Annaly Capital Management, Inc. (NYSE: NLY) ("Annaly" or the
"Company") today announced its financial results for the quarter
ended March 31, 2020.
Financial Highlights
- GAAP net income (loss) of ($2.57) per average common share for
the quarter
- Core earnings (excluding PAA) of $0.21 per average common share
for the quarter
- GAAP return on average equity of (102.17%) and core return on
average equity (excluding PAA) of 9.27% for the quarter
- Book value per common share of $7.50
- Economic leverage of 6.8x down from 7.2x in the prior
quarter
- Declared quarterly common stock cash dividend of $0.25 per
share
Business Highlights
First Quarter Highlights
Investment and Strategy
- Actively managed portfolio size to reduce leverage with total
assets of $99.3 billion(1)
- Agency MBS(2) represents 93% of total assets and 75% of
dedicated equity capital, nearly unchanged from year end
- Credit businesses well-positioned amidst current volatility
given the composition of our portfolios and manageable exposure to
industries and asset classes most heavily-affected as a result of
COVID-19
- During the quarter, we recorded reserves of $136.7 million (4%
of ACREG and AMML’s funded loan portfolio), which was largely
driven by adoption of the new CECL accounting standard and
COVID-19–related adverse economic scenario forecasting
Financing and Capital
- $6.9 billion of unencumbered assets, including cash and
unencumbered Agency MBS of $4.6 billion
- Despite the heightened market volatility in March, repo
operations were orderly with no collateral or margining issues
- Strong capital ratio of 12.3%, up 30 basis points since the
prior quarter
- Average economic cost of funds declined by 10 basis points to
1.91%
Corporate Governance & Responsibility
- Announced Annaly will acquire its external manager, Annaly
Management Company LLC, and transition to an internally-managed
REIT, with the transaction on track to close by the end of the
second quarter of 2020
- Appointed David Finkelstein as Chief Executive Officer and as a
member of the Board
- Included in the Bloomberg Gender-Equality Index for the third
consecutive year
- Utilized extensive business continuity planning to transition
to remote-working environment in response to COVID-19
"First and foremost, our thoughts go out to all those affected
by COVID-19. The health and well-being of our staff and our
community remains our first priority and we are grateful to our
talented employees who have enabled us to persevere through this
challenging time," remarked David Finkelstein, Annaly’s Chief
Executive Officer and Chief Investment Officer.
"In light of extreme volatility, Annaly performed well through
one of the most challenging and unique operating environments in
our Company's history. The breadth and flexibility in our
investments and financing positioned us to successfully navigate
the market uncertainty and we continue to benefit from the size of
our capital base and strength of our business model. We took
significant, measured steps to fortify our balance sheet and
liquidity to position ourselves for the remainder of the year.
While we continue to be cautious, we are encouraged by the
meaningful tailwinds in the mortgage market and are poised to take
advantage of upcoming investment opportunities."
(1)
Assets represent Annaly’s investments that
are on balance sheet, net of securitized debt of consolidated VIEs,
as well as investments that are off-balance sheet in which the
Company has economic exposure. Assets include TBA purchase
contracts (market value) of $13.1 billion and CMBX derivatives
(market value) of $463.5 million and are shown net of securitized
debt of consolidated VIEs of $6.4 billion.
(2)
Includes TBA purchase contracts (market
value) of $13.1 billion.
