Annaly Capital Management, Inc. (NYSE:NLY) (the “Company” or
“Annaly”) today announced its financial results for the quarter
ended June 30, 2018.
Quarterly Financial
Highlights
- GAAP net income of $595.9 million,
$0.49 per average common share
- Core earnings (excluding PAA) were
$382.8 million, $0.30 per average common share
- GAAP return on average equity was
17.20% and core return on average equity (excluding PAA) was
11.05%
- Book value per common share of
$10.35
- Economic leverage of 6.4x as compared
to 6.5x at March 31, 2018
- Net interest margin (excluding PAA) of
1.56%, up from 1.52% in the prior quarter
- Increased hedge ratio to 95% as
compared to 94% at March 31, 2018
Business
Highlights
- Increased credit capital allocation to
28%, up from 24% at the beginning of 2018, with $1.1 billion of new
credit investments
- Credit strategy further enhanced by
previously announced MTGE acquisition; the $900 million transaction
is accretive to earnings, continues consolidation strategy and is
currently expected to close during the third quarter of 2018
- Solidifying position as programmatic
issuer with third quarter 2018 residential whole loan
securitization following successful first quarter 2018 debut
offering
- Continued to add efficient funding
sources for Commercial Real Estate and Middle Market Lending,
increasing capacity, improving terms and reducing cost of
financing
- Enhanced corporate governance
disclosure in the 2018 proxy statement, resulting in a 95%
favorable say-on-pay endorsement from shareholders
- Declared 19th consecutive dividend of
$0.30 per common share
“Amidst a challenging market environment, Annaly delivered
another strong quarter demonstrating the durability of our business
model,” commented Kevin Keyes, Chairman, Chief Executive Officer
and President. “We continued to further expand our investments into
lower levered, floating rate credit cash flows while producing core
earnings of $0.30 per share and core ROE at its highest return
since our diversification strategy began in 2014. The ongoing
expansion of our proprietary partnerships in Residential Credit,
Commercial Real Estate and Middle Market Lending enable us to
source unique and complementary investment opportunities at
attractive risk adjusted returns.
“During the quarter we also successfully continued our
acquisition strategy with the announcement of the $900 million
purchase of MTGE Investment Corp. The transaction further enhances
the scale and diversification of our investment platform, is
accretive to earnings, provides immediate cost savings, increases
our equity base for continued growth and reinforces Annaly’s
stature as a market leading industry consolidator.”
Financial
Performance
The following table summarizes certain key performance
indicators as of and for the quarters ended June 30, 2018,
March 31, 2018 and June 30, 2017:
June 30, 2018 March 31,
2018 June 30, 2017 Book value per common
share $ 10.35 $ 10.53 $ 11.19 Economic
leverage at period-end (1) 6.4:1 6.5:1 6.4:1 GAAP net income (loss)
per average common share (2) $ 0.49 $ 1.12 $ (0.01 ) Annualized
GAAP return (loss) on average equity 17.20 % 36.86 % 0.46 % Net
interest margin (3) 1.53 % 1.94 % 1.23 % Average yield on interest
earning assets (4) 3.04 % 3.45 % 2.58 % Average cost of interest
bearing liabilities (5) 1.89 % 1.90 % 1.74 % Net interest spread
1.15 % 1.55 % 0.84 %
Core Earnings
Metrics: *
Core earnings (excluding PAA) per average common share (2)(6) $
0.30 $ 0.30 $ 0.30 Core earnings per average common share (2)(6) $
0.30 $ 0.41 $ 0.23 PAA cost (benefit) per average common share $ —
$ (0.11 ) $ 0.07 Annualized core return on average equity
(excluding PAA) 11.05 % 10.70 % 10.54 % Net interest margin
(excluding PAA) (3) 1.56 % 1.52 % 1.53 % Average yield on interest
earning assets (excluding PAA) (4) 3.07 % 2.99 % 2.93 % Net
interest spread (excluding PAA) 1.18 % 1.09 % 1.19 %
* Represents non-GAAP financial measures. Please refer to
the ‘Non-GAAP Financial Measures’ section for additional
information. (1) Computed as the sum of recourse debt,
to-be-announced (“TBA”) derivative notional outstanding and net
forward purchases of investments divided by total equity. Recourse
debt consists of repurchase agreements and other secured financing.
Securitized debt 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 the sum of the
Company's interest income plus TBA dollar roll 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 balances. Net interest margin (excluding PAA) excludes
the premium amortization adjustment (“PAA”) representing the
cumulative impact on prior periods, but not the current period, of
quarter-over-quarter changes in estimated long-term prepayment
speeds related to the Company’s Agency mortgage-backed securities.
