Annaly Capital Management, Inc. (NYSE:NLY) ("Annaly" or the
"Company") today announced its financial results for the quarter
ended March 31, 2019.
Financial Highlights
- GAAP net income (loss) of ($0.63) per
average common share
- Core earnings (excluding PAA) of $0.29
per average common share
- GAAP return on average equity of
(22.72%) and core return on average equity (excluding PAA) of
11.59%
- Book value per common share of $9.67 up
3% from December 31, 2018
- Economic leverage of 7.0x unchanged
from prior quarter
- Economic return for the quarter
(non-annualized) of 6.18%
- Declared quarterly common stock
dividend of $0.30 per common share in the first quarter;
pre-announced an expected quarterly common stock dividend of $0.25
per common share for the remainder of 2019 beginning with the
second quarter, subject to the discretion and approval of our board
of directors
Business Highlights
Investment and Capital Growth
- Portfolio growth of 12% largely driven
by purchases of Agency MBS; originated or purchased over $1 billion
of credit assets
- Further expansion of Annaly Commercial
Real Estate Group's national coverage model with opening of Midwest
office
Financing and Liquidity
- Economic leverage nearly 20% lower than
Agency mREIT peers; 51% less levered across our credit investment
groups than the average of the five largest peers in each
sector
- Unencumbered assets of $9 billion at
quarter end
- Annaly Commercial Real Estate Group:
Closed $857.3 million managed commercial real estate collateralized
loan obligation with a two year reinvestment period during the
first quarter of 2019
- Annaly Residential Credit Group:
Completed $394.0 million securitization during the first quarter of
2019, representing the fourth deal closed through Annaly’s
wholly-owned subsidiary, Onslow Bay Financial LLC, and closed fifth
securitization of $388.2 million subsequent to quarter end,
bringing aggregate issuance to $1.9 billion since the beginning of
2018
- Annaly Middle Market Lending Group:
Secured additional financing capacity with the establishment of a
$200.0 million credit facility during the quarter
- Securitization efforts in the first
quarter of 2019 within the residential credit and commercial real
estate businesses have contributed to over 75 basis points of
incremental levered returns on investments while adding
liquidity
- Subsequent to quarter end, announced
the redemption of Annaly’s $55.0 million 8.125% Series H preferred
stock
Corporate Governance
- Reduced management fee by 30 basis
points, a decrease of nearly 30%, to 0.75% on incremental equity
above total Stockholders’ Equity (as defined in the Management
Agreement) calculated as of February 28, 2019, highlighting the
benefits of size and scale of the platform
- Expanded Board of Directors with
election of two new Independent Directors during the quarter;
following the 2019 Annual Meeting of Stockholders, we expect the
Board will be comprised of 82% independent directors and 45%
women
- Published extensive disclosure on the
Company’s commitment to leading Corporate Responsibility
practices
"During the first quarter of 2019 we opportunistically grew our
portfolio, largely driven by purchases of Agency MBS and
supplemented by enhanced origination capabilities that resulted in
the sourcing of over $1 billion of credit assets," commented Kevin
Keyes, Chairman, Chief Executive Officer and President.
"Additionally, we increased our capital optimization and liquidity
through new financing structures and additional capacity. Over the
last five years we delivered unmatched stability with our dividend
and through our efficient operating structure and diversified
investment platform, while providing transparency about realistic
returns achievable in the market. In the current environment, one
characterized by a flattening yield curve and compressed spreads,
we remain committed to delivering high quality earnings and a
stable yield without assuming excessive risk or sacrificing
liquidity. Accordingly, we have pre-announced an expected quarterly
dividend of $0.25 for the second quarter and for the remainder of
2019. Although we could maintain elevated earnings and dividend
payouts by increasing leverage, we are focused on optimal liquidity
thresholds and managing the portfolio within conservative risk
parameters."
Mr. Keyes continued, "Also in the first quarter, we continued to
enhance our leading corporate governance practices with the
addition of two new independent directors, Kathy Hopinkah Hannan
and Thomas Hamilton. Following the 2019 Annual Meeting, we expect
the Board will be comprised of 82% independent directors and 45%
women. Finally, we proactively reduced the management fee by nearly
30% to 0.75% on incremental equity raised - further demonstrating
the benefits of scale and operational efficiency we have achieved
as Annaly continues to grow and diversify."
