Annaly Capital Management, Inc. (NYSE:NLY) (the “Company” or
“Annaly”) today announced its financial results for the quarter
ended September 30, 2018.
Quarterly Financial
Highlights
- GAAP net income of $385.4 million,
$0.29 per average common share
- Core earnings (excluding PAA) of $389.7
million, $0.30 per average common share
- GAAP return on average equity of 10.73%
and core return on average equity (excluding PAA) of 10.85%
- Book value per common share of
$10.03
- Economic leverage of 6.7x as compared
to 6.4x at June 30, 2018
- Net interest margin (excluding PAA) of
1.50% as compared to 1.56% in the prior quarter
- Increased hedge ratio to 96% as
compared to 95% at June 30, 2018
Business
Highlights
- Closed and integrated $906 million
acquisition of MTGE Investment Corp.
- Increased credit capital allocation to
30%, up from 28% at June 30, 2018 and 24% at December 31, 2017,
while maintaining strong credit quality
- Raised gross proceeds of $1.1 billion
through an overnight common equity offering and the at-the-market
("ATM") equity offering program
- Demonstrated access to diverse
financing alternatives to support each of our businesses
- Completed a residential whole loan
securitization of $383.9 million in the third quarter 2018 (debut
securitization of $327.5 million closed in the first quarter 2018)
and closed on a third securitization of $384.0 million in October
2018, for an aggregate of $1.1 billion
- Expanded and enhanced credit facilities
to support continued growth of both Commercial Real Estate and
Middle Market Lending, improving terms and reducing funding
costs
- Increased access to direct repo market,
representing over 40% of our broker-dealer's ("Arcola") balances at
September 30, 2018
- Declared 20th consecutive quarterly
dividend of $0.30 per common share
“During the third quarter, Annaly successfully continued the
execution of our internal and external growth strategies by
increasing our internal investment options, expanding our capital
base and further consolidating the industry,” commented Kevin
Keyes, Chairman, CEO and President. “We also effectively increased
our financing sources and capacity, while improving terms, as our
three credit businesses continue to perform well and complement our
Agency MBS strategies. Annaly represents a diversified, stable,
highly liquid, low beta investment option in a market where
heightened volatility has returned."
On September 7, 2018, Annaly completed the acquisition of MTGE
Investment Corp. ("MTGE"), for aggregate consideration of $906
million, representing Annaly’s third strategic acquisition since
2013. “The MTGE transaction is accretive to earnings and further
enhances our capital base,” Mr. Keyes remarked. “The acquisition
also expands our capital allocation to credit, offers significant
cost-savings to shareholders and is further evidence of Annaly’s
unique position as an industry leading consolidator.”
Financial
Performance
The following table summarizes certain key performance
indicators as of and for the quarters ended September 30,
2018, June 30, 2018 and September 30, 2017:
September 30,
2018 June 30, 2018
September 30, 2017 Book value per common share (1) $ 10.03 $
10.35 $ 11.42 Economic leverage at period-end (2) 6.7:1 6.4:1 6.9:1
GAAP net income (loss) per average common share (3) $ 0.29 $ 0.49 $
0.31 Annualized GAAP return (loss) on average equity 10.73 % 17.20
% 10.98 % Net interest margin (4) 1.49 % 1.53 % 1.33 % Average
yield on interest earning assets (5) 3.21 % 3.04 % 2.79 % Average
cost of interest bearing liabilities (6) 2.08 % 1.89 % 1.82 % Net
interest spread 1.13 % 1.15 % 0.97 %
Core Earnings
Metrics: *
Core earnings (excluding PAA) per average common share (3)(7) $
0.30 $ 0.30 $ 0.30 Core earnings per average common share (3)(7) $