(4) Average yield on interest earning assets represents annualized
interest income divided by average interest earning assets. Average
interest earning assets reflects the average amortized cost of our
investments during the period. Average yield on interest earning
assets (excluding PAA) is calculated using annualized interest
income (excluding PAA). (5) Includes GAAP interest expense and the
net interest component of interest rate swaps. Prior to the quarter
ended March 31, 2018, this metric included the net interest
component of interest rate swaps used to hedge cost of funds.
Beginning with the quarter ended March 31, 2018, as a result of
changes to the Company’s hedging portfolio, this metric reflects
the net interest component of all interest rate swaps. (6) Core
earnings is defined as net income (loss) excluding gains or losses
on disposals of investments and termination or maturity of interest
rate swaps, unrealized gains or losses on interest rate swaps and
instruments measured at fair value through earnings, net gains and
losses on other derivatives, impairment losses, net income (loss)
attributable to noncontrolling interest, transaction expenses and
certain other non-recurring gains or losses, and inclusive of TBA
dollar roll income (a component of Net gains (losses) on other
derivatives) and realized amortization of mortgage servicing rights
("MSR") (a component of net unrealized gains (losses) on
instruments measured at fair value through earnings). Core earnings
(excluding PAA) excludes the premium amortization adjustment.
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, changes in
interest rates; changes in the yield curve; changes in prepayment
rates; the availability of mortgage-backed securities and other
securities for purchase; the availability of financing and, if
available, the terms of any financing; changes in the market value
of our assets; changes in business conditions and the general
economy; our ability to grow our commercial real estate business;
our ability to grow our residential mortgage credit business; our
ability to grow our middle market lending business; credit risks
related to our investments in credit risk transfer securities,
residential mortgage-backed securities and related residential
mortgage credit assets, commercial real estate assets and corporate
debt; risks related to investments in mortgage servicing rights;
our ability to consummate any contemplated investment
opportunities; changes in government regulations and policy
affecting our business; our ability to maintain our qualification
as a REIT for U.S. federal income tax purposes; our ability to
maintain our exemption from registration under the Investment
Company Act of 1940, as amended; and our ability to consummate the
proposed MTGE Acquisition on a timely basis or at all, and
potential business disruption following the MTGE Acquisition. For a
discussion of the risks and uncertainties which could cause actual
results to differ from those contained in the forward-looking
statements, see “Risk Factors” in our most recent Annual Report on
Form 10-K and any subsequent Quarterly Reports on Form 10-Q. We do
not undertake, and specifically disclaim any obligation, to
publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date
of such statements, except as required by law.
Annaly is a leading diversified capital manager that invests in
and finances residential and commercial assets. Annaly’s principal
business objective is to generate net income for distribution to
its stockholders and to preserve capital through prudent selection
of investments and continuous management of its portfolio. Annaly
has elected to be taxed as a real estate investment trust, or REIT,
for federal income tax purposes. Annaly is externally managed by
Annaly Management Company LLC. Additional information on the
Company can be found at www.annaly.com.
Annaly routinely posts important information for investors on
the Company’s website, www.annaly.com, in the Investors section.
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, the media and others interested in
Annaly to monitor the Investors section of 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. 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
Second Quarter 2018 Investor Presentation and the Second Quarter
2018 Financial Summary can be found at the Company’s website
(www.annaly.com) in the Investors section under Investor
Presentations.
Conference
Call
The Company will hold the second quarter 2018 earnings
conference call on August 2, 2018 at 9:00 a.m. Eastern Time.
The number to call is 888-317-6003 for domestic calls and
412-317-6061 for international calls. The conference passcode is
1905089. There will also be an audio webcast of the call on
www.annaly.com. The replay of the call will be available for one
week following the conference call. The replay number is
877-344-7529 for domestic calls and 412-317-0088 for international
calls and the conference passcode is 10121993. If you would like to
be added to the e-mail distribution list, please visit
www.annaly.com, click on Investors, then select Email Alerts and
complete the email notification form.