Financial Performance
The following table summarizes certain key performance
indicators as of and for the quarters ended March 31, 2019,
December 31, 2018 and March 31, 2018:
March 31, 2019
December 31, 2018
March 31, 2018
Book value per common share
$ 9.67 $ 9.39 $ 10.53
Economic leverage at period-end (1)
7.0:1
7.0:1 6.5:1 GAAP net income (loss) per average common share (2)
$ (0.63 ) $ (1.74 ) 1.12 Annualized GAAP
return (loss) on average equity
(22.72 %) (62.05 %)
36.86 % Net interest margin (3)
1.25 % 1.34 % 1.94 %
Average yield on interest earning assets (4)
3.15 %
3.21 % 3.45 % Average cost of interest bearing liabilities (5)
2.15 % 2.22 % 1.90 % Net interest spread
1.00
% 0.99 % 1.55 %
Core earnings metrics * Core earnings
(excluding PAA) per average common share (2)(6)
$
0.29 $ 0.29 $ 0.30 Core earnings per average common share
(2)(6)
$ 0.23 $ 0.26 $ 0.41 PAA cost (benefit) per
average common share
$ 0.06 $ 0.03 $ (0.11 )
Annualized core return on average equity (excluding PAA)
11.59 % 11.48 % 10.70 % Net interest margin
(excluding PAA) (3)
1.51 % 1.49 % 1.52 % Average
yield on interest earning assets (excluding PAA) (4)
3.45
% 3.38 % 2.99 % Net interest spread (excluding PAA)
1.30 % 1.16 % 1.09 % *
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 and CMBX notional 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). Securitized
debt, certain credit facilities (included within other secured
financing) 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 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. 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) Average cost of interest bearing
liabilities represents annualized economic interest expense divided
by average interest bearing liabilities. Average interest bearing
liabilities reflects the average amortized cost during the period.
Economic interest expense is comprised of GAAP interest expense and
the net interest component of interest rate swaps. (6) Beginning
with the quarter ended September 30, 2018, the Company updated its
calculation of core earnings and related metrics to reflect changes
to its portfolio composition and operations, including the
acquisition of MTGE Investment Corp. in September 2018. Refer to
the section titled "Non-GAAP Financial Measures" for a complete
discussion of core earnings and core earnings (excluding PAA) per
average common share, and other non-GAAP financial measures. Prior
period results have not been adjusted to conform to the revised
calculation as the impact in each of those periods is not material.
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 credit business; our ability to
grow our middle market lending business; credit risks related to
our investments in credit risk transfer securities, residential
mortgage-backed securities and related residential mortgage credit
assets, commercial real estate assets and corporate debt; risks
related to investments in mortgage servicing rights; our ability to
consummate any contemplated investment opportunities; changes in
government regulations or policy affecting our business; our
ability to maintain our qualification as a REIT for U.S. federal
income tax purposes; and our ability to maintain our exemption from
registration under the Investment Company Act of 1940, as amended.
For a discussion of the risks and uncertainties which could cause
actual results to differ from those contained in the
forward-looking statements, see "Risk Factors" in our most recent
Annual Report on Form 10-K and any subsequent Quarterly Reports on
Form 10-Q. We do not undertake, and specifically disclaim any
obligation, to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances
after the date of such statements, except as required by law.
Annaly is a leading diversified capital manager that invests in
and finances residential and commercial assets. Annaly’s principal
business objective is to generate net income for distribution to
its stockholders and to preserve capital through prudent selection
of investments and continuous management of its portfolio. Annaly
has elected to be taxed as a real estate investment trust, or REIT,
for federal income tax purposes. Annaly is externally managed by
Annaly Management Company LLC. Additional information on the
Company can be found at www.annaly.com.
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
"Email Alerts" section of our website, www.annaly.com, under the
"Investors" section and enter the required information to enable
notifications. The information contained on, or that may be
accessed through, the Company’s webpage is not incorporated by
reference into, and is not a part of, this document.
The Company prepares a supplemental investor presentation and a
financial summary for the benefit of its shareholders. Both the
First Quarter 2019 Investor Presentation and the First Quarter 2019
Financial Summary can be found at the Company’s website
(www.annaly.com) in the Investors section under Investor
Presentations.
