- GAAP net income of $1.8 billion, $1.79
per average common share
- Transition to revised core earnings
metrics to conform with regulatory guidance on non-GAAP
measures
- Core earnings (unrevised - excluding
premium amortization adjustment (“PAA”)) of $327.0 million, $0.30
per average common share
- Core earnings (revised - including PAA)
of $565.9 million, $0.53 per average common share
- Common stock book value per share of
$11.16
Annaly Capital Management, Inc. (NYSE:NLY) (the “Company” or
“Annaly”) today announced its financial results for the quarter and
year ended December 31, 2016.
“The fourth quarter of 2016 was yet another period of
historically high market volatility with interest rate levels
rising meaningfully and credit spreads contracting significantly,”
commented Kevin Keyes, Chief Executive Officer and
President. “Once again, amidst this uncertainty, Annaly
delivered stable core earnings and dividends producing an
attractive return on equity for our shareholders. In addition, the
effectiveness of our diversification and hedging strategies
contributed to our book value for the quarter outperforming
expected changes despite the pronounced sell-off in the fixed
income markets.
“2016 was also a year of notable milestones for Annaly in which
we continued to expand our four complementary business platforms
into 25 investment options, completed the largest mortgage REIT
acquisition in history and delivered a $0.30 per share dividend for
the 13th consecutive quarter.
“Entering 2017, we are prepared for even more volatility and
uncertainty. Importantly, considering the wide range of potential
outcomes in the global macro-economies and marketplaces, we are
confident our diversified model is uniquely positioned to take
advantage of multiple investment opportunities.”
Updated Disclosure of
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 non-GAAP
financial measures 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. Historically, the Company has defined “core
earnings”, a non-GAAP measure, as net income (loss) excluding gains
or losses on disposals of investments and termination of interest
rate swaps, unrealized gains or losses on interest rate swaps and
investments measured at fair value through earnings, net gains and
losses on trading assets, impairment losses, net income (loss)
attributable to noncontrolling interest, the premium amortization
adjustment resulting from the quarter-over-quarter change in
estimated long-term CPR (“PAA”), corporate acquisition related
expenses and certain other non-recurring gains or losses, and
inclusive of dollar roll income (a component of Net gains (losses)
on trading assets) and realized amortization of mortgage servicing
rights (“MSR”) (a component of net unrealized gains (losses) on
investments measured at fair value through earnings).
Based upon recent regulatory guidance and interpretations on the
use of non-GAAP financial measures, beginning with the fourth
quarter 2016, the Company will report core earnings metrics
(revised) that include the PAA. In addition, this is the final
quarter that the Company will report core earnings metrics
(unrevised) that exclude the PAA. In future periods, the Company
will not make an adjustment to GAAP net income (loss) to exclude
the PAA. However, given its usefulness in evaluating the Company’s
financial performance, the Company will continue to separately
disclose the PAA. Additionally, comparative prior period results
reported in future periods will conform to the revised
presentation.
The Company believes its non-GAAP financial measures are useful
for management, investors, analysts, and other interested parties
in evaluating the Company’s performance but should not be viewed in
isolation and are not a substitute for financial measurements
computed in accordance with GAAP. Please refer to the “Non-GAAP
Financial Measures” section for additional information.
Financial
Performance
The following table summarizes certain key performance
indicators as of and for the quarters ended December 31, 2016,
September 30, 2016, and December 31, 2015:
December 31, 2016 September 30, 2016
December 31, 2015 Book value per common share $11.16
$11.83 $11.73 Economic leverage at period-end (1)
6.4:1 6.1:1 6.0:1 GAAP net income (loss) per average common share
$1.79 $0.70 $0.69
Core earnings per average common share
(unrevised - excluding PAA)* (2)
$0.30 $0.29 $0.31
Less: PAA cost (benefit) per average
common share
(0.23) - (0.02)
Core earnings per average common share
(revised - including PAA)* (2)
$0.53 $0.29 $0.33 Annualized return (loss) on average
equity 57.23% 23.55% 22.15% Annualized core return on average
equity (unrevised - excluding PAA)* 10.13% 10.09% 10.30% Annualized
core return on average equity (revised - including PAA)* 17.53%
10.09% 10.89% Net interest margin (3) 2.49% 1.40% 1.80% Core net
interest margin (excluding PAA)* 1.53% 1.42% 1.71% Net interest
spread 2.28% 1.13% 1.47% Core net interest spread (excluding PAA)*
1.15% 1.15% 1.37% Average yield on interest earning assets 3.81%
2.70% 3.15% Core average yield on interest earning assets
(excluding PAA)* 2.68% 2.72% 3.05%
*
Represents a non-GAAP financial measure.
Please refer to the ‘Non-GAAP Financial Measures’ section for
additional information.
