Annaly Capital Management, Inc. (NYSE: NLY) (“Annaly” or the
“Company”) announced today that it has issued a letter to its
shareholders reiterating the strength of its financial and risk
position as of March 31, 2020 during this period of volatility in
the mortgage and credit markets. The full text of the letter is
below.
UPDATE FOR ANNALY SHAREHOLDERS
Dear Fellow Shareholders,
Following the end of the quarter, we wanted to provide an update
to investors and key stakeholders of the firm reaffirming our
confidence in the strength and resilience of our business during
this period of dislocation in mortgage and credit markets.
Annaly is an industry leader with a differentiated platform. We
have a more than twenty-year track record managing Agency MBS,
interest rate, short-term financing and credit risk over many
cycles. The size of our capital base and deep financing
relationships, along with our measured decisions with respect to
managing the composition of our portfolio and risk profile, have
been critical to our ability to successfully navigate through
environments like the one we face today. While the operating
environment has been challenging and the situation is dynamic,
Annaly continues to benefit from its robust balance sheet, prudent
risk management, and strong liquidity, which has been further
fortified over recent weeks.
In the spirit of continued transparency during this time of
uncertainty, below are preliminary updates on our business and
financial performance, which demonstrate our ability to
successfully weather these uncertain times:
- Portfolio composition. Our portfolio is well positioned with
approximately 93% of our assets as of March 31, 2020 comprised of
Agency MBS, which have seen both improved liquidity and valuations
as a result of supportive actions taken by the Federal Reserve.
Since the beginning of the year, including during the month of
March, we have proactively reduced the size of the portfolio to
manage our leverage profile. As of March 31, 2020, our total
portfolio1 was approximately $99 billion, compared to $128.7
billion at December 31, 2019, and our repo balance was accordingly
reduced to $72.6 billion from $101.7 billion at December 31,
2019.
- Economic leverage. We estimate that on a preliminary basis our
economic leverage ratio was reduced to between 6.8:1 and 6.9:1 at
March 31, 2020, compared to 7.2:1 at December 31, 2019,
representing modest leverage relative to our historical levels as
well as peers.2
- Liquidity position. We have maintained a strong liquidity
position, with cash and unencumbered Agency MBS of $4.6 billion and
total unencumbered assets of $7.2 billion, as of March 31, 2020.
Additionally, our repo operations have been orderly with no
collateral or margining issues.
- Book value per common share. We estimate that on a preliminary
basis our book value per common share at March 31, 2020 was between
$7.40 and $7.60 compared to $9.66 per common share at December 31,
2019.
- GAAP Net income (loss) per average common share. We estimate
that on a preliminary basis our net income (loss) per average
common share for the quarter ended March 31, 2020 was estimated
between $(2.40) and $(2.60), compared to $0.82 per average common
share for the quarter ended December 31, 2019.
- Core earnings (excluding PAA) per average common share. We
estimate that on a preliminary basis our core earnings (excluding
the premium amortization adjustment, or PAA) were estimated between
$0.20 and 0.21 per average common share for the quarter ended March
31, 2020, compared to $0.26 per average common share for the
quarter ended December 31, 2019.
- Cash dividend. As previously announced on March 16, 2020, we
declared the first quarter 2020 common stock cash dividend of $0.25
per common share. This dividend is payable April 30, 2020, to
common shareholders of record on March 31, 2020.
- Repurchase program. Annaly has a $1.5 billion share repurchase
program, which was authorized by our Board of Directors in June
2019.
Per share amounts at March 31, 2020 are based on 1,430,424,398
common shares issued and outstanding as of such date.
The health and well-being of our staff and partners have been
our priority and all of our employees have been working from home
to best protect our communities and families. Our extensive
business continuity planning and infrastructure have well prepared
us for the current reality of remote work and all of our operations
have been and continue to be fully functioning. It is our talented
staff who equips us to meet the many challenges that we have faced
over our history, including the COVID-19 pandemic.
Rest assured that we remain focused on long-term value creation.