Conference Call
The Company will hold the first quarter 2019 earnings conference
call on May 2, 2019 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: http://dpregister.com/10130887.
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 844-763-8274 within
the U.S., or 412-717-9224 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 10130887. If you would like to be added to
the e-mail distribution list, please visit www.annaly.com, click on
Investors, then select Email Alerts and complete the email
notification form.
Financial Statements
ANNALY CAPITAL
MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION (dollars in thousands, except per share
data)
March 31, 2019
December 31, 2018
(1)
September 30, 2018
June 30, 2018
March 31, 2018
(unaudited) (unaudited) (unaudited)
(unaudited) Assets Cash and cash equivalents
$
1,522,605 $ 1,735,749 $ 1,082,747 $ 1,135,329 $ 984,275
Securities
104,993,271 92,623,788 91,338,611 88,478,689
90,539,192 Loans, net
3,879,324 4,585,975 4,224,203
3,692,172 3,208,617 Mortgage servicing rights
500,745
557,813 588,833 599,014 596,378 Assets transferred or pledged to
securitization vehicles
4,365,300 3,833,200 4,287,821
3,066,270 3,256,621 Real estate, net
734,239 739,473 753,014
477,887 480,063 Derivative assets
148,178 200,503 404,841
212,138 230,302 Reverse repurchase agreements
523,449
650,040 1,234,704 259,762 200,459 Receivable for unsettled trades
1,574,251 68,779 1,266,840 21,728 45,126 Interest receivable
390,930 357,365 347,278 323,769 326,989 Goodwill and
intangible assets, net
98,551 100,854 103,043 91,009 92,763
Other assets
441,706 333,988 329,868
475,230 421,448
Total assets $
119,172,549 $ 105,787,527 $ 105,961,803
$ 98,832,997 $ 100,382,233
Liabilities and
stockholders’ equity Liabilities Repurchase agreements
$ 88,554,170 $ 81,115,874 $ 79,073,026 $ 75,760,655 $
78,015,431 Other secured financing
4,144,623 4,183,311
4,108,547 3,760,487 3,830,075 Debt issued by securitization
vehicles
3,693,766 3,347,062 3,799,542 2,728,692 2,904,873
Mortgages payable
510,386 511,056 511,588 309,878 309,794
Derivative liabilities
775,980 889,750 379,794 494,037
580,941 Payable for unsettled trades
4,763,376 583,036
2,505,428 1,108,834 91,327 Interest payable
424,391 570,928
399,605 478,439 284,696 Dividends payable
434,431 394,129
102,811 349,300 347,897 Other liabilities
89,982
74,580 125,606 68,819 74,264
Total
liabilities 103,391,105 91,669,726
91,005,947 85,059,141 86,439,298
Stockholders’ equity Preferred stock, par value $0.01 per
share (2)
1,778,168 1,778,168 1,778,168 1,723,168 1,723,168
Common stock, par value $0.01 per share (3)
14,481 13,138
13,031 11,643 11,597 Additional paid-in capital
20,112,875
18,794,331 18,793,706 17,268,596 17,218,191 Accumulated other
comprehensive income (loss)
(319,376 ) (1,979,865 )
(3,822,956 ) (3,434,447 ) (3,000,080 ) Accumulated deficit
(5,809,931 ) (4,493,660 ) (1,811,955 ) (1,800,370 )
(2,015,612 )
Total stockholders’ equity 15,776,217
14,112,112 14,949,994 13,768,590 13,937,264 Noncontrolling
interests
5,227 5,689 5,862 5,266
5,671
Total equity 15,781,444
14,117,801 14,955,856 13,773,856 13,942,935
Total liabilities and equity $
119,172,549 $ 105,787,527 $ 105,961,803
$ 98,832,997 $ 100,382,233
(1) Derived from the audited consolidated
financial statements at December 31, 2018. (2) 7.625% Series C
Cumulative Redeemable Preferred Stock - Includes 7,000,000 shares
authorized, issued and outstanding at March 31, 2019, December 31,
2018 and September 30, 2018. Includes 12,000,000 shares authorized
and 7,000,000 shares issued and outstanding at June 30, 2018 and
March 31, 2018. 7.50% Series D Cumulative Redeemable Preferred
Stock - Includes 18,400,000 shares authorized, issued and
outstanding. 7.625% Series E Cumulative Redeemable Preferred Stock
- Includes 0 shares authorized, issued and outstanding at March 31,
2019, December 31, 2018 and September 30, 2018. Includes 11,500,000
shares authorized and 0 shares issued and outstanding at June 30,
2018 and March 31, 2018. 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 19,550,000 shares authorized and 17,000,000 shares issued
and outstanding.8.125% Series H Cumulative Redeemable Preferred
Stock - Includes 2,200,000 shares authorized, issued and
outstanding at March 31, 2019, December 31, 2018 and September 30,
2018. Includes 0 shares authorized, issued and outstanding at June
30, 2018 and March 31, 2018. (3) Includes 1,924,050,000 shares
authorized and 1,448,103,248 shares issued and outstanding at March
31, 2019. Includes 1,924,050,000 shares authorized and
1,313,763,450 shares issued and outstanding at December 31, 2018.
