)
Net income (loss) attributable to
Annaly
519,244
(295,642
)
1,015,674
Adjustments to exclude reported
realized and unrealized (gains) losses
Realized (gains) losses on termination or
maturity of interest rate swaps
1,196,417
—
427
Unrealized (gains) losses on interest rate
swaps
(1,380,946
)
141,067
(170,327
)
Net (gains) losses on disposal of
investments and other
(12,002
)
(16,223
)
(198,888
)
Net (gains) losses on other derivatives
and financial instruments
45,168
357,808
(169,316
)
Net unrealized (gains) losses on
instruments measured at fair value through earnings
(90,817
)
(3,984
)
(121,255
)
Loan loss provision (reversal) (1)
(6,771
)
1,078
(21,818
)
Business divestiture-related (gains)
losses
14,009
(1,527
)
—
Other adjustments
Depreciation expense related to commercial
real estate and amortization of intangibles (2)
1,122
5,635
11,363
Non-EAD (income) loss allocated to equity
method investments (3)
(2,046
)
3,141
(1,151
)
Transaction expenses and non-recurring
items (4)
2,201
1,150
2,801
Income tax effect of non-EAD income (loss)
items
(6,536
)
7,147
13,890
TBA dollar roll income and CMBX coupon
income (5)
115,586
111,592
114,092
MSR amortization (6)
(17,884
)
(13,491
)
(27,048
)
Plus:
Premium amortization adjustment cost
(benefit)
60,726
153,607
33,879
Earnings available for distribution
*
437,471
451,358
482,323
Dividends on preferred stock
26,883
26,883
35,509
Earnings available for distribution
attributable to common stockholders *
$
410,588
$
424,475
$
446,814
GAAP net income (loss) per average
common share
$
0.34
$
(0.23
)
$
0.70
Earnings available for distribution per
average common share *
$
0.28
$
0.30
$
0.32
Annualized GAAP return (loss) on
average equity
15.25
%
(8.51
%)
29.02
%
Annualized EAD return on average equity
*
12.81
%
13.05
%
13.79
%
* Represents a non-GAAP financial
measure.
(1)
Includes ($0.6) million, $0.6 million and
$0.2 million of loss provision (reversal) on the Company’s unfunded
loan commitments for the quarters ended September 30, 2021, June
30, 2021 and September 30, 2020, respectively, which is reported in
Other income (loss) in the Company’s Consolidated Statements of
Comprehensive Income (Loss).
(2)
Includes depreciation and amortization
expense related to equity method investments.
(3)
The Company excludes non-EAD (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).
(4)
The quarters ended September 30, 2021 June
30, 2021 and September 30, 2020 include costs incurred in
connection with securitizations of residential whole loans.
(5)
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
$1.2 million, $1.4 million and $1.5 million for the quarters ended
September 30, 2021, June 30, 2021 and September 30, 2020,
respectively.
(6)
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 earnings
available for distribution.
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 September 30, 2021,
June 30, 2021, and September 30, 2020:
For the quarters ended
September 30, 2021
June 30, 2021
September 30, 2020
(dollars in thousands)
Premium amortization expense
(accretion)
$
233,429
$
320,108
$
248,718
Less: PAA cost (benefit)
60,726
153,607
33,879
Premium amortization expense (excluding
PAA)
$
172,703
$
166,501
$
214,839
Economic leverage and economic capital ratios
The Company uses capital coupled with borrowed funds to invest
primarily in real estate related investments, earning the spread
between the yield on its assets and the cost of its borrowings and
hedging activities. The Company’s capital structure is designed to
offer an efficient complement of funding sources to generate
positive risk-adjusted returns for its stockholders while
maintaining appropriate liquidity to support its business and meet
the Company’s financial obligations under periods of market stress.
To maintain its desired capital profile, the Company utilizes a mix
of debt and equity funding. Debt funding may include the use of
repurchase agreements, loans, securitizations, participations
issued, lines of credit, asset backed lending facilities, corporate
bond issuance, convertible bonds, mortgages payable or other
liabilities. Equity capital primarily consists of common and
preferred stock.
The Company’s economic leverage ratio is 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. 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 economic leverage.