Financial Performance
The following table summarizes certain key performance
indicators as of and for the quarters ended March 31, 2020,
December 31, 2019 and March 31, 2019:
March 31, 2020
December 31, 2019
March 31, 2019
Book value per common share
$
7.50
$
9.66
$
9.67
Economic leverage at period-end (1)
6.8:1
7.2:1
7.0:1
GAAP net income (loss) per average common
share (2)
$
(2.57
)
$
0.82
$
(0.63
)
Annualized GAAP return (loss) on average
equity
(102.17
%)
31.20
%
(22.72
%)
Net interest margin (3)
0.18
%
1.49
%
0.79
%
Average yield on interest earning assets
(4)
1.91
%
3.53
%
3.15
%
Average GAAP cost of interest bearing
liabilities (5)
1.86
%
2.17
%
2.71
%
Net interest spread
0.05
%
1.36
%
0.44
%
Non-GAAP metrics *
Core earnings (excluding PAA) per average
common share (2)
$
0.21
$
0.26
$
0.29
Annualized core return on average equity
(excluding PAA)
9.27
%
10.56
%
11.59
%
Net interest margin (excluding PAA)
(3)
1.18
%
1.41
%
1.51
%
Average yield on interest earning assets
(excluding PAA) (4)
2.91
%
3.25
%
3.45
%
Average economic cost of interest bearing
liabilities (5)
1.91
%
2.01
%
2.15
%
Net interest spread (excluding PAA)
1.00
%
1.24
%
1.30
%
*
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, cost
basis of to-be-announced ("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.
(2)
Net of dividends on preferred stock.
(3)
Net interest margin represents interest
income less interest expense divided by average Interest Earning
Assets. Net interest margin (excluding PAA) represents 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 outstanding TBA contract and
CMBX balances. PAA represents 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 GAAP cost of interest bearing
liabilities represents annualized interest expense divided by
average interest bearing liabilities. Average interest bearing
liabilities reflects the average balances during the period.
Average economic cost of interest bearing liabilities represents
annualized economic interest expense divided by average interest
bearing liabilities. Economic interest expense is comprised of GAAP
interest expense and the net interest component of interest rate
swaps.
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, risks and
uncertainties related to the COVID-19 pandemic, including as
related to adverse economic conditions on real estate-related
assets and financing conditions; 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; our ability to maintain our 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 our current plans and operations; the
impact, if any, of the announcement or pendency of the
Internalization on our 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. 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 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. Prior to the closing of the
transaction discussed above, Annaly is externally managed by Annaly
Management Company LLC. Additional information on the company can
be found at www.annaly.com.
Annaly routinely posts important information for investors on
the Company’s website, www.annaly.com. Annaly intends to use this
webpage as a means of disclosing material, non-public information,
for complying with the Company’s disclosure obligations under
Regulation FD and to post and update investor presentations and
similar materials on a regular basis. Annaly encourages investors,
analysts, the media and others interested in Annaly to monitor the
Company’s website, in addition to following Annaly’s press
releases, SEC filings, public conference calls, presentations,
webcasts and other information it posts from time to time on its
website. To sign-up for email-notifications, please visit the
"Email Alerts" section of our website, www.annaly.com, under the
"Investors" section and enter the required information to enable
notifications. The information contained on, or that may be
accessed through, the Company’s webpage is not incorporated by
reference into, and is not a part of, this document.
The Company prepares a supplemental investor presentation and a
financial summary for the benefit of its shareholders. Both the
First Quarter 2020 Investor Presentation and the First Quarter 2020
Financial Summary can be found at the Company’s website
(www.annaly.com) in the Investors section under Investor
Presentations.
Conference Call
The Company will hold the first quarter 2020 earnings conference
call on April 30, 2020 at 10:00 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/10142582.
Pre-registration may be completed at any time, including up to
and after the call start time.
For participants who would like to join the call but have not
pre-registered, access is available by dialing 844-735-3317 within
the U.S., or 412-317-5703 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 10142582. If you would like to be added to
the e-mail distribution list, please visit www.annaly.com, click on
Investors, then select Email Alerts and complete the email
notification form.