Includes 1,924,050,000 shares authorized and 1,303,079,555 shares
issued and outstanding at September 30, 2018. Includes
1,909,750,000 shares authorized and 1,164,333,831 shares issued and
outstanding at June 30, 2018. Includes 1,909,750,000 shares
authorized and 1,159,657,350 shares issued and outstanding at March
31, 2018.
ANNALY CAPITAL MANAGEMENT, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS) (dollars in thousands, except per share data)
(Unaudited) For the quarters
ended
March 31, 2019
December 31, 2018
September 30,2018
June 30, 2018
March 31, 2018
Net interest income Interest income
$ 866,186
$ 859,674 $ 816,596 $ 776,806 $ 879,487 Interest expense
647,695 586,774 500,973 442,692
367,421
Net interest income 218,491
272,900 315,623 334,114 512,066
Realized and unrealized gains (losses) Net interest
component of interest rate swaps
134,035 65,889 51,349
31,475 (48,160 ) Realized gains (losses) on termination or maturity
of interest rate swaps
(588,256 ) — 575 — 834
Unrealized gains (losses) on interest rate swaps
(390,556
) (1,313,882 ) 417,203 343,475 977,285
Subtotal (844,777 ) (1,247,993 ) 469,127
374,950 929,959 Net gains (losses) on disposal
of investments
(93,916 ) (747,505 ) (324,294 )
(66,117 ) 13,468 Net gains (losses) on other derivatives
(115,159 ) (484,872 ) 94,827 34,189 (47,145 ) Net
unrealized gains (losses) on instruments measured at fair value
through earnings
47,629 (18,169 ) (39,944 ) (48,376 )
(51,593 ) Loan loss provision
(5,703 ) (3,496 ) —
— —
Subtotal (167,149 )
(1,254,042 ) (269,411 ) (80,304 ) (85,270 )
Total realized and
unrealized gains (losses) (1,011,926 ) (2,502,035
) 199,716 294,646 844,689
Other income
(loss) 30,502 52,377 (10,643 ) 34,170 34,023
General
and administrative expenses Compensation and management fee
44,833 43,750 45,983 45,579 44,529 Other general and
administrative expenses
38,904 33,323 80,526
18,202 17,981
Total general and
administrative expenses 83,737 77,073
126,509 63,781 62,510
Income (loss) before
income taxes (846,670 ) (2,253,831 ) 378,187
599,149 1,328,268
Income taxes 2,581 1,041
(7,242 ) 3,262 564
Net income (loss)
(849,251 ) (2,254,872 ) 385,429 595,887 1,327,704
Net income (loss) attributable to noncontrolling interests
(101 ) 17 (149 ) (32 ) (96 )
Net income
(loss) attributable to Annaly (849,150 )
(2,254,889 ) 385,578 595,919 1,327,800
Dividends on preferred
stock 32,494 32,494 31,675 31,377
33,766
Net income (loss) available (related) to
common stockholders $ (881,644 ) $
(2,287,383 ) $ 353,903 $ 564,542 $ 1,294,034
Net income (loss) per share available (related) to common
stockholders Basic
$ (0.63 ) $ (1.74 ) $
0.29 $ 0.49 $ 1.12 Diluted
$ (0.63 ) $ (1.74 )
$ 0.29 $ 0.49 $ 1.12
Weighted average number of common shares
outstanding Basic
1,398,614,205 1,314,377,748
1,202,353,851 1,160,436,777 1,159,617,848 Diluted
1,398,614,205 1,314,377,748 1,202,353,851 1,160,979,451
1,160,103,185
Other comprehensive income (loss) Net
income (loss) $ (849,251 ) $ (2,254,872 )
$ 385,429 $ 595,887 $ 1,327,704 Unrealized
gains (losses) on available-for-sale securities
1,599,398
1,100,052 (719,609 ) (505,130 ) (1,879,479 ) Reclassification
adjustment for net (gains) losses included in net income (loss)
61,091 743,039 331,100 70,763
5,419 Other comprehensive income (loss)
1,660,489
1,843,091 (388,509 ) (434,367 ) (1,874,060 )
Comprehensive income (loss)
811,238 (411,781 ) (3,080 )
161,520 (546,356 ) Comprehensive income (loss) attributable to