0.29 $ 0.30 $ 0.26 PAA cost (benefit) per average common share $
0.01 $ — $ 0.04 Annualized core return on average equity (excluding
PAA) 10.85 % 11.05 % 10.57 % Net interest margin (excluding PAA)
(4) 1.50 % 1.56 % 1.47 % Average yield on interest earning assets
(excluding PAA) (5) 3.22 % 3.07 % 2.97 % Net interest spread
(excluding PAA) 1.14 % 1.18 % 1.15 % * Represents
non-GAAP financial measures. Please refer to the ‘Non-GAAP
Financial Measures’ section for additional information. (1) Book
value per common share includes shares of the Company's common
stock that were pending issuance to shareholders of MTGE at
September 30, 2018 in connection with the Company's acquisition of
MTGE. (2) Computed as the sum of recourse debt, to-be-announced
(“TBA”) derivative 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. (3) Net of dividends on
preferred stock. The quarter ended September 30, 2017 includes
cumulative and undeclared dividends of $8.3 million on the
Company's Series F Preferred Stock as of September 30, 2017. (4)
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. (5) 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). (6)
Includes GAAP interest expense and the net interest component of
interest rate swaps. Prior to the quarter ended March 31, 2018,
this metric included the net interest component of interest rate
swaps used to hedge cost of funds. Beginning with the quarter ended
March 31, 2018, as a result of changes to the Company’s hedging
portfolio, this metric reflects the net interest component of all
interest rate swaps. (7) Beginning with the results for the quarter
ended September 30, 2018, the Company has updated its calculation
of core earnings and related metrics to reflect changes to its
portfolio composition and operations in connection with the
Company's continued growth and diversification, including the
recent acquisition of MTGE Investment Corp. 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 were 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 mortgage 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 and 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
Third Quarter 2018 Investor Presentation and the Third Quarter 2018
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 third quarter 2018 earnings conference
call on November 1, 2018 at 9:00 a.m. Eastern Time. The number
to call is 888-317-6003 for domestic calls and 412-317-6061 for
international calls. The conference passcode is 0664905. There will
also be an audio webcast of the call on www.annaly.com. The 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
10125062. 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
SUBSIDIARIESCONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION(dollars in thousands, except per share
data)
September 30, 2018
June 30,2018
March 31,2018
December 31, 2017
(1)
September 30, 2017
(Unaudited) (Unaudited)
(Unaudited) (Unaudited)
ASSETS Cash and cash equivalents $ 1,082,747 $ 1,135,329 $
984,275 $ 706,589 $ 867,840 Securities 91,338,611 88,478,689
90,539,192 92,563,572 87,989,783 Loans 4,224,203 3,692,172
3,208,617 2,999,148 2,592,922 Mortgage servicing rights 588,833
599,014 596,378 580,860 570,218 Assets transferred or pledged to
securitization vehicles 4,287,821 3,066,270 3,256,621 3,306,133
3,719,486 Real estate, net 753,014 477,887 480,063 485,953 470,928
Derivative assets 404,841 212,138 230,302 313,885 278,499 Reverse
repurchase agreements 1,234,704 259,762 200,459 — — Receivable for
unsettled trades 1,266,840 21,728 45,126 1,232 340,033 Interest
receivable 347,278 323,769 326,989 323,526 293,207 Goodwill and
intangible assets, net 103,043 91,009 92,763 95,035 97,557 Other
assets 329,868 475,230 421,448
384,117 353,708 Total assets $
105,961,803 $ 98,832,997 $ 100,382,233
$ 101,760,050 $ 97,574,181
LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Repurchase
agreements $ 79,073,026 $ 75,760,655 $ 78,015,431 $ 77,696,343 $
69,430,268 Other secured financing 4,108,547 3,760,487 3,830,075
3,837,528 3,713,256 Debt issued by securitization vehicles
3,799,542 2,728,692 2,904,873 2,971,771 3,357,929 Mortgages payable
511,588 309,878 309,794 309,686 311,886 Derivative liabilities
379,794 494,037 580,941 607,854 682,489 Payable for unsettled
trades 2,505,428 1,108,834 91,327 656,581 5,243,868 Interest
payable 399,605 478,439 284,696 253,068 231,611 Dividends payable
102,811 349,300 347,897 347,876 326,425 Other liabilities 125,606
68,819 74,264 207,770
121,231 Total liabilities 91,005,947
85,059,141 86,439,298 86,888,477
83,418,963 Stockholders’ Equity: Preferred
stock, par value $0.01 per share (2) 1,778,168 1,723,168 1,723,168
1,720,381 1,720,381 Common stock, par value $0.01 per share (3)
13,031 11,643 11,597 11,596 10,881 Additional paid-in capital
18,793,706 17,268,596 17,218,191 17,221,265 16,377,805 Accumulated
other comprehensive income (loss) (3,822,956 ) (3,434,447 )
(3,000,080 ) (1,126,020 ) (640,149 ) Accumulated deficit (1,811,955
) (1,800,370 ) (2,015,612 ) (2,961,749 )
(3,320,160 ) Total stockholders’ equity 14,949,994
13,768,590 13,937,264 14,865,473 14,148,758 Noncontrolling
interests 5,862 5,266 5,671
6,100 6,460 Total equity 14,955,856
13,773,856 13,942,935
14,871,573 14,155,218 Total liabilities and
equity $ 105,961,803 $ 98,832,997 $
100,382,233 $ 101,760,050 $ 97,574,181
(1) Derived from the audited consolidated
financial statements at December 31, 2017. (2)
7.875% Series A
Cumulative Redeemable Preferred Stock - Includes 0 shares
authorized, issued and outstanding at September 30, 2018, June 30,
2018, March 31, 2018 and December 31, 2017. Includes 7,412,500
authorized shares and 0 shares issued and outstanding at September
30, 2017.
7.625% Series C
Cumulative Redeemable Preferred Stock - Includes 7,000,000
shares authorized and 7,000,000 shares issued and outstanding at
September 30, 2018. Includes 12,000,000 shares authorized and
7,000,000 shares issued and outstanding at June 30, 2018 and March
31, 2018. Includes 12,000,000 shares authorized, issued and
outstanding at December 31, 2017. Includes 12,650,000 shares
authorized and 12,000,000 shares issued and outstanding at
September 30, 2017.
7.50% Series D
Cumulative Redeemable Preferred Stock - Includes 18,400,000
shares authorized, issued and outstanding.
7.625% Series E
Cumulative Redeemable Preferred Stock - Includes 0 shares
authorized, issued and outstanding at September 30, 2018. Includes
11,500,000 shares authorized and 0 shares issued and outstanding at
June 30, 2018 and March 31, 2018. Includes 11,500,000 shares
authorized, issued and outstanding at December 31, 2017 and
September 30, 2017.
6.95% Series F
Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
- Includes 28,800,000 shares authorized, issued and outstanding at
September 30, 2018, June 30, 2018, March 31, 2018 and December 31,
2017. Includes 32,200,000 shares authorized and 28,800,000 shares
issued and outstanding at September 30, 2017.
6.50% Series G
Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
- Includes 19,550,000 shares authorized and 17,000,000 issued and
outstanding at September 30, 2018, June 30, 2018 and March 31,
2018. Includes 0 shares authorized, issued and outstanding at
December 31, 2017 and September 30, 2017.
8.25% Series H
Cumulative Redeemable Preferred Stock - Includes 2,200,000
shares authorized, issued and outstanding at September 30, 2018.
Includes 0 shares authorized, issued and outstanding at June 30,
2018, March 31, 2018, December 31, 2017 and September 30, 2017.
(3) Includes 1,924,050,000 shares authorized and
1,303,079,555 issued and outstanding at September 30, 2018.
