Annaly Capital Management, Inc. (NYSE: NLY) ("Annaly" or the
"Company") today announced its financial results for the quarter
ended June 30, 2019.
Financial Highlights
- GAAP net income (loss) of ($1.24) per average common share
- Core earnings (excluding PAA) of $0.25 per average common
share
- GAAP return on average equity of (45.13%) and core return on
average equity (excluding PAA) of 9.94%
- Book value per common share of $9.33
- Economic leverage of 7.6x
- Economic return of 5.2% year-to-date (non-annualized)
Business Highlights
Investment and Strategy
- Increased capital allocation to Agency from 76% to 78% of
equity, driven by relative value of Agency MBS versus Credit
Businesses
- Authored industry-focused joint study on GSE reform in
conjunction with Barclays' Head of Macro Research
- Increased the number of residential whole loan origination
partners by over 25%
Financing and Capital
- Authorized the repurchase of up to $1.5 billion of outstanding
shares of common stock through December 31, 2020
- Raised gross proceeds of $442.5 million through issuance of
6.75% Series I fixed-to-floating rate cumulative redeemable
preferred equity; redeemed all outstanding shares of Series H
preferred stock and Series C preferred stock in May and July,
respectively, reducing the cost of preferred capital
- Completed two residential whole loan securitizations totaling
$772.0 million during the quarter; subsequent to quarter end,
closed an additional securitization bringing aggregate issuance to
$2.7 billion in seven transactions since the beginning of 2018
- Maintained strong liquidity position with unencumbered assets
totaling $7.8 billion at quarter end
- Expanded AMML financing capacity with a total upsize of $200.0
million across two credit facilities
Corporate Responsibility
- Three Named Executive Officers and two Independent Directors
voluntarily purchased Annaly common stock during the quarter
- Annaly’s Women’s Interactive Network ("WIN"), in partnership
with Wells Fargo’s women’s network, held a Nonprofit Board Fair,
which connected over 200 women with Executives and Board Members
from approximately 20 youth-focused non-profits in New York City to
explore opportunities to serve on boards of non-profits
"During the second quarter, Annaly proactively navigated the
challenging operating environment characterized by higher interest
rate volatility," commented Kevin Keyes, Chairman, Chief Executive
Officer and President. "Cognizant of the backdrop and as part of
our continued focus on capital optimization, we opportunistically
accessed the capital markets through a $442.5 million preferred
equity offering and redeemed two more expensive outstanding series
of preferred stock further reducing our cost of capital. We also
continued our funding diversification strategy with our successful
residential mortgage securitization program completing $1.2 billion
in three transactions. Finally, in June we authorized a $1.5
billion repurchase program, which provides us further optionality
within our broader capital allocation framework.
"Since the beginning of this hiking cycle which included nine
rate increases, Annaly demonstrated the resiliency of our
diversified model, outperforming the Agency sector with a total
shareholder return of approximately 50%, growing our market cap by
50% and distributing over $5.1 billion in dividends. Now, with the
Federal Reserve and most all other central banks poised to reduce
rates, Annaly is well-positioned to further capitalize on operating
in a lower cost market environment with our industry-leading
capital base and liquidity position. As a testament to management’s
confidence in our long-term opportunity and dedicated alignment
with our shareholders, our Executive Officers and Independent
Directors increased their individual Annaly stock holdings by over
$5.2 million during the quarter, with Annaly’s Board and executive
purchases leading all large-cap financial companies during this
time period."