(1)
Computed as the sum of recourse debt, TBA
derivative notional outstanding and net forward purchases of
investments divided by total equity. Recourse debt consists of
repurchase agreements, other secured financing and Convertible
Senior Notes. Securitized debt, participation sold and mortgages
payable are non-recourse to the Company and are excluded from this
measure.
(2)
The Company revised its definition of core
earnings to include the PAA. Core earnings (unrevised) excluded the
PAA. This is the final quarter that the Company will report core
earnings metrics that exclude the PAA. Beginning with the fourth
quarter 2016, core earnings (revised) is defined as net income
(loss) excluding gains or losses on disposals of investments and
termination of interest rate swaps, unrealized gains or losses on
interest rate swaps and investments measured at fair value through
earnings, net gains and losses on trading assets, impairment
losses, net income (loss) attributable to noncontrolling interest,
corporate acquisition related expenses and certain other
non-recurring gains or losses, and inclusive of dollar roll income
(a component of Net gains (losses) on trading assets) and realized
amortization of MSRs (a component of net unrealized gains (losses)
on investments measured at fair value through earnings).
(3)
Represents the sum of the Company’s
annualized economic net interest income (inclusive of interest
expense on interest rate swaps used to hedge cost of funds) plus
TBA dollar roll income (less interest expense on swaps used to
hedge dollar roll transactions) divided by the sum of its average
interest earning assets plus average outstanding TBA derivative
balances. Average interest earning assets reflects the average
amortized cost of our investments during the period.
Among the financial highlights for the fourth quarter 2016 are
the following:
- GAAP net income of $1.8 billion, or
$1.79 per average common share
- Core earnings* (unrevised – excluding
PAA) of $327.0 million, or $0.30 per average common share
- Core earnings* (revised – including
PAA) of $565.9 million, or $0.53 per average common share
(inclusive of PAA benefit of $238.9 million, or $0.23 per average
common share)
- GAAP return on average equity of
57.23%, core return on average equity* (unrevised – excluding PAA)
of 10.13%, core return on average equity* (revised – including PAA)
of 17.53% (PAA related benefit of 7.40%)
- Common dividend declared for the
quarter ended December 31, 2016 of $0.30 per common share. The
annualized dividend yield on the Company’s common stock for the
quarter ended December 31, 2016, based on the December 31, 2016
closing price of $9.97, was 12.04%
Among the business highlights for the year ended December 31,
2016 are the following:
- Completed the largest mREIT acquisition
in history with purchase of Hatteras Financial Corp.
- Continued diversification strategy with
expansion of investment options and targeted growth in select
credit assets
- Advanced funding strategy with
dedicated financing facilities for credit businesses while also
capitalizing on FHLB term funding
- Further aligned management and
shareholder interests by initiating employee stock ownership
program
* Represents a non-GAAP financial measure.
Please refer to the ‘Non-GAAP Financial Measures’ section for
additional information.
Amortization
In accordance with GAAP, the Company amortizes or accretes
premiums or discounts into interest income for its Agency
mortgage-backed securities, excluding interest-only securities,
considering estimates of future principal prepayment in the
calculation of the effective yield because they are probable and
the timing and amount of prepayments can be reasonably estimated.
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 investment 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. The
Company’s non-GAAP measures previously excluded the effect of the
PAA, however, beginning with the fourth quarter 2016, the Company
revised its definition of core earnings such that no adjustment
will be made to exclude the PAA. In addition, this is the final
quarter that the Company will report core earnings metrics
(unrevised) that exclude the PAA. However, given its usefulness in
evaluating the Company’s financial performance, the Company will
continue to separately disclose the PAA.
The following table illustrates the impact of
quarter-over-quarter changes to long-term CPR estimates on premium
amortization expense for the Company’s Residential Investment
Securities portfolio for the quarters ended December 31, 2016,
September 30, 2016, and December 31, 2015:
For the quarters ended December 31,
2016 September 30, 2016 December 31,
2015 (dollars in thousands) Premium amortization expense
$ (19,812 ) $ 213,241 $ 159,720 Less: PAA cost (benefit)
(238,941 ) 3,891 (18,072 )
Premium amortization expense exclusive of PAA $ 219,129
$ 209,350 $ 177,792
For the
quarters ended December 31, 2016 September 30,
2016 December 31, 2015 (per average common
share) Premium amortization expense $ (0.02 ) $ 0.21 $ 0.17
Less: PAA cost (benefit) (0.23 ) -
(1)
(0.02 ) Premium amortization expense exclusive of PAA $ 0.21
$ 0.21 $ 0.19 (1) Rounds to less than
$0.01 per average common share.