The following table presents a reconciliation of GAAP debt to
economic debt for purposes of calculating the Company’s economic
leverage ratio for the periods presented:
As of
September 30, 2021
June 30, 2021
September 30, 2020
Economic leverage ratio
reconciliation
(dollars in thousands)
Repurchase agreements
$
55,475,420
$
60,221,067
$
64,633,447
Other secured financing
729,555
909,655
861,373
Debt issued by securitization vehicles
3,935,410
3,315,087
6,027,576
Participations issued
641,006
315,810
—
Mortgages payable
—
—
507,934
Debt included in liabilities of disposal
group held for sale
113,362
2,306,633
—
Total GAAP debt
$
60,894,753
$
67,068,252
$
72,030,330
Less Non-Recourse Debt:
Credit facilities (1)
(729,555
)
(909,655
)
(828,530
)
Debt issued by securitization vehicles
(3,935,410
)
(3,315,087
)
(6,027,576
)
Participations issued
(641,006
)
(315,810
)
—
Mortgages payable
—
—
(507,934
)
Non-recourse debt included in liabilities
of disposal group held for sale
(113,362
)
(2,035,982
)
—
Total recourse debt
$
55,475,420
$
60,491,718
$
64,666,290
Plus / (Less):
Cost basis of TBA and CMBX derivatives
24,202,686
18,107,549
21,571,095
Payable for unsettled trades
571,540
154,405
1,176,001
Receivable for unsettled trades
(42,482
)
(14,336
)
(54,200
)
Economic debt *
$
80,207,164
$
78,739,336
$
87,359,186
Total equity
$
13,717,867
$
13,639,176
$
14,194,672
Economic leverage ratio *
5.8:1
5.8:1
6.2:1
* Represents a non-GAAP financial
measure.
(1)
Included in Other secured financing in the
Company’s Consolidated Statements of Financial Condition.
The following table presents a reconciliation of GAAP total
assets to economic total assets for purposes of calculating the
Company’s economic capital ratio for the periods presented:
As of
September 30, 2021
June 30, 2021
September 30, 2020
Economic capital ratio
reconciliation
(dollars in thousands)
Total GAAP assets
$
76,662,433
$
82,376,305
$
89,192,411
Less:
Gross unrealized gains on TBA derivatives
(1)
(1,776
)
(31,943
)
(38,656
)
Debt issued by securitization vehicles
(2)
(3,935,410
)
(4,925,196
)
(6,027,576
)
Plus:
Implied market value of TBA
derivatives
23,622,635
17,691,150
21,089,555
Total economic assets *
$
96,347,882
$
95,110,316
$
104,215,734
Total equity
$
13,717,867
$
13,639,176
$
14,194,672
Economic capital ratio (3)
14.2
%
14.3
%
13.6
%
* Represents a non-GAAP financial
measure.
(1)
Included in Derivative assets in
the Company’s Consolidated Statements of Financial Condition.
(2)
Includes debt issued by
securitization vehicles reported in Liabilities of disposal group
held for sale in the Company's Consolidated Statements of Financial
Condition.
(3)
Economic capital ratio is
computed as total equity divided by total economic assets.
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 September 30, 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
September 30, 2021
June 30, 2021
September 30, 2020
Interest income (excluding PAA)
reconciliation
(dollars in thousands)
GAAP interest income
$
412,972
$
383,906
$
562,443
Premium amortization adjustment
60,726
153,607
33,879
Interest income (excluding PAA)
*
$
473,698
$
537,513
$
596,322
Economic interest expense
reconciliation
GAAP interest expense
$
50,438
$
61,047
$
115,126
Add:
Net interest component of interest rate
swaps
54,411
83,087
62,529
Economic interest expense *
$
104,849
$
144,134
$
177,655
Economic net interest income (excluding
PAA) reconciliation
Interest income (excluding PAA) *
$
473,698
$
537,513
$
596,322
Less:
Economic interest expense *
104,849
144,134
177,655
Economic net interest income (excluding
PAA) *
$
368,849
$
393,379
$
418,667
* 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
September 30, 2021
June 30, 2021
September 30, 2020
Economic metrics (excluding
PAA)
(dollars in thousands)
Average interest earning assets
$
72,145,283
$
77,916,766
$
83,286,119
Interest income (excluding PAA) *
$
473,698
$
537,513
$
596,322
Average yield on interest earning assets
(excluding PAA) *
2.63
%
2.76
%
2.86
%
Average interest bearing liabilities
$
62,614,042
$
68,469,413
$
74,901,128
Economic interest expense *
$
104,849
$
144,134
$
177,655
Average economic cost of interest bearing
liabilities *
0.66
%
0.83
%
0.93
%
Economic net interest income (excluding
PAA) *
$
368,849
$
393,379
$
418,667
Net interest spread (excluding PAA) *
1.97
%
1.93
%
1.93
%
Interest income (excluding PAA) *
$
473,698
$
537,513
$
596,322
TBA dollar roll income and CMBX coupon
income
115,586
111,592
114,092
Economic interest expense *
(104,849
)
(144,134
)
(177,655
)
Subtotal
$
484,435
$
504,971
$
532,759
Average interest earnings assets
$
72,145,283
$
77,916,766
$
83,286,119
Average TBA contract and CMBX balances
22,739,226
18,761,062
20,429,935
Subtotal
$
94,884,509
$
96,677,828
$
103,716,054
Net interest margin (excluding PAA)
*
2.04
%
2.09
%
2.05
%
* Represents a non-GAAP financial
measure.
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version on businesswire.com: https://www.businesswire.com/news/home/20211027005997/en/
Annaly Capital Management, Inc. Investor Relations 1-888-8Annaly
www.annaly.com
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