Financial Performance
The following table summarizes certain key performance
indicators as of and for the quarters ended June 30, 2019, March
31, 2019 and June 30, 2018:
June 30, 2019
March 31, 2019
June 30, 2018
Book value per common share
$
9.33
$
9.67
$
10.35
Economic leverage at
period-end (1)
7.6:1
7.0:1
6.4:1
GAAP net income (loss) per average common
share (2)
$
(1.24
)
$
(0.63
)
0.49
Annualized GAAP return (loss) on average
equity
(45.13
%)
(22.72
%)
17.20
%
Net interest margin (3)
0.87
%
1.25
%
1.53
%
Average yield on interest earning assets
(4)
3.03
%
3.15
%
3.04
%
Average cost of interest bearing
liabilities (5)
2.41
%
2.15
%
1.89
%
Net interest spread
0.62
%
1.00
%
1.15
%
Core earnings metrics *
Core earnings (excluding PAA) per average
common share (2)(6)
$
0.25
$
0.29
$
0.30
Core earnings per average common share
(2)(6)
$
0.15
$
0.23
$
0.30
PAA cost (benefit) per average common
share
$
0.10
$
0.06
$
—
Annualized core return on average equity
(excluding PAA)
9.94
%
11.59
%
11.05
%
Net interest margin (excluding PAA)
(3)
1.28
%
1.51
%
1.56
%
Average yield on interest earning assets
(excluding PAA) (4)
3.48
%
3.45
%
3.07
%
Net interest spread (excluding PAA)
1.07
%
1.30
%
1.18
%
*
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. The
quarter ended June 30, 2019 includes cumulative and undeclared
dividends of $0.3 million on the Company's Series I Preferred Stock
as of June 30, 2019.
(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
Second Quarter 2019 Investor Presentation and the Second 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 second quarter 2019 earnings
conference call on August 1, 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/10133535.
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 866-777-2509 within
the U.S., or 412-317-5413 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 10133535. 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, 2019
March 31, 2019
December 31, 2018 (1)
September 30, 2018
June 30, 2018
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Assets
Cash and cash equivalents
$
1,982,311
$
1,522,605
$
1,735,749
$
1,082,747
$
1,135,329
Securities
119,926,869
104,993,271
92,623,788
91,338,611
88,478,689
Loans, net
3,546,468
3,879,324
4,585,975
4,224,203
3,692,172
Mortgage servicing rights
425,328
500,745
557,813
588,833
599,014
Assets transferred or pledged to
securitization vehicles
4,211,582
4,365,300
3,833,200
4,287,821
3,066,270
Real estate, net
733,196
734,239
739,473
753,014
477,887
Derivative assets
75,142
148,178
200,503
404,841
212,138
Reverse repurchase agreements
—
523,449
650,040
1,234,704
259,762
Receivable for unsettled trades
5,322
1,574,251
68,779
1,266,840
21,728
Interest receivable
440,940
390,930
357,365
347,278
323,769
Goodwill and intangible assets, net
96,591
98,551
100,854
103,043
91,009
Other assets
357,027
441,706
333,988
329,868
475,230
Total assets
$
131,800,776
$
119,172,549
$
105,787,527
$
105,961,803
$
98,832,997
Liabilities and stockholders’
equity
Liabilities
Repurchase agreements
$
105,181,241
$
88,554,170
$
81,115,874
$
79,073,026
$
75,760,655
Other secured financing
4,127,989
4,144,623
4,183,311
4,108,547
3,760,487
Debt issued by securitization vehicles
3,470,168
3,693,766
3,347,062
3,799,542
2,728,692
Mortgages payable
498,772
510,386
511,056
511,588
309,878
Derivative liabilities
1,043,197
775,980
889,750
379,794
494,037
Payable for unsettled trades
620,784
4,763,376
583,036
2,505,428
1,108,834
Interest payable
691,327
424,391
570,928
399,605
478,439
Dividends payable
364,066
434,431
394,129
102,811
349,300
Other liabilities
95,825
89,982
74,580
125,606
68,819
Total liabilities
116,093,369
103,391,105
91,669,726
91,005,947
85,059,141
Stockholders’ equity
Preferred stock, par value $0.01 per share
(2)
2,110,346
1,778,168
1,778,168
1,778,168
1,723,168
Common stock, par value $0.01 per share
(3)
14,562
14,481
13,138
13,031
11,643
Additional paid-in capital
20,195,419
20,112,875
18,794,331
18,793,706
17,268,596
Accumulated other comprehensive income
(loss)
1,365,003
(319,376
)
(1,979,865
)
(3,822,956
)
(3,434,447
)
Accumulated deficit
(7,982,649
)
(5,809,931
)
(4,493,660
)
(1,811,955
)
(1,800,370
)
Total stockholders’ equity
15,702,681
15,776,217
14,112,112
14,949,994
13,768,590
Noncontrolling interests
4,726
5,227
5,689
5,862
5,266
Total equity
15,707,407
15,781,444
14,117,801
14,955,856
13,773,856
Total liabilities and equity
$
131,800,776
$
119,172,549
$
105,787,527
$
105,961,803
$
98,832,997
(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 June 30, 2019, 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.