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 financings; changes in the market value
of our assets; changes in business conditions and the general
economy; our ability to grow our commercial business; our ability
to grow our residential mortgage credit 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 and
ownership of a servicer; our ability to consummate any contemplated
investment opportunities; changes in government regulations
affecting our business; our ability to maintain our qualification
as a REIT; 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’s principal business objectives are to generate net
income for distribution to its shareholders from its investments
and capital preservation. Annaly is a Maryland corporation that has
elected to be taxed as a real estate investment trust (“REIT”).
Annaly is managed and advised by Annaly Management Company LLC.
The Company prepares a supplemental investor presentation and a
financial summary for the benefit of its shareholders. Both the
Fourth Quarter 2016 Investor Presentation and the Fourth Quarter
2016 Financial Summary can be found at the Company’s website
(www.annaly.com) in the Investors section under Investor
Presentations.
Conference
Call
The Company will hold the fourth quarter 2016 earnings
conference call on February 16, 2017 at 10:00 a.m. Eastern Time.
The number to call is 888-317-6003 for domestic calls and
412-317-6061 for international calls. The conference passcode is
8442755. There will also be an audio webcast of the call on
www.annaly.com. The replay of the call is 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 10100346. 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.
ANNALY CAPITAL MANAGEMENT,
INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION (dollars in thousands, except per share data)
December 31, September 30, June 30,
March 31, December 31, 2016 2016
2016 2016
2015(1)
(Unaudited) (Unaudited)
(Unaudited) (Unaudited)
ASSETS Cash and cash equivalents $ 1,539,746 $
2,382,188 $ 2,735,250 $ 2,416,136 $ 1,769,258 Investments, at fair
value: Agency mortgage-backed securities 75,589,873 73,476,105
64,862,992 65,439,824 65,718,224 Agency debentures - - - 157,035
152,038 Credit risk transfer securities 724,722 669,295 520,321
501,167 456,510 Non-Agency mortgage-backed securities 1,401,307
1,460,261 1,197,549 1,157,507 906,722 Residential mortgage loans
(2) 342,289 310,148 - - - Mortgage servicing rights 652,216 492,169
- - - Commercial real estate debt investments (3) 4,321,739
4,319,077 4,361,972 4,401,725 2,911,828 Commercial real estate debt
and preferred equity, held for investment (4) 970,505 1,070,197
1,137,971 1,177,468 1,348,817 Commercial loans held for sale, net
114,425 144,275 164,175 278,600 278,600 Investments in commercial
real estate 474,567 500,027 504,605 527,786 535,946 Corporate debt
773,274 716,831 669,612 639,481 488,508 Interest rate swaps, at
fair value 68,194 113,253 146,285 93,312 19,642 Other derivatives,
at fair value 171,266 87,921 137,490 77,449 22,066 Receivable for
investments sold 51,461 493,839 697,943 2,220 121,625 Accrued
interest and dividends receivable 270,400 260,583 227,225 232,180
231,336 Other assets 333,063 301,419 237,959 234,407 119,422
Goodwill 71,815 71,815 71,815 71,815 71,815 Intangible assets, net
34,184 39,903
43,306 35,853 38,536
Total assets $ 87,905,046 $ 86,909,306
$ 77,716,470 $ 77,443,965
$ 75,190,893
LIABILITIES AND STOCKHOLDERS’
EQUITY Liabilities: Repurchase agreements $ 65,215,810 $
61,784,121 $ 53,868,385 $ 54,448,141 $ 56,230,860 Other secured
financing 3,884,708 3,804,742 3,588,326 3,588,326 1,845,048
Securitized debt of consolidated VIEs (5) 3,655,802 3,712,821
3,748,289 3,802,682 2,540,711 Participation sold 12,869 12,976
13,079 13,182 13,286 Mortgages payable 311,636 327,632 327,643
334,765 334,707 Interest rate swaps, at fair value 1,443,765
2,919,492 3,208,986 2,782,961 1,677,571 Other derivatives, at fair
value 86,437 73,445 154,017 69,171 49,963 Dividends payable 305,674
269,111 277,479 277,456 280,779 Payable for investments purchased
65,041 454,237 746,090 250,612 107,115 Accrued interest payable
163,013 173,320 159,435 163,983 151,843 Accounts payable and other
liabilities 184,319 115,606
62,868 54,679
53,088 Total liabilities 75,329,074