noncontrolling interests
(101 ) 17 (149 ) (32
) (96 ) Comprehensive income (loss) attributable to Annaly
811,339 (411,798 ) (2,931 ) 161,552 (546,260 ) Dividends on
preferred stock
32,494 32,494 31,675
31,377 33,766
Comprehensive income (loss)
attributable to common stockholders $ 778,845
$ (444,292 ) $ (34,606 ) $ 130,175 $ (580,026
)
Key Financial Data
The following table presents key metrics of the Company’s
portfolio, liabilities and hedging positions, and performance as of
and for the quarters ended March 31, 2019, December 31,
2018, and March 31, 2018:
March 31,
2019 December 31,2018 March
31,2018 Portfolio related metrics Fixed-rate
Residential Securities as a percentage of total Residential
Securities
94 % 93 % 91 % Adjustable-rate and
floating-rate Residential Securities as a percentage of total
Residential Securities
6 % 7 % 9 % Weighted average
experienced CPR for the period
7.3 % 7.9 % 8.9 %
Weighted average projected long-term CPR at period-end
11.6
% 10.1 % 9.2 %
Liabilities and hedging metrics
Weighted average days to maturity on repurchase agreements
outstanding at period-end
72 77 72 Hedge ratio (1)
85
% 94 % 94 % Weighted average pay rate on interest rate swaps
at period-end (2)
2.20 % 2.17 % 2.00 % Weighted
average receive rate on interest rate swaps at period-end (2)
2.66 % 2.68 % 2.13 % Weighted average net rate on
interest rate swaps at period-end (2)
(0.46 %) (0.51
%) (0.13 %) Leverage at period-end (3)
6.1:1 6.3:1 6.1:1
Economic leverage at period-end (4)
7.0:1 7.0:1 6.5:1
Capital ratio at period-end
12.0 % 12.1 % 13.1 %
Performance related metrics Book value per common share
$ 9.67 $ 9.39 $ 10.53 GAAP net income (loss) per
average common share (5)
$ (0.63 ) $ (1.74 ) $
1.12 Annualized GAAP return (loss) on average equity
(22.72
%) (62.05 %) 36.86 % Net interest margin
1.25
% 1.34 % 1.94 % Average yield on interest earning assets (6)
3.15 % 3.21 % 3.45 % Average cost of interest bearing
liabilities (7)
2.15 % 2.22 % 1.90 % Net interest
spread
1.00 % 0.99 % 1.55 % Dividend declared per
common share
$ 0.30 $ 0.30 $ 0.30 Annualized dividend
yield (8)
12.01 % 12.22 % 11.51 %
Core earnings
metrics * Core earnings (excluding PAA) per average common
share (5)
$ 0.29 $ 0.29 $ 0.30 Core earnings per
average common share (5)
$ 0.23 $ 0.26 $ 0.41 PAA
cost (benefit) per average common share
$ 0.06 $ 0.03
$ (0.11 ) Annualized core return on average equity (excluding PAA)
11.59 % 11.48 % 10.70 % Net interest margin
(excluding PAA)
1.51 % 1.49 % 1.52 % Average yield on
interest earning assets (excluding PAA) (6)
3.45 %
3.38 % 2.99 % Net interest spread (excluding PAA)
1.30 % 1.16 % 1.09 %
* 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. Certain
credit facilities (included within other secured financing),
securitized debt and mortgages payable are non-recourse to the
Company. (4) Computed as the sum of recourse debt, TBA derivative
and CMBX 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)
Average cost of interest bearing liabilities represents annualized
economic interest expense divided by average interest bearing
liabilities. Average interest bearing liabilities reflects the
average amortized cost during the period. Economic interest expense
is comprised of GAAP interest expense and the net interest
component of interest rate swaps. (8) Based on the closing price of
the Company’s common stock of $9.99, $9.82 and $10.43 at March 31,
2019, December 31, 2018 and March 31, 2018, respectively.