Financial Statements
ANNALY CAPITAL MANAGEMENT,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION
(dollars in thousands, except
per share data)
March 31, 2020
December 31, 2019 (1)
September 30, 2019
June 30, 2019
March 31, 2019
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Assets
Cash and cash equivalents
$
2,823,521
$
1,850,729
$
1,793,921
$
1,982,311
$
1,522,605
Securities
79,357,596
114,833,580
116,094,061
119,926,869
104,993,271
Loans, net
4,068,189
4,462,350
3,946,614
3,546,468
3,879,324
Mortgage servicing rights
280,558
378,078
386,051
425,328
500,745
Assets transferred or pledged to
securitization vehicles
7,671,662
7,002,460
4,688,144
4,211,582
4,365,300
Real estate, net
751,738
725,638
725,508
733,196
734,239
Derivative assets
238,776
113,556
168,755
75,142
148,178
Reverse repurchase agreements
—
—
—
—
523,449
Receivable for unsettled trades
1,006,853
4,792
193,229
5,322
1,574,251
Principal and interest receivable
335,170
449,906
483,744
440,940
390,930
Goodwill and intangible assets, net
98,293
92,772
94,904
96,591
98,551
Other assets
284,918
381,220
381,189
357,027
441,706
Total assets
$
96,917,274
$
130,295,081
$
128,956,120
$
131,800,776
$
119,172,549
Liabilities and stockholders’
equity
Liabilities
Repurchase agreements
$
72,580,183
$
101,740,728
$
102,682,104
$
105,181,241
$
88,554,170
Other secured financing
1,805,428
4,455,700
4,466,030
4,127,989
4,144,623
Debt issued by securitization vehicles
6,364,949
5,622,801
3,856,082
3,470,168
3,693,766
Mortgages payable
484,762
485,005
485,657
498,772
510,386
Derivative liabilities
1,331,188
803,866
972,415
1,043,197
775,980
Payable for unsettled trades
923,552
463,387
245,626
620,784
4,763,376
Interest payable
261,304
476,335
565,797
691,327
424,391
Dividends payable
357,606
357,527
359,491
364,066
434,431
Other liabilities
100,772
93,388
99,214
95,825
89,982
Total liabilities
84,209,744
114,498,737
113,732,416
116,093,369
103,391,105
Stockholders’ equity
Preferred stock, par value $0.01 per share
(2)
1,982,026
1,982,026
1,982,026
2,110,346
1,778,168
Common stock, par value $0.01 per share
(3)
14,304
14,301
14,380
14,562
14,481
Additional paid-in capital
19,968,372
19,966,923
20,034,970
20,195,419
20,112,875
Accumulated other comprehensive income
(loss)
3,121,371
2,138,191
2,313,815
1,365,003
(319,376
)
Accumulated deficit
(12,382,648
)
(8,309,424
)
(9,125,895
)
(7,982,649
)
(5,809,931
)
Total stockholders’ equity
12,703,425
15,792,017
15,219,296
15,702,681
15,776,217
Noncontrolling interests
4,105
4,327
4,408
4,726
5,227
Total equity
12,707,530
15,796,344
15,223,704
15,707,407
15,781,444
Total liabilities and equity
$
96,917,274
$
130,295,081
$
128,956,120
$
131,800,776
$
119,172,549
(1)
Derived from the audited consolidated
financial statements at December 31, 2019.
(2)
7.625% Series C Cumulative Redeemable
Preferred Stock - Includes 0 shares authorized, issued and
outstanding at March 31, 2020, December 31, 2019 and September 30,
2019. Includes 7,000,000 shares authorized, issued and outstanding
at June 30, 2019 and March 31, 2019. 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
March 31, 2020, December 31, 2019, September 30, 2019 and June 30,
2019. Includes 2,200,000 shares authorized, issued and outstanding
at March 31, 2019. 6.75% Series I Preferred Stock - Includes
18,400,000 shares authorized and 17,700,000 issued and outstanding
at March 31, 2020, December 31, 2019 and September 30, 2019.
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.
(3)
Includes 2,914,850,000 shares authorized
and 1,430,424,398 shares issued and outstanding at March 31, 2020.
Includes 2,914,850,000 shares authorized and 1,430,106,199 shares
issued and outstanding at December 31, 2019. Includes 2,914,850,000
shares authorized and 1,437,964,466 shares issued and outstanding
at September 30, 2019. 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.