Financial
Statements
ANNALY CAPITAL MANAGEMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
(dollars in thousands, except per share
data)
June 30, 2018
March 31, 2018
December 31, 2017
(1)
September 30, 2017
June 30, 2017
(Unaudited) (Unaudited)
(Unaudited) (Unaudited) ASSETS Cash and
cash equivalents $ 1,135,329 $ 984,275 $ 706,589 $ 867,840 $
700,692 Investments, at fair value: Agency mortgage-backed
securities 86,593,058 88,579,097 90,551,763 85,889,131 73,963,998
Credit risk transfer securities 563,796 628,942 651,764 582,938
605,826 Non-Agency mortgage-backed securities 1,006,785 1,066,343
1,097,294 1,227,235 1,234,053 Residential mortgage loans (2)
1,666,157 1,535,685 1,438,322 895,919 779,685 Mortgage servicing
rights 599,014 596,378 580,860 570,218 605,653 Commercial real
estate debt investments (3) 2,857,463 2,960,323 3,089,108 3,869,110
3,972,560 Commercial real estate debt and preferred equity, held
for investment 1,251,138 1,081,295 1,029,327 981,748 928,181 Loans
held for sale, net 42,458 — — — — Investments in commercial real
estate 477,887 480,063 485,953 470,928 474,510 Corporate debt
1,256,276 1,152,745 1,011,275 856,110 773,957 Interest rate swaps,
at fair value 82,458 69,109 30,272 12,250 10,472 Other derivatives,
at fair value 129,680 161,193 283,613 266,249 154,004 Reverse
repurchase agreements 259,762 200,459 — — — Receivable for
investments sold 21,728 45,126 1,232 340,033 9,784 Accrued interest
and dividends receivable 323,769 326,989 323,526 293,207 263,217
Other assets 475,230 421,448 384,117 353,708 399,456 Goodwill
71,815 71,815 71,815 71,815 71,815 Intangible assets, net 19,194
20,948 23,220 25,742
28,715 Total assets $ 98,832,997
$ 100,382,233 $ 101,760,050 $
97,574,181 $ 84,976,578
LIABILITIES AND
STOCKHOLDERS’ EQUITY Liabilities: Repurchase agreements $
75,760,655 $ 78,015,431 $ 77,696,343 $ 69,430,268 $ 62,497,400
Other secured financing 3,760,487 3,830,075 3,837,528 3,713,256
3,785,543 Securitized debt of consolidated VIEs (4) 2,728,692
2,904,873 2,971,771 3,357,929 3,438,675 Mortgages payable 309,878
309,794 309,686 311,886 311,810 Interest rate swaps, at fair value
376,106 427,838 569,129 606,960 614,589 Other derivatives, at fair
value 117,931 153,103 38,725 75,529 99,380 Dividends payable
349,300 347,897 347,876 326,425 305,709 Payable for investments
purchased 1,108,834 91,327 656,581 5,243,868 1,043,379 Accrued
interest payable 478,439 284,696 253,068 231,611 185,720 Accounts
payable and other liabilities 68,819 74,264
207,770 121,231 84,948
Total liabilities 85,059,141 86,439,298
86,888,477 83,418,963 72,367,153
Stockholders’ Equity: 7.875% Series A Cumulative Redeemable
Preferred Stock (5) — — — — 177,088 7.625% Series C Cumulative
Redeemable Preferred Stock (6) 169,466 169,466 290,514 290,514
290,514 7.50% Series D Cumulative Redeemable Preferred Stock (7)
445,457 445,457 445,457 445,457 445,457 7.625% Series E Cumulative
Redeemable Preferred Stock (8) — — 287,500 287,500 287,500 6.95%
Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred
Stock (9) 696,910 696,910 696,910 696,910 — 6.50% Series G
Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (10)
411,335 411,335 — — — Common stock, par value $0.01 per share (11)
11,643 11,597 11,596 10,881 10,190 Additional paid-in capital
17,268,596 17,218,191 17,221,265 16,377,805 15,581,760 Accumulated
other comprehensive income (loss) (3,434,447 ) (3,000,080 )
(1,126,020 ) (640,149 ) (850,767 ) Accumulated deficit (1,800,370 )
(2,015,612 ) (2,961,749 ) (3,320,160 )
(3,339,228 ) Total stockholders’ equity 13,768,590 13,937,264
14,865,473 14,148,758 12,602,514 Noncontrolling interest 5,266
5,671 6,100 6,460
6,911 Total equity 13,773,856
13,942,935 14,871,573 14,155,218
12,609,425 Total liabilities and equity $ 98,832,997
$ 100,382,233 $ 101,760,050
$ 97,574,181 $ 84,976,578
(1) Derived from the audited consolidated financial
statements at December 31, 2017. (2) Includes securitized
residential mortgage loans transferred or pledged to consolidated
variable interest entities (“VIEs”) carried at fair value of $523.0
million, $560.2 million, $478.8 million, $139.8 million and $150.9
million at June 30, 2018, March 31, 2018, December 31, 2017,
September 30, 2017 and June 30, 2017, respectively. (3) Includes
senior securitized commercial mortgage loans of consolidated VIEs
with a carrying value of $2.5 billion, $2.7 billion, $2.8 billion,
$3.6 billion and $3.7 billion at June 30, 2018, March 31, 2018,
December 31, 2017, September 30, 2017 and June 30, 2017,
respectively. (4) Includes securitized debt of consolidated VIEs
carried at fair value of $2.7 billion, $2.9 billion, $3.0 billion,
$3.4 billion and $3.4 billion at June 30, 2018, March 31, 2018,
December 31, 2017, September 30, 2017 and June 30, 2017,
respectively. (5) Includes 0 shares authorized, issued and
outstanding at June 30, 2018, March 31, 2018 and December 31, 2017.