The following table contains additional information on our
residential and commercial investments as of the dates
presented:
For the
quarters ended March 31, 2019 December
31,2018 March 31,2018 Agency
mortgage-backed securities
$ 103,093,526 $ 90,752,995
$ 88,579,097 Credit risk transfer securities
607,945 552,097
628,942 Non-agency mortgage-backed securities
1,116,569
1,161,938 1,066,343 Commercial mortgage-backed securities
175,231 156,758 264,810
Total securities $
104,993,271 $ 92,623,788 $ 90,539,192 Residential mortgage
loans
$ 1,311,720 $ 1,359,806 $ 974,577 Commercial
real estate debt and preferred equity
722,962 1,296,803
1,081,295 Corporate debt
1,758,082 1,887,182 1,152,745 Loans
held for sale
86,560 42,184 —
Total loans, net
$ 3,879,324 $ 4,585,975 $ 3,208,617
Mortgage
servicing rights $ 500,745 $ 557,813 $ 596,378
Residential mortgage loans transferred or pledged to securitization
vehicles
$ 1,425,668 $ 1,094,831 $ 561,108 Commercial
real estate debt transferred or pledged to securitization vehicles
2,939,632 2,738,369 2,695,513
Assets transferred or
pledged to securitization vehicles $ 4,365,300 $
3,833,200 $ 3,256,621
Real estate, net $
734,239 $ 739,473 $ 480,063
Total residential and
commercial investments $ 114,472,879 $
102,340,249 $ 98,080,871
Non-GAAP Financial
Measures
Beginning with the quarter ended September 30, 2018, the Company
updated its calculation of core earnings and related metrics to
reflect changes to its portfolio composition and operations,
including the acquisition of MTGE Investment Corp. ("MTGE") in
September 2018. Compared to prior periods, the revised definition
of core earnings includes coupon income (expense) on CMBX positions
(reported in Net gains (losses) on other derivatives) and excludes
depreciation and amortization expense on real estate and related
intangibles (reported in Other income (loss)), non-core income
(loss) allocated to equity method investments (reported in Other
income (loss)) and the income tax effect of non-core income (loss)
(reported in Income taxes). Prior period results have not been
adjusted to conform to the revised calculation as the impact in
each of those periods is not material.
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);
• interest income (excluding PAA);
• core earnings attributable to common
stockholders and core earnings attributable to common stockholders
(excluding PAA);
• economic interest expense;
• core earnings and core earnings
(excluding PAA) per average common share;
• economic net interest income (excluding
PAA);
• annualized core return on average equity
(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
may be useful to investors, and reconciliations to their most
directly comparable GAAP results are provided below.
Core earnings and core earnings (excluding PAA), core
earnings attributable to common stockholders and core earnings
attributable to common stockholders (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 defined as the
sum of (a) economic net interest income, (b) TBA dollar roll income
and CMBX coupon income, (c) realized amortization of MSRs, (d)
other income (loss) (excluding depreciation and amortization
expense on real estate and related intangibles, non-core income
allocated to equity method investments and other non-core
components of other income (loss)), (e) general and administrative
expenses (excluding transaction expenses and non-recurring items)
and (f) income taxes (excluding the income tax effect of non-core
income (loss) items), and core earnings (excluding PAA), which is
defined as core earnings excluding 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, are used by the Company's
management and, the Company believes, used by analysts and
investors to measure its progress in achieving its principal
business objective.
The Company seeks to fulfill this objective through a variety of
factors including portfolio construction, the degree of market risk
exposure and related hedge profile, and the use and forms of
leverage, all while operating within the parameters of the
Company's capital allocation policy and risk governance
framework.