73,647,503 66,154,597
65,785,958 63,284,971
Stockholders’ Equity: 7.875% Series A Cumulative
Redeemable Preferred Stock:
7,412,500 authorized, issued and
outstanding
177,088 177,088 177,088 177,088 177,088 7.625% Series C Cumulative
Redeemable Preferred Stock
12,650,000 authorized, 12,000,000 issued
and outstanding
290,514 290,514 290,514 290,514 290,514 7.50% Series D Cumulative
Redeemable Preferred Stock:
18,400,000 authorized, issued and
outstanding
445,457 445,457 445,457 445,457 445,457 7.625% Series E Cumulative
Redeemable Preferred Stock:
11,500,000 authorized, issued and
outstanding
287,500 287,500 - - - Common stock, par value $0.01 per share,
1,945,437,500, 1,945,437,500, 1,956,937,500, 1,956,937,500 and
1,956,937,500 authorized, 1,018,913,249, 1,018,857,866,
924,929,607, 924,853,133 and 935,929,561 issued and outstanding,
respectively 10,189 10,189 9,249 9,249 9,359 Additional paid-in
capital 15,579,342 15,578,677 14,575,426 14,573,760 14,675,768
Accumulated other comprehensive income (loss) (1,085,893 )
1,119,677 1,117,046 640,366 (377,596 ) Accumulated deficit
(3,136,017 ) (4,655,440 ) (5,061,565 )
(4,487,982 ) (3,324,616 ) Total
stockholders’ equity 12,568,180 13,253,662 11,553,215 11,648,452
11,895,974 Noncontrolling interest 7,792
8,141 8,658
9,555 9,948 Total equity
12,575,972 13,261,803
11,561,873 11,658,007
11,905,922 Total liabilities and equity $ 87,905,046
$ 86,909,306 $ 77,716,470
$ 77,443,965 $ 75,190,893
(1)
Derived from the audited consolidated
financial statements at December 31, 2015.
(2)
Includes securitized mortgage loans of a
consolidated VIE carried at fair value of $165.9 million and $176.7
million at December 31, 2016 and September 30, 2016,
respectively.
(3)
Includes senior securitized commercial
mortgage loans of consolidated VIEs with a carrying value of $3.9
billion, $4.0 billion, $4.0 billion, $4.0 billion and $2.6 billion
at December 31, 2016, September 30, 2016, June 30, 2016, March 31,
2016 and December 31, 2015, respectively.
(4)
Includes senior securitized commercial
mortgage loans of consolidated VIE with a carrying value of $0,
$128.9 million, $187.2 million, $211.9 million and $262.7 million
at December 31, 2016, September 30, 2016, June 30, 2016, March 31,
2016 and December 31, 2015, respectively.
(5)
Includes securitized debt of consolidated
VIEs carried at fair value of $3.7 billion, $3.7 billion, $3.7
billion, $3.7 billion and $2.4 billion at December 31, 2016,
September 30, 2016, June 30, 2016, March 31, 2016 and December 31,
2015, respectively.
ANNALY CAPITAL MANAGEMENT, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS) (UNAUDITED) (dollars in thousands, except per
share data) For the quarters
ended December 31, September 30, June 30,
March 31, December 31, 2016
2016 2016
2016 2015
Net interest income: Interest income $ 807,022 $ 558,668 $
457,118 $ 388,143 $ 576,580 Interest expense 183,396
174,154 152,755
147,447 118,807
Net interest income
623,626 384,514
304,363 240,696 457,773
Realized and unrealized gains (losses):
Realized gains (losses) on interest rate swaps(1) (103,872 )
(124,572 ) (130,762 ) (147,475 ) (159,487 ) Realized gains (losses)
on termination of interest rate swaps (55,214 ) 1,337 (60,064 ) - -
Unrealized gains (losses) on interest rate swaps 1,430,668
256,462 (373,220 )
(1,031,720 ) 463,126
Subtotal
1,271,582 133,227
(564,046 ) (1,179,195 ) 303,639
Net gains (losses) on disposal of investments 7,782 14,447 12,535
(1,675 ) (7,259 ) Net gains (losses) on trading assets (139,470 )
162,981 81,880 125,189 42,584 Net unrealized gains (losses) on
investments measured at fair value through earnings 110,742 29,675
(54,154 ) 128 (62,703 ) Bargain purchase gain -
72,576 - -
-
Subtotal (20,946 )
279,679 40,261
123,642 (27,378 )
Total realized and
unrealized gains (losses) 1,250,636
412,906 (523,785 ) (1,055,553 )
276,261
Other income (loss)
30,918 29,271 (9,930 ) (6,115 ) (10,447 )
General and
administrative expenses: Compensation and management fee 39,845
38,709 36,048 36,997 37,193 Other general and administrative
expenses 15,608 59,028
13,173 10,948
10,643
Total general and administrative expenses
55,453 97,737
49,221 47,945 47,836
Income (loss) before income taxes 1,849,727
728,954 (278,573 ) (868,917 ) 675,751
Income taxes