Includes 1,909,750,000 shares authorized and 1,164,333,831 issued
and outstanding at June 30, 2018. Includes 1,909,750,000 shares
authorized and 1,159,657,350 issued and outstanding at March 31,
2018. Includes 1,929,300,000 shares authorized and 1,159,585,078
issued and outstanding at December 31, 2017. Includes 1,917,837,500
shares authorized and 1,088,083,794 shares issued and outstanding
at September 30, 2017.
ANNALY CAPITAL MANAGEMENT, INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)(Unaudited)(dollars in thousands, except per
share data)
For the quarters ended
September 30,2018
June 30, 2018
March 31,2018
December 31,2017
September 30,2017
Net interest income: Interest
income $ 816,596 $ 776,806 $ 879,487 $ 745,423 $ 622,550 Interest
expense 500,973 442,692 367,421
318,711 268,937
Net interest
income 315,623 334,114 512,066
426,712 353,613
Realized and unrealized gains (losses): Net interest
component of interest rate swaps 51,349 31,475 (48,160 ) (82,271 )
(88,211 ) Realized gains (losses) on termination or maturity of
interest rate swaps 575 — 834 (160,075 ) — Unrealized gains
(losses) on interest rate swaps 417,203 343,475
977,285 484,447 56,854
Subtotal 469,127 374,950
929,959 242,101 (31,357 ) Net gains
(losses) on disposal of investments (324,294 ) (66,117 ) 13,468
7,895 (11,552 ) Net gains (losses) on other derivatives 94,827
34,189 (47,145 ) 121,334 154,208 Net unrealized gains (losses) on
instruments measured at fair value through earnings (39,944 )
(48,376 ) (51,593 ) (12,115 ) (67,492 )
Subtotal (269,411 ) (80,304 ) (85,270 )
117,114 75,164
Total realized and
unrealized gains (losses) 199,716 294,646
844,689 359,215 43,807
Other income (loss) (10,643 ) 34,170 34,023 25,064 28,282
General and administrative expenses: Compensation and
management fee 45,983 45,579 44,529 44,129 41,993 Other general and
administrative expenses 80,526 18,202
17,981 15,128 15,023
Total
general and administrative expenses 126,509
63,781 62,510 59,257
57,016
Income (loss) before income taxes 378,187
599,149 1,328,268 751,734 368,686
Income taxes (7,242 )
3,262 564 4,963
1,371
Net income (loss) 385,429 595,887 1,327,704
746,771 367,315
Net income (loss) attributable to noncontrolling
interests (149 ) (32 ) (96 ) (151 )
(232 )
Net income (loss) attributable to Annaly 385,578
595,919 1,327,800 746,922 367,547
Dividends on preferred
stock (1) 31,675 31,377
33,766 32,334 30,355
Net
income (loss) available (related) to common stockholders $
353,903 $ 564,542 $ 1,294,034
$ 714,588 $ 337,192
Net
income (loss) per share available (related) to common
stockholders: Basic $ 0.29 $ 0.49 $
1.12 $ 0.62 $ 0.31 Diluted $
0.29 $ 0.49 $ 1.12 $ 0.62
$ 0.31
Weighted average number of
common shares outstanding: Basic 1,202,353,851
1,160,436,777 1,159,617,848
1,151,653,296 1,072,566,395 Diluted
1,202,353,851 1,160,979,451
1,160,103,185 1,152,138,887
1,073,040,637
Net income (loss) $ 385,429
$ 595,887 $ 1,327,704 $
746,771 $ 367,315
Other comprehensive
income (loss): Unrealized gains (losses) on available-for-sale
securities (719,609 ) (505,130 ) (1,879,479 ) (487,597 ) 195,251
Reclassification adjustment for net (gains) losses included in net
income (loss) 331,100 70,763 5,419
1,726 15,367 Other comprehensive
income (loss) (388,509 ) (434,367 ) (1,874,060 )
(485,871 ) 210,618 Comprehensive income (loss)
(3,080 ) 161,520 (546,356 ) 260,900 577,933 Comprehensive income
(loss) attributable to noncontrolling interests (149 ) (32 )
(96 ) (151 ) (232 ) Comprehensive income
(loss) attributable to Annaly (2,931 ) 161,552 (546,260 ) 261,051
578,165 Dividends on preferred stock (1) 31,675
31,377 33,766 32,334
30,355
Comprehensive income (loss) attributable to common
stockholders $ (34,606 ) $ 130,175 $
(580,026 ) $ 228,717 $ 547,810
(1) The quarter ended December 31, 2017
excludes, and the quarter ended September 30, 2017 includes,
cumulative and undeclared dividends of $8.3 million on the
Company's Series F Preferred Stock as of September 30, 2017.