ANNALY CAPITAL MANAGEMENT,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except
per share data)
(Unaudited)
For the quarters ended
March 31, 2020
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
Net interest income
Interest income
$
555,026
$
1,074,214
$
919,299
$
927,598
$
866,186
Interest expense
503,473
620,058
766,905
750,217
647,695
Net interest income
51,553
454,156
152,394
177,381
218,491
Realized and unrealized gains
(losses)
Net interest component of interest rate
swaps
(13,980
)
45,221
88,466
83,653
134,035
Realized gains (losses) on termination or
maturity of interest rate swaps
(397,561
)
(4,615
)
(682,602
)
(167,491
)
(588,256
)
Unrealized gains (losses) on interest rate
swaps
(2,827,723
)
782,608
(326,309
)
(1,276,019
)
(390,556
)
Subtotal
(3,239,264
)
823,214
(920,445
)
(1,359,857
)
(844,777
)
Net gains (losses) on disposal of
investments and other
206,583
17,783
66,522
(38,333
)
(93,916
)
Net gains (losses) on other
derivatives
206,426
(42,312
)
(16,888
)
(506,411
)
(115,159
)
Net unrealized gains (losses) on
instruments measured at fair value through earnings
(730,160
)
(5,636
)
(1,091
)
(4,881
)
47,629
Loan loss provision
(99,326
)
(7,362
)
(3,504
)
—
(5,703
)
Subtotal
(416,477
)
(37,527
)
45,039
(549,625
)
(167,149
)
Total realized and unrealized gains
(losses)
(3,655,741
)
785,687
(875,406
)
(1,909,482
)
(1,011,926
)
Other income (loss)
14,926
42,656
35,074
28,181
30,502
General and administrative
expenses
Compensation and management fee
40,825
40,403
41,161
44,231
44,833
Other general and administrative
expenses
36,804
32,948
24,977
34,177
38,904
Total general and administrative
expenses
77,629
73,351
66,138
78,408
83,737
Income (loss) before income
taxes
(3,666,891
)
1,209,148
(754,076
)
(1,782,328
)
(846,670
)
Income taxes
(26,702
)
(594
)
(6,907
)
(5,915
)
2,581
Net income (loss)
(3,640,189
)
1,209,742
(747,169
)
(1,776,413
)
(849,251
)
Net income (loss) attributable to
noncontrolling interests
66
68
(110
)
(83
)
(101
)
Net income (loss) attributable to
Annaly
(3,640,255
)
1,209,674
(747,059
)
(1,776,330
)
(849,150
)
Dividends on preferred stock
(1)
35,509
35,509
36,151
32,422
32,494
Net income (loss) available (related)
to common stockholders
$
(3,675,764
)
$
1,174,165
$
(783,210
)
$
(1,808,752
)
$
(881,644
)
Net income (loss) per share available
(related) to common stockholders
Basic
$
(2.57
)
$
0.82
$
(0.54
)
$
(1.24
)
$
(0.63
)
Diluted
$
(2.57
)
$
0.82
$
(0.54
)
$
(1.24
)
$
(0.63
)
Weighted average number of common
shares outstanding
Basic
1,430,994,319
1,431,079,108
1,453,359,211
1,456,038,736
1,398,614,205
Diluted
1,430,994,319
1,431,079,108
1,453,359,211
1,456,038,736
1,398,614,205
Other comprehensive income
(loss)
Net income (loss)
$
(3,640,189
)
$
1,209,742
$
(747,169
)
$
(1,776,413
)
$
(849,251
)
Unrealized gains (losses) on
available-for-sale securities
1,374,796
(153,192
)
1,034,873
1,654,783
1,599,398
Reclassification adjustment for net
(gains) losses included in net income (loss)
(391,616
)
(22,432
)
(86,061
)
29,596
61,091
Other comprehensive income (loss)
983,180
(175,624
)
948,812
1,684,379
1,660,489
Comprehensive income (loss)
(2,657,009
)
1,034,118
201,643
(92,034
)
811,238
Comprehensive income (loss) attributable
to noncontrolling interests
66
68
(110
)
(83
)
(101
)
Comprehensive income (loss) attributable
to Annaly
(2,657,075
)
1,034,050
201,753
(91,951
)
811,339
Dividends on preferred stock (1)
35,509
35,509
36,151
32,422
32,494
Comprehensive income (loss)
attributable to common stockholders
$
(2,692,584
)
$
998,541
$
165,602
$
(124,373
)
$
778,845
(1)
The quarter ended September 30, 2019
excludes, and 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.