Includes 7,412,500 authorized shares and 0 shares issued and
outstanding at September 30, 2017. Includes 7,412,500 shares
authorized, issued and outstanding at June 30, 2017. (6) Includes
12,000,000 shares authorized and 7,000,000 shares issued and
outstanding at June 30, 2018 and March 31, 2018. Includes
12,000,000 shares authorized, issued and outstanding at December
31, 2017. Includes 12,650,000 shares authorized and 12,000,000
shares issued and outstanding at each of September 30, 2017 and
June 30, 2017. (7) Includes 18,400,000 shares authorized, issued
and outstanding. (8) Includes 11,500,000 authorized, and 0 shares
issued and outstanding at June 30, 2018 and March 31, 2018.
Includes 11,500,000 shares authorized, issued and outstanding at
each of December 31, 2017, September 30, 2017 and June 30, 2017.
(9) Includes 28,800,000 shares authorized, issued and outstanding
at June 30, 2018, March 31, 2018 and December 31, 2017. Includes
32,200,000 shares authorized and 28,800,000 shares issued and
outstanding at September 30, 2017. Includes 0 shares authorized,
issued and outstanding at June 30, 2017. (10) Includes 19,550,000
shares authorized and 17,000,000 issued and outstanding at June 30,
2018 and March 31, 2018. Includes 0 shares authorized, issued and
outstanding at each of December 31, 2017, September 30, 2017 and
June 30, 2017. (11) Includes 1,909,750,000 shares authorized and
1,164,333,831 issued and outstanding at June 30, 2018. Includes
1,909,750,000 shares authorized and 1,159,657,350 issued and
outstanding at March 31, 2018. Includes 1,929,300,000 shares
authorized and 1,159,585,078 issued and outstanding at December 31,
2017. Includes 1,917,837,500 shares authorized and 1,088,083,794
shares issued and outstanding at September 30, 2017. Includes
1,945,437,500 shares authorized and 1,019,027,880 shares issued and
outstanding at June 30, 2017.
ANNALY CAPITAL MANAGEMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(dollars in thousands, except per share
data)
For the quarters ended
June 30, 2018
March 31, 2018
December 31,2017
September 30, 2017
June 30, 2017
Net interest income: Interest
income $ 776,806 $ 879,487 $ 745,423 $ 622,550 $ 537,426 Interest
expense 442,692 367,421 318,711
268,937 222,281
Net interest
income 334,114 512,066 426,712
353,613 315,145
Realized and unrealized gains (losses): Net interest
component of interest rate swaps 31,475 (48,160 ) (82,271 ) (88,211
) (96,470 ) Realized gains (losses) on termination or maturity of
interest rate swaps — 834 (160,075 ) — (58 ) Unrealized gains
(losses) on interest rate swaps 343,475 977,285
484,447 56,854 (177,567 )
Subtotal 374,950 929,959 242,101
(31,357 ) (274,095 ) Net gains (losses) on
disposal of investments (66,117 ) 13,468 7,895 (11,552 ) (5,516 )
Net gains (losses) on other derivatives 34,189 (47,145 ) 121,334
154,208 (14,423 ) Net unrealized gains (losses) on instruments
measured at fair value through earnings (48,376 ) (51,593 )
(12,115 ) (67,492 ) 16,240
Subtotal (80,304 ) (85,270 ) 117,114
75,164 (3,699 )
Total realized and
unrealized gains (losses) 294,646 844,689
359,215 43,807 (277,794 )
Other income (loss) 34,170 34,023 25,064 28,282 30,865
General and administrative expenses: Compensation and
management fee 45,579 44,529 44,129 41,993 38,938 Other general and
administrative expenses 18,202 17,981
15,128 15,023 15,085
Total
general and administrative expenses 63,781 62,510
59,257 57,016 54,023
Income (loss) before income taxes 599,149 1,328,268
751,734 368,686 14,193
Income taxes 3,262 564
4,963 1,371 (329 )
Net
income (loss) 595,887 1,327,704 746,771 367,315 14,522
Net
income (loss) attributable to noncontrolling interest (32 )
(96 ) (151 ) (232 ) (102 )
Net
income (loss) attributable to Annaly 595,919 1,327,800 746,922
367,547 14,624
Dividends on preferred stock (1)
31,377 33,766 32,334
30,355 23,473
Net income (loss) available
(related) to common stockholders $ 564,542 $
1,294,034 $ 714,588 $ 337,192
$ (8,849 )
Net income (loss) per share available
(related) to common stockholders: Basic $ 0.49 $
1.12 $ 0.62 $ 0.31 $
(0.01 ) Diluted $ 0.49 $ 1.12 $ 0.62
$ 0.31 $ (0.01 )
Weighted
average number of common shares outstanding: Basic
1,160,436,777 1,159,617,848
1,151,653,296 1,072,566,395
1,019,000,817 Diluted 1,160,979,451
1,160,103,185 1,152,138,887
1,073,040,637 1,019,000,817
Net
income (loss) $ 595,887 $ 1,327,704
$ 746,771 $ 367,315 $ 14,522
Other comprehensive income (loss): Unrealized gains (losses)
on available-for-sale securities (505,130 ) (1,879,479 ) (487,597 )
195,251 261,964 Reclassification adjustment for net (gains) losses
included in net income (loss) 70,763 5,419
1,726 15,367 13,360 Other
comprehensive income (loss) (434,367 ) (1,874,060 )
(485,871 ) 210,618 275,324
Comprehensive income (loss) 161,520 (546,356 ) 260,900 577,933
289,846 Comprehensive income (loss) attributable to noncontrolling
interest (32 ) (96 ) (151 ) (232 ) (102
) Comprehensive income (loss) attributable to Annaly 161,552
(546,260 ) 261,051 578,165 289,948 Dividends on preferred stock (1)
31,377 33,766 32,334
30,355 23,473
Comprehensive income (loss)
attributable to common stockholders $ 130,175 $
(580,026 ) $ 228,717 $ 547,810 $
266,475 (1) The quarter ended December
31, 2017 excludes, and the quarter ended September 30, 2017
includes, cumulative and undeclared dividends of $8.3 million on
the Company's Series F Preferred Stock as of September 30, 2017.