1,244 (1,926 ) (76 )
(837 ) 6,085
Net
income (loss) 1,848,483 730,880 (278,497 ) (868,080 ) 669,666
Net income (loss) attributable to noncontrolling
interest (87 ) (336 ) (385 )
(162 ) (373 )
Net income
(loss) attributable to Annaly 1,848,570 731,216 (278,112 )
(867,918 ) 670,039
Dividends on preferred stock
23,473 22,803
17,992 17,992 17,992
Net income (loss) available (related) to common
stockholders $ 1,825,097 $ 708,413
$ (296,104 ) $ (885,910 ) $ 652,047
Net income (loss) per share available (related) to common
stockholders: Basic $ 1.79 $ 0.70 $
(0.32 ) $ (0.96 ) $ 0.69 Diluted $ 1.79
$ 0.70 $ (0.32 ) $ (0.96 ) $
0.69
Weighted average number of common shares
outstanding: Basic 1,018,886,380
1,007,607,893 924,887,316
926,813,588 945,072,058 Diluted
1,019,251,111 1,007,963,406
924,887,316 926,813,588
945,326,098
Net income (loss) $
1,848,483 $ 730,880 $ (278,497 )
$ (868,080 ) $ 669,666
Other comprehensive income
(loss): Unrealized gains (losses) on available-for-sale
securities (2,206,288 ) 18,237 483,930 1,017,707 (648,106 )
Reclassification adjustment for net (gains) losses included in net
income (loss) 718 (15,606 )
(7,250 ) 255 7,655
Other comprehensive income (loss) (2,205,570 )
2,631 476,680 1,017,962
(640,451 ) Comprehensive income (loss)
(357,087 ) 733,511 198,183 149,882 29,215 Comprehensive income
(loss) attributable to noncontrolling interest (87 )
(336 ) (385 ) (162 )
(373 )
Comprehensive income (loss) attributable to
Annaly $ (357,000 ) $ 733,847 $ 198,568
$ 150,044 $ 29,588
(1)
Interest expense related to the Company’s
interest rate swaps is recorded in Realized gains (losses) on
interest rate swaps on the Consolidated Statements of Comprehensive
Income.
ANNALY CAPITAL MANAGEMENT, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS) (dollars in thousands, except per share data)
For the years ended December 31, December
31, 2016
2015 (1)
(Unaudited) Net interest income:
Interest income $ 2,210,951 $ 2,170,697 Interest expense
657,752 471,596
Net interest
income 1,553,199 1,699,101
Realized and unrealized gains (losses): Realized
gains (losses) on interest rate swaps(2) (506,681 ) (624,495 )
Realized gains (losses) on termination of interest rate swaps
(113,941 ) (226,462 ) Unrealized gains (losses) on interest rate
swaps 282,190 (124,869 )
Subtotal (338,432 ) (975,826 ) Net
gains (losses) on disposal of investments 33,089 50,987 Net gains
(losses) on trading assets 230,580 29,623 Net unrealized gains
(losses) on investments measured at fair value through earnings
86,391 (103,169 ) Bargain purchase gain 72,576 - Impairment of
goodwill - (22,966 )
Subtotal
422,636 (45,525 )
Total realized and
unrealized gains (losses) 84,204
(1,021,351 )
Other income (loss): Investment advisory
income - 24,848 Dividend income from affiliate - 8,636 Other income
(loss) 44,144 (47,201 )
Total other
income (loss) 44,144 (13,717 )
General and administrative expenses: Compensation and
management fee 151,599 150,286 Other general and administrative
expenses 98,757 49,954
Total
general and administrative expenses 250,356
200,240
Income (loss) before income
taxes 1,431,191 463,793
Income taxes
(1,595 ) (1,954 )
Net income (loss)
1,432,786 465,747
Net income (loss) attributable to
noncontrolling interest (970 ) (809 )
Net income (loss) attributable to Annaly 1,433,756
466,556
Dividends on preferred stock 82,260
71,968
Net income (loss)
available (related) to common stockholders $ 1,351,496
$ 394,588
Net income (loss) per share
available (related) to common stockholders: Basic $ 1.39
$ 0.42 Diluted $ 1.39 $ 0.42
Weighted average number of common shares outstanding:
Basic 969,787,583 947,062,099
Diluted 970,102,353 947,276,742
Net income (loss) $ 1,432,786 $ 465,747
Other comprehensive income (loss): Unrealized gains
(losses) on available-for-sale securities (686,414 ) (531,952 )
Reclassification adjustment for net (gains) losses included in net
income (loss) (21,883 ) (50,527 ) Other
comprehensive income (loss) (708,297 )
(582,479 ) Comprehensive income (loss) 724,489 (116,732 )
Comprehensive income (loss) attributable to noncontrolling interest
(970 ) (809 )
Comprehensive income (loss)
attributable to Annaly $ 725,459 $ (115,923 )
(1)
Derived from the audited consolidated
financial statements at December 31, 2015.