Key Financial Data
The following table presents key metrics of the Company’s
portfolio, liabilities and hedging positions, and performance as of
and for the quarters ended March 31, 2020, December 31, 2019, and
March 31, 2019:
March 31, 2020
December 31, 2019
March 31, 2019
Portfolio related metrics
Fixed-rate Residential Securities as a
percentage of total Residential Securities
99
%
97
%
94
%
Adjustable-rate and floating-rate
Residential Securities as a percentage of total Residential
Securities
1
%
3
%
6
%
Weighted average experienced CPR for the
period
13.6
%
17.8
%
7.3
%
Weighted average projected long-term CPR
at period-end
17.7
%
13.9
%
11.6
%
Liabilities and hedging metrics
Weighted average days to maturity on
repurchase agreements outstanding at period-end
48
65
72
Hedge ratio (1)
19
%
75
%
85
%
Weighted average pay rate on interest rate
swaps at period-end (2)
1.63
%
1.84
%
2.20
%
Weighted average receive rate on interest
rate swaps at period-end (2)
1.16
%
1.89
%
2.66
%
Weighted average net rate on interest rate
swaps at period-end (2)
0.47
%
(0.05
%)
(0.46
%)
Leverage at period-end (3)
6.4:1
7.1:1
6.1:1
Economic leverage at period-end (4)
6.8:1
7.2:1
7.0:1
Capital ratio at period-end
12.3
%
12.0
%
12.0
%
Performance related metrics
Book value per common share
$
7.50
$
9.66
$
9.67
GAAP net income (loss) per average common
share (5)
$
(2.57
)
$
0.82
$
(0.63
)
Annualized GAAP return (loss) on average
equity
(102.17
%)
31.20
%
(22.72
%)
Net interest margin (6)
0.18
%
1.49
%
0.79
%
Average yield on interest earning assets
(7)
1.91
%
3.53
%
3.15
%
Average GAAP cost of interest bearing
liabilities (8)
1.86
%
2.17
%
2.71
%
Net interest spread
0.05
%
1.36
%
0.44
%
Dividend declared per common share
$
0.25
$
0.25
$
0.30
Annualized dividend yield (9)
19.72
%
10.62
%
12.01
%
Non-GAAP metrics *
Core earnings (excluding PAA) per average
common share (5)
$
0.21
$
0.26
$
0.29
Annualized core return on average equity
(excluding PAA)
9.27
%
10.56
%
11.59
%
Net interest margin (excluding PAA)
(6)
1.18
%
1.41
%
1.51
%
Average yield on interest earning assets
(excluding PAA) (7)
2.91
%
3.25
%
3.45
%
Average economic cost of interest bearing
liabilities (8)
1.91
%
2.01
%
2.15
%
Net interest spread (excluding PAA)
1.00
%
1.24
%
1.30
%
*
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 (excluding receiver
swaptions) and futures relative to repurchase agreements, other
secured financing and cost basis of TBA derivatives 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, cost
basis of TBA and CMBX derivatives outstanding, and net forward
purchases (sales) of investments divided by total equity.
(5)
Net of dividends on preferred stock.
(6)
Net interest margin represents interest
income less interest expense divided by average interest earning
assets. Net interest margin (excluding PAA) represents 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.
(7)
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).
(8)
Average GAAP cost of interest bearing
liabilities represents annualized interest expense divided by
average interest bearing liabilities. Average interest bearing
liabilities reflects the average balances during the period.
Average economic cost of interest bearing liabilities represents
annualized economic interest expense divided by average interest
bearing liabilities. Economic interest expense is comprised of GAAP
interest expense and the net interest component of interest rate
swaps.