ANNALY CAPITAL MANAGEMENT, INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)(Unaudited)(dollars in thousands, except per
share data)
For the nine months ended
September 30,2018
September 30,2017
Net interest income: Interest income $ 2,472,889 $
1,747,703 Interest expense 1,311,086 689,643
Net interest income 1,161,803 1,058,060
Realized and unrealized gains (losses): Net interest
component of interest rate swaps 34,664 (288,837 ) Realized gains
(losses) on termination or maturity of interest rate swaps 1,409
(58 ) Unrealized gains (losses) on interest rate swaps 1,737,963
28,471
Subtotal 1,774,036
(260,424 ) Net gains (losses) on disposal of investments (376,943 )
(11,833 ) Net gains (losses) on other derivatives 81,871 140,104
Net unrealized gains (losses) on instruments measured at fair value
through earnings (139,913 ) (27,569 )
Subtotal
(434,985 ) 100,702
Total realized and unrealized
gains (losses) 1,339,051 (159,722 )
Other
income (loss) 57,550 90,793
General and administrative
expenses: Compensation and management fee 136,091 120,193 Other
general and administrative expenses 116,709 44,674
Total general and administrative expenses 252,800
164,867
Income (loss) before income
taxes 2,305,604 824,264
Income taxes (3,416 )
2,019
Net income (loss) 2,309,020 822,245
Net
income (loss) attributable to noncontrolling interests (277 )
(437 )
Net income (loss) attributable to Annaly
2,309,297 822,682
Dividends on preferred stock 96,818
77,301
Net income (loss) available (related) to
common stockholders $ 2,212,479 $ 745,381
Net income (loss) per share available (related) to common
stockholders: Basic $ 1.88 $ 0.72 Diluted
$ 1.88 $ 0.72
Weighted average
number of common shares outstanding: Basic 1,174,292,701
1,037,033,076 Diluted 1,174,292,701
1,037,445,177
Net income (loss) $ 2,309,020
$ 822,245
Other comprehensive income
(loss): Unrealized gains (losses) on available-for-sale
securities (3,104,218 ) 397,600 Reclassification adjustment for net
(gains) losses included in net income (loss) 407,282
48,144 Other comprehensive income (loss) (2,696,936 )
445,744 Comprehensive income (loss) (387,916 ) 1,267,989
Comprehensive income (loss) attributable to noncontrolling
interests (277 ) (437 ) Comprehensive income (loss)
attributable to Annaly (387,639 ) 1,268,426 Dividends on preferred
stock 96,818 77,301
Comprehensive income
(loss) attributable to common stockholders $ (484,457 )
$ 1,191,125
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 September 30, 2018, June 30,
2018, and September 30, 2017:
September 30, 2018
June 30,2018
September 30, 2017
Portfolio Related
Metrics:
Fixed-rate Residential Securities as a percentage of total
Residential Securities 92 % 91 % 89 % Adjustable-rate and
floating-rate Residential Securities as a percentage of total
Residential Securities 8 % 9 % 11 % Weighted average experienced
CPR for the period 10.3 % 10.1 % 10.3 % Weighted average projected