The Company believes these non-GAAP measures provide management
and investors with additional details regarding the Company’s
underlying operating results and investment portfolio trends by (i)
making adjustments to account for the disparate reporting of
changes in fair value where certain instruments are reflected in
GAAP net income (loss) while others are reflected in other
comprehensive income (loss), and (ii) by excluding certain
unrealized, non-cash or episodic components of GAAP net income
(loss) in order to provide additional transparency into the
operating performance of the Company’s portfolio. Annualized core
return on average equity (excluding PAA), which is calculated by
dividing core earnings (excluding PAA) over average stockholders’
equity, provides investors with additional detail on the core
earnings generated by the Company’s invested equity capital.
The following table presents a reconciliation of GAAP financial
results to non-GAAP core earnings for the periods presented:
For the
quarters ended March 31, 2019 December
31,2018 March 31,2018 (dollars
in thousands, except per share data) GAAP net income (loss)
$ (849,251 ) $ (2,254,872 ) $ 1,327,704 Net
income (loss) attributable to noncontrolling interests
(101
) 17 (96 )
Net income (loss) attributable to
Annaly (849,150 ) (2,254,889 ) 1,327,800
Adjustments to exclude reported realized and unrealized (gains)
losses Realized (gains) losses on termination or maturity of
interest rate swaps
588,256 — (834 ) Unrealized (gains)
losses on interest rate swaps
390,556 1,313,882 (977,285 )
Net (gains) losses on disposal of investments
93,916 747,505
(13,468 ) Net (gains) losses on other derivatives
115,159
484,872 47,145 Net unrealized (gains) losses on instruments
measured at fair value through earnings
(47,629 )
18,169 51,593 Loan loss provision
5,703 3,496 —
Adjustments to exclude components of other (income) loss
Depreciation and amortization expense related to commercial real
estate
10,114 11,000 — Non-core (income) loss allocated to
equity method investments (1)
9,496 (10,307 ) —
Adjustments to exclude components of general and administrative
expenses and income taxes Transaction expenses and
non-recurring items (2)
9,982 3,816 1,519 Income tax effect
of non-core income (loss) items
726 3,334 —
Adjustments
to add back components of realized and unrealized (gains)
losses TBA dollar roll income and CMBX coupon income (3)
38,134 69,572 88,353 MSR amortization (4)
(13,979
) (18,753 ) (21,156 )
Core earnings * 351,284
371,697 503,667
Less: Premium amortization adjustment cost
(benefit)
81,871 45,472 (118,395 )
Core
earnings (excluding PAA) * $ 433,155 $
417,169 $ 385,272 Dividends on
preferred stock
32,494 32,494 33,766
Core earnings attributable to common stockholders * $
318,790 $ 339,203 $ 469,901
Core
earnings attributable to common stockholders (excluding PAA) *
$ 400,661 $ 384,675 $ 351,506
GAAP net income (loss) per average common share $
(0.63 ) $ (1.74 ) $ 1.12
Core earnings per average
common share * $ 0.23 $ 0.26 $ 0.41
Core
earnings (excluding PAA) per average common share * $
0.29 $ 0.29 $ 0.30
Annualized GAAP return (loss) on
average equity (22.72 %) (62.05 %) 36.86 %
Annualized core return on average equity (excluding PAA) *
11.59 % 11.48 %
10.70 % * Represents a non-GAAP
financial measure. (1) Beginning with the quarter ended September
30, 2018, the Company excludes non-core (income) loss allocated to
equity method investments, which represents the unrealized (gains)
losses allocated to equity interests in a portfolio of MSR, which
is a component of Other income (loss). The quarter ended December
31, 2018 also includes a realized gain on sale within an
unconsolidated joint venture, which is a component of Other income
(loss). (2) Represents costs incurred in connection with
securitizations of residential whole loans. The quarter ended March
31, 2019 also includes costs incurred in connection with the
securitization of commercial loans. The quarter ended December 31,
2018 also includes costs incurred in connection with the MTGE
transaction. (3) TBA dollar roll income and CMBX coupon income each
represent a component of Net gains (losses) on other derivatives.
CMBX coupon income totaled $1.1 million and $1.2 million for the
quarters ended March 31, 2019 and December 31, 2018, respectively.
There were no adjustments for CMBX coupon income prior to September
30, 2018. (4) 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
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).