(9)
Based on the closing price of the
Company’s common stock of $5.07, $9.42 and $9.99 at March 31, 2020,
December 31, 2019 and March 31, 2019, respectively.
The following table contains additional information on our
residential and commercial investments as of the dates
presented:
For the quarters ended
March 31, 2020
December 31, 2019
March 31, 2019
Agency mortgage-backed securities
$
78,456,846
$
112,893,367
$
103,093,526
Credit risk transfer securities
222,871
531,322
607,945
Non-agency mortgage-backed securities
585,954
1,135,868
1,116,569
Commercial mortgage-backed securities
91,925
273,023
175,231
Total securities
$
79,357,596
$
114,833,580
$
104,993,271
Residential mortgage loans
$
1,268,083
$
1,647,787
$
1,311,720
Commercial real estate debt and preferred
equity
649,843
669,713
722,962
Corporate debt
2,150,263
2,144,850
1,758,082
Loans held for sale
—
—
86,560
Total loans, net
$
4,068,189
$
4,462,350
$
3,879,324
Mortgage servicing rights
$
280,558
$
378,078
$
500,745
Agency mortgage-backed securities
transferred or pledged to securitization vehicles
$
1,803,608
$
1,122,588
$
—
Residential mortgage loans transferred or
pledged to securitization vehicles
3,027,188
2,598,374
1,425,668
Commercial real estate debt investments
transferred or pledged to securitization vehicles
1,927,575
2,345,120
2,939,632
Commercial real estate debt and preferred
equity transferred or pledged to securitization vehicles
913,291
936,378
—
Assets transferred or pledged to
securitization vehicles
$
7,671,662
$
7,002,460
$
4,365,300
Real estate, net
$
751,738
$
725,638
$
734,239
Total residential and commercial
investments
$
92,129,743
$
127,402,106
$
114,472,879
Non-GAAP Financial Measures
To supplement its consolidated financial statements, which are
prepared and presented in accordance with U.S. generally accepted
accounting principles ("GAAP"), the Company provides the following
non-GAAP measures:
- core earnings (excluding PAA);
- core earnings (excluding PAA) attributable to common
stockholders;
- 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);
- average economic cost of interest bearing liabilities;
- 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 (excluding PAA), 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 (excluding PAA), core earnings (excluding PAA)
attributable to common stockholders, 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 (excluding PAA), 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 excludes (g) 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
("PAA"), is 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 (excluding PAA) generated by the Company’s invested equity
capital.
The following table presents a reconciliation of GAAP financial
results to non-GAAP core earnings (excluding PAA) for the periods
presented:
For the quarters ended
March 31, 2020
December 31, 2019
March 31, 2019
(dollars in thousands, except
per share data)
GAAP net income (loss)
$
(3,640,189
)
$
1,209,742
$
(849,251
)
Net income (loss) attributable to
noncontrolling interests
66
68
(101
)
Net income (loss) attributable to
Annaly
(3,640,255
)
1,209,674
(849,150
)
Adjustments to exclude reported
realized and unrealized (gains) losses
Realized (gains) losses on termination or
maturity of interest rate swaps
397,561
4,615
588,256
Unrealized (gains) losses on interest rate
swaps
2,827,723
(782,608
)
390,556
Net (gains) losses on disposal of
investments and other
(206,583
)
(17,783
)
93,916
Net (gains) losses on other
derivatives
(206,426
)
42,312
115,159
Net unrealized (gains) losses on
instruments measured at fair value through earnings
730,160
5,636
(47,629
)
Loan loss provision (1)
99,993
7,362
5,703
Adjustments to exclude components of
other (income) loss
Depreciation and amortization expense
related to commercial real estate
7,934
9,823
10,114
Non-core (income) loss allocated to equity
method investments (2)
19,398
(3,979
)
9,496
Adjustments to exclude components of
general and administrative expenses and income taxes
Transaction expenses and non-recurring
items (3)
7,245
3,634
9,982
Income tax effect of non-core income
(loss) items
(23,862
)
(418
)
726
Adjustments to add back components of
realized and unrealized (gains) losses
TBA dollar roll income and CMBX coupon
income (4)
44,904
36,901
38,134
MSR amortization (5)
(18,296
)
(22,120
)
(13,979
)
Plus:
Premium amortization adjustment cost
(benefit)
290,722
(83,892
)
81,871
Core earnings (excluding PAA) *
330,218
409,157
433,155
Dividends on preferred stock
35,509
35,509
32,494
Core earnings (excluding PAA)
attributable to common stockholders *
$
294,709
$
373,648
$
400,661
GAAP net income (loss) per average
common share
$
(2.57
)
$
0.82
$
(0.63
)
Core earnings (excluding PAA) per
average common share *
$
0.21
$
0.26
$
0.29
Annualized GAAP return (loss) on
average equity
(102.17
%)
31.20
%
(22.72
%)
Annualized core return on average
equity (excluding PAA) *
9.27
%
10.56
%
11.59
%
* Represents a non-GAAP financial measure.