7.50% Series D Cumulative Redeemable
Preferred Stock - Includes 18,400,000 shares authorized, issued and
outstanding.
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 0 shares
authorized, issued and outstanding at June 30, 2019. 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.
6.75% Series I Fixed-to-Floating Rate
Cumulative Redeemable Preferred Stock (“Series I Preferred Stock”)
- Includes 18,400,000 shares authorized and 16,000,000 issued and
outstanding at June 30, 2019. Includes 0 shares authorized, issued
and outstanding at March 31, 2019, December 31, 2018, September 30,
2018 and June 30, 2018.
(3)
Includes 2,907,850,000 shares authorized
and 1,456,263,410 shares issued and outstanding at June 30, 2019.
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.
ANNALY CAPITAL MANAGEMENT,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except
per share data)
(Unaudited)
For the quarters ended
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
June 30, 2018
Net interest income
Interest income
$
927,598
$
866,186
$
859,674
$
816,596
$
776,806
Interest expense
750,217
647,695
586,774
500,973
442,692
Net interest income
177,381
218,491
272,900
315,623
334,114
Realized and unrealized gains
(losses)
Net interest component of interest rate
swaps
83,653
134,035
65,889
51,349
31,475
Realized gains (losses) on termination or
maturity of interest rate swaps
(167,491
)
(588,256
)
—
575
—
Unrealized gains (losses) on interest rate
swaps
(1,276,019
)
(390,556
)
(1,313,882
)
417,203
343,475
Subtotal
(1,359,857
)
(844,777
)
(1,247,993
)
469,127
374,950
Net gains (losses) on disposal of
investments
(38,333
)
(93,916
)
(747,505
)
(324,294
)
(66,117
)
Net gains (losses) on other
derivatives
(506,411
)
(115,159
)
(484,872
)
94,827
34,189
Net unrealized gains (losses) on
instruments measured at fair value through earnings
(4,881
)
47,629
(18,169
)
(39,944
)
(48,376
)
Loan loss provision
—
(5,703
)
(3,496
)
—
—
Subtotal
(549,625
)
(167,149
)
(1,254,042
)
(269,411
)
(80,304
)
Total realized and unrealized gains
(losses)
(1,909,482
)
(1,011,926
)
(2,502,035
)
199,716
294,646
Other income (loss)
28,181
30,502
52,377
(10,643
)
34,170
General and administrative
expenses
Compensation and management fee
44,231
44,833
43,750
45,983
45,579
Other general and administrative
expenses
34,177
38,904
33,323
80,526
18,202
Total general and administrative
expenses
78,408
83,737
77,073
126,509
63,781
Income (loss) before income
taxes
(1,782,328
)
(846,670
)
(2,253,831
)
378,187
599,149
Income taxes
(5,915
)
2,581
1,041
(7,242
)
3,262
Net income (loss)
(1,776,413
)
(849,251
)
(2,254,872
)
385,429
595,887
Net income (loss) attributable to
noncontrolling interests
(83
)
(101
)
17
(149
)
(32
)
Net income (loss) attributable to
Annaly
(1,776,330
)
(849,150
)
(2,254,889
)
385,578
595,919
Dividends on preferred stock
(1)
32,422
32,494
32,494
31,675
31,377
Net income (loss) available (related)
to common stockholders
$
(1,808,752
)
$
(881,644
)
$
(2,287,383
)
$
353,903
$
564,542
Net income (loss) per share available
(related) to common stockholders
Basic
$
(1.24
)
$
(0.63
)
$
(1.74
)
$
0.29
$
0.49
Diluted
$
(1.24
)
$
(0.63
)
$
(1.74
)
$
0.29
$
0.49
Weighted average number of common
shares outstanding
Basic
1,456,038,736
1,398,614,205
1,314,377,748
1,202,353,851
1,160,436,777
Diluted
1,456,038,736
1,398,614,205
1,314,377,748
1,202,353,851
1,160,979,451
Other comprehensive income
(loss)
Net income (loss)
$
(1,776,413