(2)
Interest expense related to the Company’s
interest rate swaps is recorded in Realized gains (losses) on
interest rate swaps on the Consolidated Statements of Comprehensive
Income.
Key
Metrics
The following table presents key metrics of the Company’s
portfolio, liabilities and hedging positions, and performance as of
and for the quarters ended December 31, 2016, September 30, 2016,
and December 31, 2015:
December 31, 2016 September 30, 2016
December 31, 2015
Portfolio Related
Metrics:
Fixed-rate Residential Investment Securities as a
percentage of total Residential Investment Securities 83% 81% 93%
Adjustable-rate and floating-rate Residential Investment Securities
as a percentage of total Residential Investment Securities 17% 19%
7% Weighted average experienced CPR for the period 15.6% 15.9% 9.7%
Weighted average projected long-term CPR at period end 10.1%
14.4% 8.8%
Liabilities and
Hedging Metrics:
Weighted average days to maturity on repurchase agreements
outstanding at period-end 96 128 151 Hedge ratio (1) 56% 52% 55%
Weighted average pay rate on interest rate swaps at period-end (2)
2.22% 2.25% 2.26% Weighted average receive rate on interest rate
swaps at period-end (2) 1.02% 0.88% 0.53% Weighted average net rate
on interest rate swaps at period-end (2) 1.20% 1.37% 1.73% Leverage
at period-end (3) 5.8:1 5.3:1 5.1:1 Economic leverage at period-end
(4) 6.4:1 6.1:1 6.0:1 Capital ratio at period-end 13.1%
13.3% 13.7%
Performance
Related Metrics:
Book value per common share $11.16 $11.83 $11.73 GAAP net income
(loss) per common share $1.79 $0.70 $0.69 Core
earnings per common share (unrevised - excluding PAA)* $0.30 $0.29
$0.31 Less: PAA cost (benefit) (0.23) - (0.02) Core
earnings per common share (revised - including PAA)* $0.53
$0.29 $0.33 Annualized return (loss) on average equity
57.23% 23.55% 22.15% Annualized core return on average equity
(unrevised - excluding PAA)* 10.13% 10.09% 10.30% Annualized core
return on average equity (revised - including PAA)* 17.53% 10.09%
10.89% Net interest margin 2.49% 1.40% 1.80% Core net interest
margin (excluding PAA)* 1.53% 1.42% 1.71% Average yield on interest
earning assets (5) 3.81% 2.70% 3.15% Core average yield on interest
earning assets (excluding PAA)* (6) 2.68% 2.72% 3.05% Average cost
of interest bearing liabilities (6) 1.53% 1.57% 1.68% Net interest
spread 2.28% 1.13% 1.47% Core net interest spread (excluding PAA)*
1.15% 1.15% 1.37%
*
Represents a non-GAAP financial measure.
Please refer to the ‘Non-GAAP Financial Measures’ section for
additional information.
(1)
Measures total notional balances of
interest rate swaps, interest rate swaptions and futures relative
to repurchase agreements, other secured financing and TBA notional
outstanding.
(2)
Excludes forward starting swaps.
(3)
Debt consists of repurchase agreements,
other secured financing, Convertible Senior Notes, securitized
debt, participation sold and mortgages payable. Securitized debt,
participation sold and mortgages payable are non-recourse to the
Company.
(4)
Computed as the sum of recourse debt, TBA
derivative notional outstanding and net forward purchases of
investments divided by total equity.
(5)
Average interest earning assets reflects
the average amortized cost of our investments during the
period.
(6)
Includes interest expense on interest rate
swaps used to hedge cost of funds.
Non-GAAP Financial
Measures
Based upon recent regulatory guidance and interpretations on the
use of non-GAAP financial measures, beginning with the fourth
quarter 2016, the Company will report core earnings metrics
(revised) that include the PAA. In addition, this is the final
quarter that the Company will report core earnings metrics
(unrevised) that exclude the PAA. In future periods, the Company
will not make an adjustment to GAAP net income (loss) to exclude
the PAA. However, given its usefulness in evaluating the Company’s
financial performance, the Company will continue to separately
disclose the PAA. Additionally, comparative prior period results
reported in future periods will conform to the revised
presentation.
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 financial measures. These measures should not be
considered a substitute for, or superior to, financial measures
computed in accordance with GAAP.
- core earnings;
- core earnings per average common
share;
- annualized core return on average
equity;
- core interest income (excluding
PAA);
- economic interest expense;
- economic core net interest income
(excluding PAA);
- core average yield on interest earning
assets (excluding PAA);
- core net interest margin (excluding
PAA); and
- core net interest spread (excluding
PAA).