*
Represents a non-GAAP financial
measure.
(1)
Includes $0.7 million of loss provision on
the Company’s unfunded loan commitments for the quarter ended March
31, 2020 which is reported in Other income (loss) in the Company’s
Consolidated Statements of Comprehensive Income (Loss).
(2)
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).
(3)
The quarter ended March 31, 2020 includes
costs incurred in connection with securitizations of Agency
mortgage-backed securities and residential whole loans as well as
costs incurred in connection with the expected Internalization and
costs incurred in connection with the CEO transition. The quarter
ended December 31, 2019 includes costs incurred in connection with
securitizations of Agency mortgage-backed securities and
residential whole loans. The quarter ended March 31, 2019 includes
costs incurred in connection with a securitization of commercial
loans and a securitization of residential whole loans.
(4)
TBA dollar roll income and CMBX coupon
income each represent a component of Net gains (losses) on other
derivatives. CMBX coupon income totaled $1.2 million, $1.3 million
and $1.1 million for the quarters ended March 31, 2020, December
31, 2019 and March 31, 2019, respectively.
(5)
MSR amortization represents the portion of
changes in fair value that is attributable to the realization of
estimated cash flows on the Company’s MSR portfolio and is reported
as a component of Net unrealized gains (losses) on instruments
measured at fair value.
From time to time, the Company enters into TBA forward contracts
as an alternate means of investing in and financing Agency
mortgage-backed securities. A TBA contract is an agreement to
purchase or sell, for future delivery, an Agency mortgage-backed
security with a specified issuer, term and coupon. A TBA dollar
roll represents a transaction where TBA contracts with the same
terms but different settlement dates are simultaneously bought and
sold. The TBA contract settling in the later month typically prices
at a discount to the earlier month contract with the difference in
price commonly referred to as the "drop". The drop is a reflection
of the expected net interest income from an investment in similar
Agency mortgage-backed securities, net of an implied financing
cost, that would be foregone as a result of settling the contract
in the later month rather than in the earlier month. The drop
between the current settlement month price and the forward
settlement month price occurs because in the TBA dollar roll
market, the party providing the financing is the party that would
retain all principal and interest payments accrued during the
financing period. Accordingly, TBA dollar roll income generally
represents the economic equivalent of the net interest income
earned on the underlying Agency mortgage-backed security less an
implied financing cost.
TBA dollar roll transactions are accounted for under GAAP as a
series of derivatives transactions. The fair value of TBA
derivatives is based on methods similar to those used to value
Agency mortgage-backed securities. The Company records TBA
derivatives at fair value on its Consolidated Statements of
Financial Condition and recognizes periodic changes in fair value
in 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 (excluding PAA).
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 and residential securities transferred or pledged to
securitization vehicles, for the quarters ended March 31, 2020,
December 31, 2019, and March 31, 2019:
For the quarters ended
March 31, 2020
December 31, 2019
March 31, 2019
(dollars in thousands)
Premium amortization expense
(accretion)
$
616,937
$
171,447
$
247,446
Less: PAA cost (benefit)
290,722
(83,892
)
81,871
Premium amortization expense (excluding
PAA)
$
326,215
$
255,339
$
165,575
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 March 31, 2020.