We are confident in our business model and our emphasis is on
capital preservation and active management of our diverse portfolio
of investments. The mortgage REIT industry plays an important role
supporting real estate finance and we wish other industry players
success in navigating through this difficult environment brought on
by the health crisis.
We thank you for your continued support throughout these times
and assure you we have our full team dedicated to managing our
portfolio, liquidity and the risks before us. We are committed to
proactively communicating with you as the situation evolves. To
that end, we look forward to sharing our 2019 Annual Report and
2020 Proxy Statement shortly, which will provide more information
on the Company.
We hope you remain safe and look forward to speaking with you on
the Q1 2020 Earnings Call later this month.
Best,
David Finkelstein Chief Executive Officer & Chief
Investment Officer
April 7, 2020
____________________________________ 1 Total portfolio
represents Annaly’s portfolio of investments on its balance sheet,
including to-be-announced (“TBA”) purchase contracts and excluding
securitized debt of consolidated VIEs. 2 Economic leverage is
computed as the sum of recourse debt, cost basis of TBA and CMBX
derivatives outstanding, and net forward purchases (sales) of
investments divided by total equity. Recourse debt consists of
repurchase agreements and other secured financing (excluding
certain non-recourse credit facilities). 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.
About Annaly
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 optimize its returns through prudent
management of its diversified investment strategies. Annaly has
elected to be taxed as a real estate investment trust, or REIT, for
federal income tax purposes. Until the closing of its announced
internalization transaction, Annaly is externally managed by Annaly
Management Company LLC. Additional information on the Company can
be found at www.annaly.com.
Forward-Looking Statements
This letter to shareholders 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. Such statements include those
relating to the Company’s future performance, macro outlook, the
interest rate and credit environments, tax reform, future
opportunities and the anticipated Internalization. Actual results
could differ materially from those set forth in forward-looking
statements due to a variety of factors, including, but not limited
to, the macro- and micro-economic impact of the COVID-19 pandemic;
changes in interest rates; changes in the yield curve; changes in
prepayment rates; the availability of mortgage-backed securities
(“MBS”) and other securities for purchase; the availability of
financing and, if available, the terms of any financing; changes in
the market value of the Company’s assets; changes in business
conditions and the general economy; the Company’s ability to grow
our commercial real estate business; the Company’s ability to grow
its residential credit business; the Company’s ability to grow its
middle market lending business; credit risks related to the
Company’s 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;
the Company’s ability to consummate any contemplated investment
opportunities; changes in government regulations or policy
affecting the Company’s business; the Company’s ability to maintain
its qualification as a REIT for U.S. federal income tax purposes;
the Company’s ability to maintain its exemption from registration
under the Investment Company Act of 1940, as amended; and risks and
uncertainties associated with the Internalization, including but
not limited to the occurrence of any event, change or other
circumstances that could give rise to the termination of the
Internalization Agreement; the outcome of any legal proceedings
that may be instituted against the parties to the Internalization
Agreement; the inability to complete the Internalization due to the
failure to satisfy closing conditions or otherwise; risks that the
Internalization disrupts the Company’s current plans and
operations; the impact, if any, of the announcement or pendency of
the Internalization on the Company’s relationships with third
parties; and the amount of the costs, fees, expenses charges
related to the Internalization; and the risk that the expected
benefits, including long-term cost savings, of the Internalization
are not achieved. For a discussion of the risks and uncertainties
which could cause actual results to differ from those contained in
the forward-looking statements, see “Risk Factors” in our most
recent Annual Report on Form 10-K and any subsequent Quarterly
Reports on Form 10-Q. The Company does not undertake, and
specifically disclaims any obligation, to publicly release the
result of any revisions which may be made to any forward-looking
statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such
statements, except as required by law.
Non-GAAP Financial Measures
This letter to shareholders includes certain non-GAAP financial
measures, including core earnings (excluding PAA). To supplement
our preliminary estimate range of net income per average common
share, which is prepared and presented in accordance with U.S.
generally accepted accounting principles (GAAP), we provide core
earnings (excluding PAA) per average common share. Core earnings, a
non-GAAP measure, 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), 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 our
Agency mortgage-backed securities, are used by management and, we
believe, used by analysts and investors to measure our progress in
achieving our principal business objective.