)
$
(849,251
)
$
(2,254,872
)
$
385,429
$
595,887
Unrealized gains (losses) on
available-for-sale securities
1,654,783
1,599,398
1,100,052
(719,609
)
(505,130
)
Reclassification adjustment for net
(gains) losses included in net income (loss)
29,596
61,091
743,039
331,100
70,763
Other comprehensive income (loss)
1,684,379
1,660,489
1,843,091
(388,509
)
(434,367
)
Comprehensive income (loss)
(92,034
)
811,238
(411,781
)
(3,080
)
161,520
Comprehensive income (loss) attributable
to noncontrolling interests
(83
)
(101
)
17
(149
)
(32
)
Comprehensive income (loss) attributable
to Annaly
(91,951
)
811,339
(411,798
)
(2,931
)
161,552
Dividends on preferred stock
32,422
32,494
32,494
31,675
31,377
Comprehensive income (loss)
attributable to common stockholders
$
(124,373
)
$
778,845
$
(444,292
)
$
(34,606
)
$
130,175
1.
The quarter ended June 30, 2019 includes
cumulative and undeclared dividends of $0.3 million on the
Company's Series I Preferred Stock as of June 30, 2019.
ANNALY CAPITAL MANAGEMENT,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except
per share data)
(Unaudited)
For the six months
ended
June 30, 2019
June 30, 2018
Net interest income
Interest income
$
1,793,784
$
1,656,293
Interest expense
1,397,912
810,113
Net interest income
395,872
846,180
Realized and unrealized gains
(losses)
Net interest component of interest rate
swaps
217,688
(16,685
)
Realized gains (losses) on termination or
maturity of interest rate swaps
(755,747
)
834
Unrealized gains (losses) on interest rate
swaps
(1,666,575
)
1,320,760
Subtotal
(2,204,634
)
1,304,909
Net gains (losses) on disposal of
investments
(132,249
)
(52,649
)
Net gains (losses) on other
derivatives
(621,570
)
(12,956
)
Net unrealized gains (losses) on
instruments measured at fair value through earnings
42,748
(99,969
)
Loan loss provision
(5,703
)
—
Subtotal
(716,774
)
(165,574
)
Total realized and unrealized gains
(losses)
(2,921,408
)
1,139,335
Other income (loss)
58,683
68,193
General and administrative
expenses
Compensation and management fee
89,064
90,108
Other general and administrative
expenses
73,081
36,183
Total general and administrative
expenses
162,145
126,291
Income (loss) before income
taxes
(2,628,998
)
1,927,417
Income taxes
(3,334
)
3,826
Net income (loss)
(2,625,664
)
1,923,591
Net income (loss) attributable to
noncontrolling interests
(184
)
(128
)
Net income (loss) attributable to
Annaly
(2,625,480
)
1,923,719
Dividends on preferred stock
(1)
64,916
65,143
Net income (loss) available (related)
to common stockholders
$
(2,690,396
)
$
1,858,576
Net income (loss) per share available
(related) to common stockholders
Basic
$
(1.88
)
$
1.60
Diluted
$
(1.88
)
$
1.60
Weighted average number of common
shares outstanding
Basic
1,427,485,102
1,160,029,575
Diluted
1,427,485,102
1,160,543,580
Other comprehensive income
(loss)
Net income (loss)
$
(2,625,664
)
$
1,923,591
Unrealized gains (losses) on
available-for-sale securities
3,254,181
(2,384,609
)
Reclassification adjustment for net
(gains) losses included in net income (loss)
90,687
76,182
Other comprehensive income (loss)
3,344,868
(2,308,427
)
Comprehensive income (loss)
719,204
(384,836
)
Comprehensive income (loss) attributable
to noncontrolling interests
(184
)
(128
)
Comprehensive income (loss) attributable
to Annaly
719,388
(384,708
)
Dividends on preferred stock
64,916
65,143
Comprehensive income (loss)
attributable to common stockholders
$
654,472
$
(449,851
)
1.