Similarly, economic net interest income (excluding PAA), as
computed below, provides investors with additional information to
enhance their understanding of the net economics of our primary
business operations.
For the quarters ended
March 31, 2020
December 31, 2019
March 31, 2019
Interest income (excluding PAA)
reconciliation
(dollars in thousands)
GAAP interest income
$
555,026
$
1,074,214
$
866,186
Premium amortization adjustment
290,722
(83,892
)
81,871
Interest income (excluding PAA)
*
$
845,748
$
990,322
$
948,057
Economic interest expense
reconciliation
GAAP interest expense
$
503,473
$
620,058
$
647,695
Add:
Net interest component of interest rate
swaps
13,980
(45,221
)
(134,035
)
Economic interest expense *
$
517,453
$
574,837
$
513,660
Economic net interest income (excluding
PAA) reconciliation
Interest income (excluding PAA) *
$
845,748
$
990,322
$
948,057
Less:
Economic interest expense *
517,453
574,837
513,660
Economic net interest income (excluding
PAA) *
$
328,295
$
415,485
$
434,397
* Represents a non-GAAP financial
measure.
Average yield on interest earning assets (excluding PAA), net
interest spread (excluding PAA), net interest margin (excluding
PAA) and average economic cost of interest bearing
liabilities
Net interest spread (excluding PAA), which is the difference
between the average yield on interest earning assets (excluding
PAA) and the average economic cost of interest bearing liabilities,
which represents annualized economic interest expense divided by
average interest bearing liabilities, and net interest margin
(excluding PAA), which is calculated as the sum of interest income
(excluding PAA) plus TBA dollar roll income and CMBX coupon income
less interest expense and the net interest component of interest
rate swaps divided by the sum of average interest earning assets
plus average TBA contract and CMBX balances, provide management
with additional measures of the Company’s profitability that
management relies upon in monitoring the performance of the
business.
Disclosure of these measures, which are presented below,
provides investors with additional detail regarding how management
evaluates the Company’s performance.
For the quarters ended
March 31, 2020
December 31, 2019
March 31, 2019
Economic metrics (excluding
PAA)
(dollars in thousands)
Average interest earning assets
$
116,063,895
$
121,801,951
$
109,946,527
Interest income (excluding PAA) *
$
845,748
$
990,322
$
948,057
Average yield on interest earning assets
(excluding PAA) *
2.91
%
3.25
%
3.45
%
Average interest bearing liabilities
$
107,029,466
$
111,873,379
$
95,529,819
Economic interest expense *
$
517,453
$
574,837
$
513,660
Average economic cost of interest bearing
liabilities *
1.91
%
2.01
%
2.15
%
Economic net interest income (excluding
PAA) *
$
328,295
$
415,485
$
434,397
Net interest spread (excluding PAA) *
1.00
%
1.24
%
1.30
%
Interest income (excluding PAA) *
$
845,748
$
990,322
$
948,057
TBA dollar roll income and CMBX coupon
income
44,904
36,901
38,134
Interest expense
(503,473
)
(620,058
)
(647,695
)
Net interest component of interest rate
swaps
(13,980
)
45,221
134,035
Subtotal
$
373,199
$
452,386
$
472,531
Average interest earnings assets
$
116,063,895
$
121,801,951
$
109,946,527
Average TBA contract and CMBX balances
9,965,142
6,878,502
14,927,490
Subtotal
$
126,029,037
$
128,680,453
$
124,874,017
Net interest margin (excluding PAA)
*
1.18
%
1.41
%
1.51
%
* Represents a non-GAAP financial
measure.
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version on businesswire.com: https://www.businesswire.com/news/home/20200429005859/en/
Annaly Capital Management, Inc. Investor Relations 1-888-8Annaly
www.annaly.com
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