ANNALY CAPITAL MANAGEMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(dollars in thousands, except per share
data)
For the six months ended June 30, 2018
June 30, 2017 Net interest income:
Interest income $ 1,656,293 $ 1,125,153 Interest expense 810,113
420,706
Net interest income 846,180
704,447
Realized and unrealized
gains (losses): Net interest component of interest rate swaps
(16,685 ) (200,626 ) Realized gains (losses) on termination or
maturity of interest rate swaps 834 (58 ) Unrealized gains (losses)
on interest rate swaps 1,320,760 (28,383 )
Subtotal 1,304,909 (229,067 ) Net gains
(losses) on disposal of investments (52,649 ) (281 ) Net gains
(losses) on other derivatives (12,956 ) (14,104 ) Net unrealized
gains (losses) on instruments measured at fair value through
earnings (99,969 ) 39,923
Subtotal (165,574 )
25,538
Total realized and unrealized gains
(losses) 1,139,335 (203,529 )
Other income
(loss) 68,193 62,511
General and administrative
expenses: Compensation and management fee 90,108 78,200 Other
general and administrative expenses 36,183 29,651
Total general and administrative expenses 126,291
107,851
Income (loss) before income
taxes 1,927,417 455,578
Income taxes 3,826
648
Net income (loss) 1,923,591 454,930
Net income
(loss) attributable to noncontrolling interest (128 )
(205 )
Net income (loss) attributable to Annaly 1,923,719
455,135
Dividends on preferred stock 65,143
46,946
Net income (loss) available (related) to common
stockholders $ 1,858,576 $ 408,189
Net income (loss) per share available (related) to common
stockholders: Basic $ 1.60 $ 0.40 Diluted
$ 1.60 $ 0.40
Weighted average
number of common shares outstanding: Basic 1,160,029,575
1,018,971,942 Diluted 1,160,543,580
1,019,357,697
Net income (loss) $ 1,923,591
$ 454,930
Other comprehensive income
(loss): Unrealized gains (losses) on available-for-sale
securities (2,384,609 ) 202,349 Reclassification adjustment for net
(gains) losses included in net income (loss) 76,182
32,777 Other comprehensive income (loss) (2,308,427 )
235,126 Comprehensive income (loss) (384,836 ) 690,056
Comprehensive income (loss) attributable to noncontrolling interest
(128 ) (205 ) Comprehensive income (loss) attributable to
Annaly (384,708 ) 690,261 Dividends on preferred stock 65,143
46,946
Comprehensive income (loss)
attributable to common stockholders $ (449,851 ) $
643,315
Key
Metrics
The following table presents key metrics of the Company’s
portfolio, liabilities and hedging positions, and performance as of
and for the quarters ended June 30, 2018, March 31, 2018,
and June 30, 2017:
June 30, 2018 March
31,2018 June 30, 2017
Portfolio Related
Metrics:
Fixed-rate Residential Investment Securities as a
percentage of total Residential Investment Securities 91 % 91 % 86
% Adjustable-rate and floating-rate Residential Investment
Securities as a percentage of total Residential Investment
Securities 9 % 9 % 14 % Weighted average experienced CPR for the
period 10.1 % 8.9 % 10.9 % Weighted average projected long-term CPR
at period-end 9.1 % 9.2 % 10.6 %
Liabilities and
Hedging Metrics:
Weighted average days to maturity on repurchase agreements
outstanding at period-end 71 72 88 Hedge ratio (1) 95 % 94 % 67 %
Weighted average pay rate on interest rate swaps at period-end (2)
2.08 % 2.00 % 2.26 % Weighted average receive rate on interest rate
swaps at period-end (2) 2.31 % 2.13 % 1.28 % Weighted average net
rate on interest rate swaps at period-end (2) (0.23 %) (0.13 %)
0.98 % Leverage at period-end (3) 6.0:1 6.1:1 5.6:1 Economic
leverage at period-end (4) 6.4:1 6.5:1 6.4:1 Capital ratio at
period-end 13.2 % 13.1 % 13.2 %
Performance
Related Metrics:
Book value per common share $ 10.35 $ 10.53 $ 11.19 GAAP net income
(loss) per average common share (5) $ 0.49 $ 1.12 $ (0.01 )
Annualized GAAP return (loss) on average equity 17.20 % 36.86 %
0.46 % Net interest margin 1.53 % 1.94 % 1.23 % Average yield on
interest earning assets (6) 3.04 % 3.45 % 2.58 % Average cost of
interest bearing liabilities (7) 1.89 % 1.90 % 1.74 % Net interest