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, core earnings per average common share and
annualized core return on average equity
One of the Company’s principal business objectives is to
generate net income by earning a net interest spread on its
investment portfolio, which is a function of the Company’s interest
income from its investment portfolio less financing, hedging and
operating costs. Core earnings, which is comprised of interest
income plus TBA dollar roll incomei, less financing and hedging
costsii and general and administrative expenses, is used by
management to measure its progress in achieving this objective.
Historically, the Company has defined “core earnings”, a
non-GAAP measure, as net income (loss) excluding gains or losses on
disposals of investments and termination of interest rate swaps,
unrealized gains or losses on interest rate swaps and investments
measured at fair value through earnings, net gains and losses on
trading assets, impairment losses, net income (loss) attributable
to noncontrolling interest, the premium amortization adjustment
resulting from the quarter-over-quarter change in estimated
long-term CPR (“PAA”), corporate acquisition related expenses and
certain other non-recurring gains or losses, and inclusive of
dollar roll income (a component of Net gains (losses) on trading
assets) and realized amortization of mortgage servicing rights
(“MSR”) (a component of net unrealized gains (losses) on
investments measured at fair value through earnings).
Beginning with the fourth quarter 2016, the Company will report
core earnings metrics (revised) that include the PAA. In addition,
this is the final quarter that the Company will report core
earnings metrics (unrevised) that exclude the PAA. In future
periods, the Company will not make an adjustment to GAAP net income
(loss) to exclude the PAA.
The Company believes these 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, which is calculated by dividing core
earnings 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 trading assets in the Company’s Consolidated Statements
of Comprehensive Income (Loss). TBA dollar roll income represents
the economic equivalent of interest income on the underlying
security less the implied cost of financing. ii The interest
component of hedging costs are reported as realized gains (losses)
on interest rate swaps in the Company’s Consolidated Statements of
Comprehensive Income (Loss).
The following table presents a reconciliation of GAAP financial
results to non-GAAP core earnings for the periods presented.
For the quarters ended December 31, 2016
September 30, 2016 December 31, 2015
(dollars in thousands) GAAP net income (loss) $ 1,848,483
$ 730,880 $ 669,666 Less: Realized (gains) losses on
termination of interest rate swaps 55,214 (1,337 ) - Unrealized
(gains) losses on interest rate swaps (1,430,668 ) (256,462 )
(463,126 ) Net (gains) losses on disposal of investments (7,782 )
(14,447 ) 7,259 Net (gains) losses on trading assets 139,470
(162,981 ) (42,584 ) Net unrealized (gains) losses on investments
measured at fair value through earnings (110,742 ) (29,675 ) 62,703
Bargain purchase gain - (72,576 ) - Corporate acquisition related
expenses (1) - 46,724 - Net (income) loss attributable to
noncontrolling interest 87 336 373 Premium amortization adjustment
cost (benefit) (238,941 ) 3,891 (18,072 ) Plus: TBA dollar roll
income (2) 98,896 90,174 94,914 MSR amortization (3) (27,018
) (21,634 ) - Core earnings
(unrevised - excluding PAA)* 326,999 312,893 311,133 Add back:
Premium amortization adjustment 238,941
(3,891 ) 18,072 Core earnings (revised -
including PAA)* $ 565,940 $ 309,002 $
329,205 GAAP net income (loss) per average common
share $ 1.79 $ 0.70 $ 0.69 Core
earnings per average common share (unrevised - excluding PAA)* $
0.30 $ 0.29 $ 0.31 Core earnings
per average common share (revised - including PAA)* $ 0.53
$ 0.29 $ 0.33 Annualized GAAP
return (loss) on average equity 57.23 % 23.55
% 22.15 % Annualized core return on average equity
(unrevised - excluding PAA)* 10.13 % 10.09 %
10.30 % Annualized core return on average equity
(revised - including PAA)* 17.53 % 10.09 %
10.89 %
For the years ended December
31, 2016 December 31, 2015
(dollars in thousands)
GAAP net income (loss) $ 1,432,786 $ 465,747 Less: Realized
(gains) losses on termination of interest rate swaps 113,941
226,462 Unrealized (gains) losses on interest rate swaps (282,190 )
124,869 Net (gains) losses on disposal of investments (33,089 )
(50,987 ) Net (gains) losses on trading assets (230,580 ) (29,623 )
Net unrealized (gains) losses on investments measured at fair value
through earnings (86,391 ) 103,169 Bargain purchase gain (72,576 )
- Impairment of goodwill - 22,966 Corporate acquisition related
expenses (1) 48,887 - Net (income) loss attributable to
noncontrolling interest 970 809 Premium amortization adjustment
cost (benefit) 18,941 73,365 Plus: TBA dollar roll income (2)
351,778 348,531 MSR amortization (3) (48,652 )
- Core earnings (unrevised - excluding PAA)* 1,213,825
1,285,308 Add back: Premium amortization adjustment (18,941
) (73,365 ) Core earnings (revised - including PAA)*
$ 1,194,884 $ 1,211,943 GAAP net income
(loss) per average common share $ 1.39 $ 0.42
Core earnings per average common share (unrevised - excluding PAA)*
$ 1.17 $ 1.28 Core earnings per average common
share (revised - including PAA)* $ 1.15 $ 1.20
Annualized GAAP return (loss) on average equity 11.75
% 3.73 % Annualized core return on average equity
(unrevised - excluding PAA)* 9.96 % 10.17 %
Annualized core return on average equity (revised - including PAA)*
9.81 % 9.59 %
*
Represents a non-GAAP financial
measure.