The Company believes its 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. Additionally, the
Company’s non-GAAP measures may be useful in assessing our
performance versus that of industry peers.
While intended to offer a fuller understanding of our results
and operations, non-GAAP financial measures also have limitations.
For example, we may define our non-GAAP measures differently than
those of industry peers. Additionally, in the case of core earnings
(excluding PAA), the amount of premium 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 we 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 our GAAP and
non-GAAP financial results. Our non-GAAP measures should not be
considered a substitute for, or superior to, financial measures
computed in accordance with GAAP. For additional information
pertaining to our use of non-GAAP measures, please refer to our
Annual Report on Form 10-K for the fiscal year ended December 31,
2019, both of which have been incorporated herein by
reference.
The following table presents a summary reconciliation of our
preliminary estimate range of our GAAP financial results to our
preliminary estimate range of non-GAAP core earnings (excluding
PAA) for the quarter ended March 31, 2020. Amounts for the quarter
ended December 31, 2019 are based on actual results, as previously
reported:
For the Quarters Ended
March 31, 2020
December 31, 2019
(dollars in millions, except
per share data)
GAAP net income (loss)
$
(3,445) - (3,730)
$
1,210
Less:
Unrealized (gains) losses and other
(income) loss(1)
3,405 - 3,660
(725)
Realized (gains) losses(2)
20 - 45
(7)
Plus:
TBA dollar roll income and MSR
amortization
25 - 30
15
PAA cost (benefit)
275 - 300
(84)
Core earnings (excluding PAA)
$
280 - 305
$
409
GAAP net income (loss) per average common
share(3)
$
(2.40) - (2.60)
$
0.82
Core earnings (excluding PAA) per average
common share(3)
$
0.20 - 0.21
$
0.26
(1)
Comprised of unrealized gains (losses) on
interest rate swaps, net gains (losses) on other derivatives
(unrealized portion), net unrealized gains (losses) on instruments
measured at fair value through earnings, loan loss provision,
depreciation and amortization expense related to commercial real
estate, non-core income (loss) allocated to equity method
investments, transaction expenses and non-recurring items, income
tax effect of non-core income (loss) and net income (loss)
attributable to noncontrolling interests.
(2)
Comprised of realized gains (losses) on
termination or maturity of interest rate swaps, net gains (losses)
on disposal of investments and net gains (losses) on other
derivatives (realized portion).
(3)
Net of dividends on preferred stock.
Our closing procedures for the three months ended March 31, 2020
are not yet complete and, as a result, our preliminary estimates of
the financial information above reflect our preliminary estimate
ranges with respect to such results based on information currently
available to management, and may vary from our actual financial
results as of and for the quarter ended March 31, 2020. Further,
these estimates are not a comprehensive statement of our financial
results as of and for the quarter ended March 31, 2020.
Accordingly, you should not place undue reliance on this
preliminary information. These estimates, which are the
responsibility of our management, were prepared by our management
in connection with the preparation of our financial statements and
are based upon a number of assumptions. Additional items that may
require adjustments to the preliminary operating results may be
identified and could result in material changes to our estimated
preliminary operating results. Estimates of operating results are
inherently uncertain and we undertake no obligation to update this
information. See “Special Note Regarding Forward-Looking
Statements,” “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included
or incorporated by reference herein for factors that could impact
our actual results of operations. Ernst & Young LLP has not
audited, reviewed, compiled or performed any procedures with
respect to this preliminary financial information. Accordingly,
Ernst & Young LLP does not express an opinion or provide any
form of assurance with respect thereto.
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version on businesswire.com: https://www.businesswire.com/news/home/20200407005796/en/
Investor Contact Annaly Capital Management, Inc. Investor
Relations 1-888-8Annaly investor@annaly.com
Media Contact Brunswick Group Alex Yankus 1-212-333-3810
ANNALY@brunswickgroup.com
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