spread 1.15 % 1.55 % 0.84 % Dividend declared per common share $
0.30 $ 0.30 $ 0.30 Annualized dividend yield (8) 11.66 % 11.51 %
9.96 %
Core Earnings Metrics * Core earnings (excluding PAA)
per average common share (5) $ 0.30 $ 0.30 $ 0.30 Core earnings per
average common share (5) $ 0.30 $ 0.41 $ 0.23 PAA cost (benefit)
per average common share $ — $ (0.11 ) $ 0.07 Annualized core
return on average equity (excluding PAA) 11.05 % 10.70 % 10.54 %
Net interest margin (excluding PAA) 1.56 % 1.52 % 1.53 % Average
yield on interest earning assets (excluding PAA) (6) 3.07 % 2.99 %
2.93 % Net interest spread (excluding PAA) 1.18 % 1.09 %
1.19 % * Represents non-GAAP financial
measures. Please refer to the ‘Non-GAAP Financial Measures’ section
for additional information. (1) Measures total notional balances of
interest rate swaps, interest rate swaptions and futures relative
to repurchase agreements, other secured financing and TBA notional
outstanding; excludes MSRs and the effects of term financing, both
of which serve to reduce interest rate risk. Additionally, the
hedge ratio does not take into consideration differences in
duration between assets and liabilities. (2) Excludes forward
starting swaps. (3) Debt consists of repurchase agreements, other
secured financing, securitized debt and mortgages payable.
Securitized debt and mortgages payable are non-recourse to the
Company. (4) Computed as the sum of recourse debt, TBA derivative
notional outstanding and net forward purchases of investments
divided by total equity. (5) Net of dividends on preferred stock.
(6) Average yield on interest earning assets represents annualized
interest income divided by average interest earning assets. Average
interest earning assets reflects the average amortized cost of our
investments during the period. Average yield on interest earning
assets (excluding PAA) is calculated using annualized interest
income (excluding PAA). (7) Includes GAAP interest expense and the
net interest component of interest rate swaps. Prior to the quarter
ended March 31, 2018, this metric included the net interest
component of interest rate swaps used to hedge cost of funds.
Beginning with the quarter ended March 31, 2018, as a result of
changes to the Company’s hedging portfolio, this metric reflects
the net interest component of all interest rate swaps. (8) Based on
the closing price of the Company’s common stock of $10.29, $10.43
and $12.05 at June 30, 2018, March 31, 2018 and June 30, 2017,
respectively.
Non-GAAP Financial
Measures
To supplement its consolidated financial statements, which are
prepared and presented in accordance with U.S. generally accepted
accounting principles (“GAAP”), the Company provides the following
non-GAAP measures:
- core earnings and core earnings
(excluding PAA);
- core earnings and core earnings
(excluding PAA) per average common share;
- annualized core return on average
equity (excluding PAA);
- interest income (excluding PAA);
- economic interest expense;
- economic net interest income (excluding
PAA);
- average yield on interest earning
assets (excluding PAA);
- net interest margin (excluding PAA);
and
- net interest spread (excluding
PAA).
These measures should not be considered a substitute for, or
superior to, financial measures computed in accordance with GAAP.
While intended to offer a fuller understanding of the Company’s
results and operations, non-GAAP financial measures also have
limitations. For example, the Company may calculate its non-GAAP
metrics, such as core earnings, or the PAA, differently than its
peers making comparative analysis difficult. Additionally, in the
case of non-GAAP measures that exclude the PAA, the amount of
amortization expense excluding the PAA is not necessarily
representative of the amount of future periodic amortization nor is
it indicative of the term over which the Company will amortize the
remaining unamortized premium. Changes to actual and estimated
prepayments will impact the timing and amount of premium
amortization and, as such, both GAAP and non-GAAP results.