(1)
Represents non-recurring transaction costs
incurred in connection with the Company’s acquisition of Hatteras
Financial Corp.
(2)
Represents a component of Net gains
(losses) on trading assets.
(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 investments measured at fair
value.
Core interest income (excluding PAA), economic interest
expense and economic core net interest income (excluding
PAA)
Core interest income (excluding PAA) represents interest income
excluding the effect of the PAA, and serves as the basis for
deriving core average yield on interest bearing assets (excluding
PAA), core net interest margin (excluding PAA) and core net
interest spread (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 effect
of quarter-over-quarter changes in estimated long-term prepayment
speeds related to the Company’s Agency mortgage-backed securities
(other than interest-only securities), which can obscure underlying
trends in the performance of the portfolio.
Economic interest expense is comprised of interest expense, as
computed in accordance with GAAP, plus interest expense on interest
rate swaps used to hedge cost of funds, which is a component of
Realized gains (losses) on interest rate swaps in the Company’s
Consolidated Statements of Comprehensive Income (Loss). The Company
uses interest rate swaps to manage its exposure to changing
interest rates on its repurchase agreements by economically hedging
cash flows associated with these borrowings. Accordingly, adding
the contractual interest payments on interest rate swaps to
interest expense, as computed in accordance with GAAP, reflects the
total contractual interest expense and thus, provides investors
with additional information about the cost of our financing
strategy.
Similarly, economic core net interest income (excluding PAA), as
computed below, provides investors with additional information to
enhance their understanding of the net economics of our primary
business operations.
For the quarters ended December 31,
2016 September 30, 2016 December 31,
2015 (dollars in thousands)
Core Interest
Income Reconciliation
GAAP interest income $ 807,022 $ 558,668 $ 576,580
Premium amortization adjustment (238,941 )
3,891 (18,072 ) Core interest income (excluding PAA)*
$ 568,081 $ 562,559 $ 558,508
Economic Interest
Expense Reconciliation
GAAP interest expense $ 183,396 $ 174,154 $ 118,807 Add: Interest
expense on interest rate swaps used to hedge cost of funds
92,841 103,100 135,267
Economic interest expense* $ 276,237 $ 277,254
$ 254,074
Economic Core Net
Interest Income Reconciliation
Core interest income (excluding PAA)* $ 568,081 $ 562,559 $ 558,508
Less: Economic interest expense* 276,237
277,254 254,074 Economic core net
interest income (excluding PAA)* $ 291,844 $ 285,305
$ 304,434 * Represents a non-GAAP financial measure.
Core average yield on interest earnings assets (excluding
PAA), core net interest margin (excluding PAA) and core net
interest spread (excluding PAA)
Core net interest spread (excluding PAA), which is the
difference between the core average yield on interest earning
assets (excluding PAA) and the average cost of interest bearing
liabilities, and core net interest margin (excluding PAA), which is
calculated by dividing the economic core net interest income
(excluding PAA) by average interest earning assets, provide
management with additional measures of the Company’s profitability
that management relies upon in monitoring the performance of the
business. Disclosure of these measures, which are presented below,
provides investors with additional detail regarding how management
evaluates the Company’s performance.
For the quarters ended December 31,
2016 September 30, 2016 December 31,
2015
Economic Core
Metrics
(dollars in thousands) Core interest income (excluding PAA)*
$ 568,081 $ 562,559 $ 558,508 Average interest
earning assets $ 84,799,222 $ 82,695,270 $ 73,178,965 Core average
yield on interest earning assets (excluding PAA)* 2.68%
2.72% 3.05% Economic interest expense*
$ 276,237 $ 277,254 $ 254,074 Average interest bearing liabilities
$ 72,032,600 $ 70,809,712 $ 60,516,996 Average cost of interest
bearing liabilities 1.53% 1.57%
1.68% Core net interest spread (excluding PAA)* 1.15%
1.15% 1.37% Core net interest margin
(excluding PAA)* 1.53% 1.42%
1.71% * Represents a non-GAAP financial measure.
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Annaly Capital Management, Inc.Investor
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