The six months ended June 30, 2019 include
cumulative and undeclared dividends of $0.3 million on the
Company's Series I Preferred Stock as of June 30, 2019.
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 June 30, 2019, March 31, 2019, and June
30, 2018:
June 30, 2019
March 31, 2019
June 30, 2018
Portfolio related metrics
Fixed-rate Residential Securities as a
percentage of total Residential Securities
96
%
94
%
91
%
Adjustable-rate and floating-rate
Residential Securities as a percentage of total Residential
Securities
4
%
6
%
9
%
Weighted average experienced CPR for the
period
11.2
%
7.3
%
10.1
%
Weighted average projected long-term CPR
at period-end
14.5
%
11.6
%
9.1
%
Liabilities and hedging metrics
Weighted average days to maturity on
repurchase agreements outstanding at period-end
70
72
71
Hedge ratio (1)
74
%
85
%
95
%
Weighted average pay rate on interest rate
swaps at period-end (2)
2.12
%
2.20
%
2.08
%
Weighted average receive rate on interest
rate swaps at period-end (2)
2.46
%
2.66
%
2.31
%
Weighted average net rate on interest rate
swaps at period-end (2)
(0.34
%)
(0.46
%)
(0.23
%)
Leverage at period-end (3)
7.2:1
6.1:1
6.0:1
Economic leverage at period-end (4)
7.6:1
7.0:1
6.4:1
Capital ratio at period-end
11.4
%
12.0
%
13.2
%
Performance related metrics
Book value per common share
$
9.33
$
9.67
$
10.35
GAAP net income (loss) per average common
share (5)
$
(1.24
)
$
(0.63
)
$
0.49
Annualized GAAP return (loss) on average
equity
(45.13
%)
(22.72
%)
17.20
%
Net interest margin
0.87
%
1.25
%
1.53
%
Average yield on interest earning assets
(6)
3.03
%
3.15
%
3.04
%
Average cost of interest bearing
liabilities (7)
2.41
%
2.15
%
1.89
%
Net interest spread
0.62
%
1.00
%
1.15
%
Dividend declared per common share
$
0.25
$
0.30
$
0.30
Annualized dividend yield (8)
10.95
%
12.01
%
11.66
%
Core earnings metrics *
Core earnings (excluding PAA) per average
common share (5)
$
0.25
$
0.29
$
0.30
Core earnings per average common share
(5)
$
0.15
$
0.23
$
0.30
PAA cost (benefit) per average common
share
$
0.10
$
0.06
$
—
Annualized core return on average equity
(excluding PAA)
9.94
%
11.59
%
11.05
%
Net interest margin (excluding PAA)
1.28
%
1.51
%
1.56
%
Average yield on interest earning assets
(excluding PAA) (6)
3.48
%
3.45
%
3.07
%
Net interest spread (excluding PAA)
1.07
%
1.30
%
1.18
%
*
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. The
quarter ended June 30, 2019 includes cumulative and undeclared
dividends of $0.3 million on the Company's Series I Preferred Stock
as of June 30, 2019.
(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 $9.13, $9.99 and $10.29 at June 30, 2019,
March 31, 2019 and June 30, 2018, respectively.