These non-GAAP measures provide additional detail to enhance
investor understanding of the Company’s period-over-period
operating performance and business trends, as well as for assessing
the Company’s performance versus that of industry peers. Additional
information pertaining to the Company’s use of these non-GAAP
financial measures, including discussion of how each such measure
is useful to investors, and reconciliations to their most directly
comparable GAAP results are provided below.
Core earnings and core earnings (excluding PAA), core
earnings and core earnings (excluding PAA) per average common share
and annualized core return on average equity (excluding
PAA)
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, which is comprised of
interest income plus TBA dollar roll incomei, less financing and
hedging costs and general and administrative expenses, and core
earnings (excluding PAA), are used by the Company's management and,
the Company believes, used by analysts and investors to measure its
progress in achieving this 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 defines “core earnings”, a non-GAAP measure, as net
income (loss) excluding gains or losses on disposals of investments
and termination or maturity of interest rate swaps, unrealized
gains or losses on interest rate swaps and instruments measured at
fair value through earnings, net gains and losses on other
derivatives, impairment losses, net income (loss) attributable to
noncontrolling interest, transaction expenses and certain other
non-recurring gains or losses, and inclusive of TBA dollar roll
income (a component of Net gains (losses) on other derivatives) and
realized amortization of MSRs (a component of net unrealized gains
(losses) on instruments measured at fair value through earnings).
Core earnings (excluding PAA) excludes the premium amortization
adjustment representing the cumulative impact on prior periods, but
not the current period, of quarter-over-quarter changes in
estimated long-term prepayment speeds related to the Company’s
Agency mortgage-backed securities.
The Company believes these non-GAAP measures provide management
and investors with additional details regarding the Company’s
underlying operating results and investment portfolio trends by (i)
making adjustments to account for the disparate reporting of
changes in fair value where certain instruments are reflected in
GAAP net income (loss) while others are reflected in other
comprehensive income (loss), and (ii) by excluding certain
unrealized, non-cash or episodic components of GAAP net income
(loss) in order to provide additional transparency into the
operating performance of the Company’s portfolio. Annualized core
return on average equity (excluding PAA), which is calculated by
dividing core earnings (excluding PAA) over average stockholders’
equity, provides investors with additional detail on the core
earnings generated by the Company’s invested equity capital.
i TBA dollar roll transactions are accounted for as derivatives,
with gains and losses reflected as a component of Net gains
(losses) on other derivatives in the Company’s Consolidated
Statements of Comprehensive Income (Loss). TBA dollar roll income
represents the economic equivalent of interest income on the
underlying security less the implied cost of financing.
The following table presents a reconciliation of GAAP financial
results to non-GAAP core earnings for the periods presented:
For the quarters ended June 30,
2018 March 31,2018 June
30, 2017 (dollars in thousands, except per share
data) GAAP net income (loss) $ 595,887 $ 1,327,704
$ 14,522 Less: Realized (gains) losses on termination or
maturity of interest rate swaps — (834 ) 58 Unrealized (gains)
losses on interest rate swaps (343,475 ) (977,285 ) 177,567 Net
(gains) losses on disposal of investments 66,117 (13,468 ) 5,516
Net (gains) losses on other derivatives (34,189 ) 47,145 14,423 Net
unrealized (gains) losses on instruments measured at fair value
through earnings 48,376 51,593 (16,240 ) Transaction expenses (1) —
1,519 — Net (income) loss attributable to noncontrolling interest
32 96 102 Plus: TBA dollar roll income (2) 62,491 88,353 81,051 MSR
amortization (3) (19,942 ) (21,156 ) (17,098 ) Core
earnings * 375,297 503,667 259,901 Less: Premium amortization
adjustment cost (benefit) 7,516 (118,395 )
72,700 Core earnings (excluding PAA) * $ 382,813
$ 385,272 $ 332,601 GAAP net income
(loss) per average common share $ 0.49 $ 1.12
$ (0.01 ) Core earnings per average common share * $ 0.30
$ 0.41 $ 0.23 Core earnings
(excluding PAA) per average common share * $ 0.30 $
0.30 $ 0.30 Annualized GAAP return (loss) on
average equity 17.20 % 36.86 % 0.46 % Annualized core
return on average equity (excluding PAA) * 11.05 % 10.70 %
10.54 % * Represents a non-GAAP
financial measure. (1) Represents costs incurred in connection with
a securitization of residential whole loans. (2) Represents a
component of Net gains (losses) on other derivatives. (3)
Represents the portion of changes in fair value that is
attributable to the realization of estimated cash flows on the
Company’s MSR portfolio and is reported as a component of Net
unrealized gains (losses) on 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
as Net gains (losses) on other derivatives 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
in the Consolidated Statements of Comprehensive Income (Loss).