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 in the Consolidated Statements of
Comprehensive Income (Loss). The coupon payments received or paid
on CMBX positions are equivalent to interest income (expense) and
therefore included in core earnings.
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 for the quarters ended March 31, 2019,
December 31, 2018, and March 31, 2018:
For the quarters ended March 31, 2019
December 31,2018 March 31,2018
(dollars in thousands) Premium amortization expense
(accretion)
$ 247,446 $ 220,131 $ 95,832 Less: PAA
cost (benefit)
81,871 45,472 (118,395 )
Premium amortization expense (excluding PAA) $
165,575 $ 174,659 $ 214,227
For the quarters ended
March 31, 2019 December 31,2018
March 31,2018 (per average common share)
Premium amortization expense (accretion)
$ 0.18 $
0.17 $ 0.08 Less: PAA cost (benefit) (1)
0.06 0.03
(0.11 )
Premium amortization expense (excluding PAA)
$ 0.12 $ 0.14 $ 0.19
(1) The Company
separately calculates core earnings per average common share and
core earnings (excluding PAA) per average common share, with the
difference between these two per share amounts attributed to the
PAA cost (benefit) per average common share. As such, the reported
value of the PAA cost (benefit) per average common share may not
reflect the result of dividing the PAA cost (benefit) by the
weighted average number of common shares outstanding due to
rounding.
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. 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 March
31, 2019 December 31,2018
March 31,2018 Interest income (excluding PAA)
reconciliation (dollars in thousands) GAAP interest
income
$ 866,186 $ 859,674 $ 879,487 Premium
amortization adjustment
81,871 45,472 (118,395
)
Interest income (excluding PAA) * $ 948,057
$ 905,146 $ 761,092
Economic interest
expense reconciliation GAAP interest expense
$
647,695 $ 586,774 $ 367,421
Add: Net interest
component of interest rate swaps
(134,035 ) (65,889 )
48,160
Economic interest expense * $
513,660 $ 520,885 $ 415,581
Economic
net interest income (excluding PAA) reconciliation Interest
income (excluding PAA) *
$ 948,057 $ 905,146 $
761,092
Less: Economic interest expense *
513,660
520,885 415,581
Economic net interest
income (excluding PAA) * $ 434,397 $
384,261 $ 345,511
* 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 and
CMBX coupon income less interest expense and the net interest
component of interest rate swaps divided by the sum of average
interest earning assets plus average TBA contract and CMBX
balances, provide management with additional measures of the
Company’s profitability that management relies upon in monitoring
the performance of the business.
Disclosure of these measures, which are presented below,
provides investors with additional detail regarding how management
evaluates the Company’s performance.
For the quarters ended
March 31, 2019 December 31,2018
March 31,2018 Economic metrics (excluding
PAA) (dollars in thousands) Average interest earning
assets
$ 109,946,527 $ 107,232,861 $ 101,979,042
Interest income (excluding PAA) *
$ 948,057 $ 905,146
$ 761,092 Average yield on interest earning assets (excluding PAA)
*
3.45 % 3.38 % 2.99 % Average interest bearing
liabilities
$ 95,529,819 $ 91,746,160 $ 87,376,452
Economic interest expense *
$ 513,660 $ 520,885 $
415,581 Average cost of interest bearing liabilities
2.15
% 2.22 % 1.90 % Economic net interest income (excluding PAA)
*
$ 434,397 $ 384,261 $ 345,511 Net interest spread
(excluding PAA) *
1.30 % 1.16 % 1.09 % Interest
income (excluding PAA) *
$ 948,057 $ 905,146 $
761,092 TBA dollar roll income and CMBX coupon income
38,134
69,572 88,353 Interest expense
(647,695 ) (586,774 )
(367,421 ) Net interest component of interest rate swaps
134,035 65,889 (48,160 )
Subtotal
$ 472,531 $ 453,833 $ 433,864
Average interest earnings assets
$ 109,946,527 $
107,232,861 $ 101,979,042 Average TBA contract and CMBX balances
14,927,490 14,788,453 12,050,341
Subtotal $ 124,874,017 $ 122,021,314 $
114,029,383
Net interest margin (excluding PAA) *
1.51 % 1.49 % 1.52 %
* Represents a
non-GAAP financial measure.
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Annaly Capital Management, Inc.Investor
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