The following table contains additional information on our
residential and commercial investments as of the dates
presented:
For the quarters ended
June 30, 2019
March 31, 2019
June 30, 2018
Agency mortgage-backed securities
$
118,202,040
$
103,093,526
$
86,593,058
Credit risk transfer securities
491,969
607,945
563,796
Non-agency mortgage-backed securities
1,097,752
1,116,569
1,006,785
Commercial mortgage-backed securities
135,108
175,231
315,050
Total securities
$
119,926,869
$
104,993,271
$
88,478,689
Residential mortgage loans
$
1,061,124
$
1,311,720
$
1,142,300
Commercial real estate debt and preferred
equity
623,705
722,962
1,251,138
Corporate debt
1,792,837
1,758,082
1,256,276
Loans held for sale
68,802
86,560
42,458
Total loans, net
$
3,546,468
$
3,879,324
$
3,692,172
Mortgage servicing rights
$
425,328
$
500,745
$
599,014
Residential mortgage loans transferred or
pledged to securitization vehicles
$
2,106,981
$
1,425,668
$
523,857
Commercial real estate debt transferred or
pledged to securitization vehicles
2,104,601
2,939,632
2,542,413
Assets transferred or pledged to
securitization vehicles
$
4,211,582
$
4,365,300
$
3,066,270
Real estate, net
$
733,196
$
734,239
$
477,887
Total residential and commercial
investments
$
128,843,443
$
114,472,879
$
96,314,032
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);
- 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;
- 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
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
June 30, 2019
March 31, 2019
June 30, 2018
(dollars in thousands, except
per share data)
GAAP net income (loss)
$
(1,776,413
)
$
(849,251
)
$
595,887
Net income (loss) attributable to
noncontrolling interests
(83
)
(101
)
(32
)
Net income (loss) attributable to
Annaly
(1,776,330
)
(849,150
)
595,919
Adjustments to exclude reported
realized and unrealized (gains) losses
Realized (gains) losses on termination or
maturity of interest rate swaps
167,491
588,256
—
Unrealized (gains) losses on interest rate
swaps
1,276,019
390,556
(343,475
)
Net (gains) losses on disposal of
investments
38,333
93,916
66,117
Net (gains) losses on other
derivatives
506,411
115,159
(34,189
)
Net unrealized (gains) losses on
instruments measured at fair value through earnings
4,881
(47,629
)
48,376
Loan loss provision
—
5,703
—
Adjustments to exclude components of
other (income) loss
Depreciation and amortization expense
related to commercial real estate
10,147
10,114
—
Non-core (income) loss allocated to equity
method investments (1)
11,327
9,496
—
Adjustments to exclude components of
general and administrative expenses and income taxes
Transaction expenses and non-recurring
items (2)
3,046
9,982
—
Income tax effect of non-core income
(loss) items
(3,507
)
726
—
Adjustments to add back components of
realized and unrealized (gains) losses
TBA dollar roll income and CMBX coupon
income (3)
33,229
38,134
62,491
MSR amortization (4)
(19,657
)
(13,979
)
(19,942
)
Core earnings *
251,390
351,284
375,297
Less:
Premium amortization adjustment cost
(benefit)
139,763
81,871
7,516
Core earnings (excluding PAA) *
$
391,153
$
433,155
$
382,813
Dividends on preferred stock (5)
32,422
32,494
31,377
Core earnings attributable to common
stockholders *
$
218,968
$
318,790
$
343,920
Core earnings attributable to common
stockholders (excluding PAA) *
$
358,731
$
400,661
$
351,436
GAAP net income (loss) per average
common share
$
(1.24
)
$
(0.63
)
$
0.49
Core earnings per average common share
*
$
0.15
$
0.23
$
0.30
Core earnings (excluding PAA) per
average common share *
$
0.25
$
0.29
$
0.30
Annualized GAAP return (loss) on
average equity
(45.13
%)
(22.72
%)
17.20
%
Annualized core return on average
equity (excluding PAA) *
9.94
%
11.59
%
11.05
%
*
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).
(2)
Represents costs incurred in connection
with securitizations of residential whole loans. The quarter ended
March 31, 2019 includes costs incurred in connection with the
securitization of commercial loans.
(3)
TBA dollar roll income and CMBX coupon
income each represent a component of Net gains (losses) on other
derivatives. CMBX coupon income totaled $0.8 million and $1.1
million for the quarters ended June 30, 2019 and March 31, 2019,
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.