Premium Amortization Expense ("PAA")
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 Investment
Securities portfolio for the quarters ended June 30, 2018,
March 31, 2018, and June 30, 2017:
For the quarters ended June 30,
2018 March 31,2018
June 30, 2017 (dollars in thousands) Premium
amortization expense (accretion) $ 202,426 $ 95,832 $
251,084 Less: PAA cost (benefit) 7,516 (118,395 )
72,700 Premium amortization expense (excluding PAA) $ 194,910
$ 214,227 $ 178,384
For the quarters
ended June 30, 2018 March
31,2018 June 30, 2017
(per average common share) Premium amortization expense
(accretion) $ 0.17 $ 0.08 $ 0.25 Less: PAA cost (benefit) —
(0.11 ) 0.07 Premium amortization expense (excluding PAA) $
0.17 $ 0.19 $ 0.18
Interest income (excluding PAA), economic interest expense
and economic net interest income (excluding PAA)
Interest income (excluding PAA) represents interest income
excluding the effect of the PAA, and serves as the basis for
deriving average yield on interest earning assets (excluding PAA),
net interest spread (excluding PAA) and net interest margin
(excluding PAA), which are discussed below. The Company believes
this measure provides management and investors with additional
detail to enhance their understanding of the Company’s operating
results and trends by excluding the component of premium
amortization expense representing the cumulative impact on prior
periods, but not the current period, of quarter-over-quarter
changes in estimated long-term prepayment speeds related to the
Company’s Agency mortgage-backed securities (other than
interest-only securities), which can obscure underlying trends in
the performance of the portfolio.
Economic interest expense includes GAAP interest expense and the
net interest component of interest rate swaps. Prior to the quarter
ended March 31, 2018, economic interest expense included the net
interest component of interest rate swaps used to hedge cost of
funds. Beginning with the quarter ended March 31, 2018, as a result
of changes to the Company’s hedging portfolio, this metric reflects
the net interest component of all 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.
Similarly, economic net interest income (excluding PAA), as
computed below, provides investors with additional information to
enhance their understanding of the net economics of our primary
business operations.
For the quarters ended June 30,
2018 March 31,2018 June
30, 2017 (dollars in thousands)
Interest Income
(Excluding PAA) Reconciliation
GAAP interest income $ 776,806 $ 879,487 $ 537,426
Premium amortization adjustment 7,516 (118,395 )
72,700 Interest income (excluding PAA) * $ 784,322
$ 761,092 $ 610,126
Economic Interest
Expense Reconciliation
GAAP interest expense $ 442,692 $ 367,421 $ 222,281 Add: Net
interest component of interest rate swaps (31,475 ) 48,160
84,252 Economic interest expense * $ 411,217
$ 415,581 $ 306,533
Economic Net
Interest Income (Excluding PAA) Reconciliation
Interest income (excluding PAA) * $ 784,322 $ 761,092 $ 610,126
Less: Economic interest expense * 411,217 415,581
306,533 Economic net interest income (excluding PAA)
* $ 373,105 $ 345,511 $ 303,593
* Represents a non-GAAP financial measure.
Average yield on interest earning assets (excluding PAA), net
interest spread (excluding PAA) and net interest margin (excluding
PAA)
Net interest spread (excluding PAA), which is the difference
between the average yield on interest earning assets (excluding
PAA) and the average cost of interest bearing liabilities, and net
interest margin (excluding PAA), which is calculated as the sum of
interest income (excluding PAA) plus TBA dollar roll 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 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 June 30,
2018 March 31,2018 June
30, 2017
Economic Metrics
(Excluding PAA)
(dollars in thousands) Average interest earning assets $
102,193,435 $ 101,979,042 $ 83,427,268 Interest
income (excluding PAA) * $ 784,322 $ 761,092 $ 610,126 Average
yield on interest earning assets (excluding PAA) * 3.07 %
2.99 % 2.93 % Average interest bearing liabilities $
87,103,807 $ 87,376,452 $ 70,486,779 Economic interest expense * $
411,217 $ 415,581 $ 306,533 Average cost of interest bearing
liabilities 1.89 % 1.90 % 1.74 % Economic net
interest income (excluding PAA) * $ 373,105 $ 345,511 $ 303,593 Net
interest spread (excluding PAA) * 1.18 % 1.09 % 1.19
% Interest income (excluding PAA) * $ 784,322 $ 761,092 $
610,126 TBA dollar roll income 62,491 88,353 81,051 Interest
expense (442,692 ) (367,421 ) (222,281 ) Net interest component of
interest rate swaps 31,475 (48,160 ) (96,470 )
Subtotal $ 435,596 $ 433,864 $
372,426 Average interest earnings assets $ 102,193,435 $
101,979,042 $ 83,427,268 Average TBA contract balances 9,407,819
12,050,341 14,206,869
Subtotal $ 111,601,254 $ 114,029,383
$ 97,634,137 Net interest margin (excluding PAA) *
1.56 % 1.52 % 1.53 % *
Represents a non-GAAP financial measure.
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