long-term CPR at period-end 9.1 % 9.1 %
10.4 %
Liabilities and
Hedging Metrics:
Weighted average days to maturity on repurchase agreements
outstanding at period-end 55 71 65 Hedge ratio (1) 96 % 95 % 67 %
Weighted average pay rate on interest rate swaps at period-end (2)
2.10 % 2.08 % 2.27 % Weighted average receive rate on interest rate
swaps at period-end (2) 2.33 % 2.31 % 1.35 % Weighted average net
rate on interest rate swaps at period-end (2) (0.23 %) (0.23 %)
0.92 % Leverage at period-end (3) 5.9:1 6.0:1 5.4:1 Economic
leverage at period-end (4) 6.7:1 6.4:1 6.9:1 Capital ratio at
period-end 12.6 % 13.2 % 12.3 %
Performance
Related Metrics:
Book value per common share (5) $ 10.03 $ 10.35 $ 11.42 GAAP net
income (loss) per average common share (6) $ 0.29 $ 0.49 $ 0.31
Annualized GAAP return (loss) on average equity 10.73 % 17.20 %
10.98 % Net interest margin 1.49 % 1.53 % 1.33 % Average yield on
interest earning assets (7) 3.21 % 3.04 % 2.79 % Average cost of
interest bearing liabilities (8) 2.08 % 1.89 % 1.82 % Net interest
spread 1.13 % 1.15 % 0.97 % Dividend declared per common share $
0.30 $ 0.30 $ 0.30 Annualized dividend yield (9) 11.73 % 11.66 %
9.84 %
Core Earnings Metrics * Core earnings (excluding PAA)
per average common share (6) $ 0.30 $ 0.30 $ 0.30 Core earnings per
average common share (6) $ 0.29 $ 0.30 $ 0.26 PAA cost (benefit)
per average common share $ 0.01 $ — $ 0.04 Annualized core return
on average equity (excluding PAA) 10.85 % 11.05 % 10.57 % Net
interest margin (excluding PAA) 1.50 % 1.56 % 1.47 % Average yield
on interest earning assets (excluding PAA) (7) 3.22 % 3.07 % 2.97 %
Net interest spread (excluding PAA) 1.14 %
1.18 % 1.15 % * 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
notional outstanding and net forward purchases of investments
divided by total equity. (5) Book value per common share includes
shares of the Company's common stock that were pending issuance to
shareholders of MTGE at September 30, 2018 in connection with the
Company's acquisition of MTGE. (6) Net of dividends on preferred
stock. The quarter ended September 30, 2017 includes cumulative and
undeclared dividends of $8.3 million on the Company's Series F
Preferred Stock as of September 30, 2017. (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) Includes GAAP interest expense and the
net interest component of interest rate swaps. Prior to the quarter
ended March 31, 2018, this metric included the net interest
component of interest rate swaps used to hedge cost of funds.
Beginning with the quarter ended March 31, 2018, as a result of
changes to the Company’s hedging portfolio, this metric reflects
the net interest component of all interest rate swaps. (9) Based on
the closing price of the Company’s common stock of $10.23, $10.29
and $12.19 at September 30, 2018, June 30, 2018 and September 30,
2017, respectively.