(5)
The quarter ended June 30, 2019 includes
cumulative and undeclared dividends of $0.3 million on the
Company's Series I Preferred Stock as of June 30, 2019.
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 June 30, 2019, March 31, 2019, and
June 30, 2018:
For the quarters ended
June 30, 2019
March 31, 2019
June 30, 2018
(dollars in thousands)
Premium amortization expense
(accretion)
$
318,587
$
247,446
$
202,426
Less: PAA cost (benefit)
139,763
81,871
7,516
Premium amortization expense (excluding
PAA)
$
178,824
$
165,575
$
194,910
For the quarters ended
June 30, 2019
March 31, 2019
June 30, 2018
(per average common
share)
Premium amortization expense
(accretion)
$
0.22
$
0.18
$
0.17
Less: PAA cost (benefit) (1)
0.10
0.06
—
Premium amortization expense (excluding
PAA)
$
0.12
$
0.12
$
0.17
(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. The
Company may use market agreed coupon (“MAC”) interest rate swaps in
which the Company may receive or make a payment at the time of
entering into such interest rate swap to compensate for the
off-market nature of such interest rate swap. In accordance with
GAAP, upfront payments associated with MAC interest rate swaps are
not reflected in the net interest component of interest rate swaps
in the Company's Consolidated Statements of Comprehensive Income
(Loss). The Company did not enter into any MAC interest rate swaps
during the quarter ended June 30, 2019.
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, 2019
March 31, 2019
June 30, 2018
Interest income (excluding PAA)
reconciliation
(dollars in thousands)
GAAP interest income
$
927,598
$
866,186
$
776,806
Premium amortization adjustment
139,763
81,871
7,516
Interest income (excluding PAA)
*
$
1,067,361
$
948,057
$
784,322
Economic interest expense
reconciliation
GAAP interest expense
$
750,217
$
647,695
$
442,692
Add:
Net interest component of interest rate
swaps
(83,653
)
(134,035
)
(31,475
)
Economic interest expense *
$
666,564
$
513,660
$
411,217
Economic net interest income (excluding
PAA) reconciliation
Interest income (excluding PAA) *
$
1,067,361
$
948,057
$
784,322
Less:
Economic interest expense *
666,564
513,660
411,217
Economic net interest income (excluding
PAA) *
$
400,797
$
434,397
$
373,105
*
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
June 30, 2019
March 31, 2019
June 30, 2018
Economic metrics (excluding
PAA)
(dollars in thousands)
Average interest earning assets
$
122,601,881
$
109,946,527
$
102,193,435
Interest income (excluding PAA) *
$
1,067,361
$
948,057
$
784,322
Average yield on interest earning assets
(excluding PAA) *
3.48
%
3.45
%
3.07
%
Average interest bearing liabilities
$
109,628,007
$
95,529,819
$
87,103,807
Economic interest expense *
$
666,564
$
513,660
$
411,217
Average cost of interest bearing
liabilities
2.41
%
2.15
%
1.89
%
Economic net interest income (excluding
PAA) *
$
400,797
$
434,397
$
373,105
Net interest spread (excluding PAA) *
1.07
%
1.30
%
1.18
%
Interest income (excluding PAA) *
$
1,067,361
$
948,057
$
784,322
TBA dollar roll income and CMBX coupon
income
33,229
38,134
62,491
Interest expense
(750,217
)
(647,695
)
(442,692
)
Net interest component of interest rate
swaps
83,653
134,035
31,475
Subtotal
$
434,026
$
472,531
$
435,596
Average interest earnings assets
$
122,601,881
$
109,946,527
$
102,193,435
Average TBA contract and CMBX balances
12,757,975
14,927,490
9,407,819
Subtotal
$
135,359,856
$
124,874,017
$
111,601,254
Net interest margin (excluding PAA)
*
1.28
%
1.51
%
1.56
%
*
Represents a non-GAAP financial
measure.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190731005976/en/
Annaly Capital Management, Inc. Investor Relations 1-888-8Annaly
www.annaly.com
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