The following table contains additional information on our
residential and commercial investments as of the dates
presented:
For the quarters ended
September 30, 2018
June 30,2018
September 30, 2017
Agency mortgage-backed securities $ 89,290,128 $
86,593,058 $ 85,889,131 Credit risk transfer
securities 688,521 563,796 582,938 Non-agency mortgage-backed
securities 1,173,467 1,006,785 1,227,235 Commercial mortgage-backed
securities 186,495 315,050
290,479
Total securities $ 91,338,611
$ 88,478,689 $ 87,989,783
Residential mortgage loans $ 1,217,139 $ 1,142,300 $ 755,064
Commercial real estate debt and preferred equity 1,435,865
1,251,138 981,748 Loans held for sale 42,325 42,458 — Corporate
debt 1,528,874 1,256,276
856,110
Total loans $ 4,224,203 $
3,692,172 $ 2,592,922
Mortgage
servicing rights $ 588,833 $ 599,014
$ 570,218 Residential mortgage loans $
765,876 $ 523,857 $ 140,855 Commercial real estate debt 3,521,945
2,542,413 3,578,631
Assets transferred or pledged to securitization vehicles $
4,287,821 $ 3,066,270 $
3,719,486
Real estate, net $ 753,014
$ 477,887 $ 470,928
Total
residential and commercial investments $ 101,192,482
$ 96,314,032 $ 95,343,337
Non-GAAP Financial
Measures
In connection with the Company's continued growth and
diversification, including the recent acquisition of MTGE
Investment Corp., the Company has updated its calculation of core
earnings and related metrics to reflect changes to its portfolio
composition and operations. Beginning with the results for the
quarter ended September 30, 2018, core earnings has been refreshed
to include coupon income (expense) on CMBX positions (reported in
Net gains (losses) on other derivatives) and to exclude
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 will not be
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 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
is useful to investors, and reconciliations to their most directly
comparable GAAP results are provided below.
Core earnings and core earnings (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 this 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
September 30, 2018
June 30,2018
September 30, 2017
(dollars in thousands, except per share data) GAAP net
income (loss) $ 385,429 $ 595,887 $ 367,315 Net
income (loss) attributable to noncontrolling interests (149 )
(32 ) (232 ) Net income (loss) attributable to Annaly
385,578 595,919 367,547
Adjustments to exclude reported realized
and unrealized (gains) losses: Realized (gains) losses on
termination or maturity of interest rate swaps (575 ) — —
Unrealized (gains) losses on interest rate swaps (417,203 )
(343,475 ) (56,854 ) Net (gains) losses on disposal of investments
324,294 66,117 11,552 Net (gains) losses on other derivatives
(94,827 ) (34,189 ) (154,208 ) Net unrealized (gains) losses on
instruments measured at fair value through earnings 39,944 48,376
67,492
Adjustments to exclude components of other (income)
loss: Depreciation and amortization expense related to
commercial real estate 9,278 — — Non-core (income) loss allocated
to equity method investments (1) (2,358 ) — — Non-core other
(income) loss (2) 44,525 — —
Adjustments to exclude components
of general and administrative expenses and income taxes:
Transaction expenses and non-recurring items (3) 60,081 — — Income
tax effect of non-core income (loss) items 886 — —
Adjustments
to add back components of realized and unrealized (gains)
losses: TBA dollar roll income and CMBX coupon income (4)
56,570 62,491 94,326 MSR amortization (5) (19,913 ) (19,942
) (16,208 ) Core earnings * 386,280 375,297 313,647
Less: Premium amortization adjustment cost (benefit) 3,386
7,516 39,899 Core earnings
(excluding PAA) * $ 389,666 $ 382,813 $
353,546 GAAP net income
(loss) per average common share $ 0.29 $ 0.49
$ 0.31 Core earnings per average common share * $
0.29 $ 0.30 $ 0.26 Core earnings
(excluding PAA) per average common share * $ 0.30 $
0.30 $ 0.30 Annualized GAAP return (loss) on
average equity 10.73 % 17.20 % 10.98 % Annualized
core return on average equity (excluding PAA) * 10.85 %
11.05 % 10.57 % * 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 the amount of
consideration paid for the acquisition of MTGE Investment Corp. in
excess of the fair value of net assets acquired. This amount is
primarily attributable to a decline in portfolio valuation between
the pricing and closing dates of the transaction and is consistent
with changes in market values observed for similar instruments over
the same period. (3) Represents costs incurred in connection with
the MTGE transaction and costs incurred in connection with 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 for the quarter ended September 30, 2018. There were
no adjustments for CMBX coupon income prior to September 30, 2018.
(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
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 ("PAA")
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 September 30, 2018,
June 30, 2018, and September 30, 2017:
For the quarters ended
September 30, 2018
June 30,2018
September 30, 2017
(dollars in thousands) Premium amortization expense
(accretion) $ 187,537 $ 202,426 $
220,636 Less: PAA cost (benefit) 3,386 7,516
39,899 Premium amortization expense (excluding
PAA) $ 184,151 $ 194,910
$ 180,737
For the quarters ended
September 30, 2018
June 30,2018
September 30, 2017
(per average common share) Premium amortization expense
(accretion) $ 0.16 $ 0.17 $ 0.21 Less: PAA cost (benefit) (1) 0.01
— 0.04 Premium
amortization expense (excluding PAA) $ 0.15 $
0.17 $ 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. Prior to the quarter
ended March 31, 2018, economic interest expense included the net
interest component of interest rate swaps used to hedge cost of
funds. Beginning with the quarter ended March 31, 2018, as a result
of changes to the Company’s hedging portfolio, this metric reflects
the net interest component of all interest rate swaps. The Company
uses interest rate swaps to manage its exposure to changing
interest rates on its repurchase agreements by economically hedging
cash flows associated with these borrowings. Accordingly, adding
the net interest component of interest rate swaps to interest
expense, as computed in accordance with GAAP, reflects the total
contractual interest expense and thus, provides investors with
additional information about the cost of the Company's financing
strategy.
Similarly, economic net interest income (excluding PAA), as
computed below, provides investors with additional information to
enhance their understanding of the net economics of our primary
business operations.
For the quarters ended
September 30, 2018
June 30,2018 September
30, 2017 (dollars in thousands)
Interest Income
(Excluding PAA) Reconciliation
GAAP interest income $ 816,596 $
776,806 $ 622,550 Premium amortization adjustment 3,386
7,516 39,899 Interest income
(excluding PAA) * $ 819,982 $ 784,322
$ 662,449
Economic Interest
Expense Reconciliation
GAAP interest expense $ 500,973 $ 442,692 $ 268,937 Add: Net
interest component of interest rate swaps (51,349 )
(31,475 ) 78,564 Economic interest expense * $
449,624 $ 411,217 $
347,501
Economic Net
Interest Income (Excluding PAA) Reconciliation
Interest income (excluding PAA) * $ 819,982 $ 784,322 $ 662,449
Less: Economic interest expense * 449,624
411,217 347,501 Economic net interest income
(excluding PAA) * $ 370,358 $ 373,105
$ 314,948
* 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 September
30, 2018 June 30,2018
September 30, 2017
Economic Metrics
(Excluding PAA)
(dollars in thousands) Average interest earning assets $
101,704,957 $ 102,193,435 $ 89,253,094
Interest income (excluding PAA) * $ 819,982 $ 784,322 $ 662,449
Average yield on interest earning assets (excluding PAA) * 3.22 %
3.07 % 2.97 % Average interest bearing liabilities $
86,638,082 $ 87,103,807 $ 76,382,315 Economic interest expense * $
449,624 $ 411,217 $ 347,501 Average cost of interest bearing
liabilities 2.08 % 1.89 % 1.82 %
Economic net interest income (excluding PAA) * $ 370,358 $ 373,105
$ 314,948 Net interest spread (excluding PAA) * 1.14 %
1.18 % 1.15 % Interest income
(excluding PAA) * $ 819,982 $ 784,322 $ 662,449 TBA dollar roll
income and CMBX coupon income 56,570 62,491 94,326 Interest expense
(500,973 ) (442,692 ) (268,937 ) Net interest component of interest
rate swaps 51,349 31,475
(88,211 )
Subtotal $ 426,928 $ 435,596
$ 399,627 Average interest earnings
assets $ 101,704,957 $ 102,193,435 $ 89,253,094 Average TBA
contract and CMBX balances 12,216,863
9,407,819 19,291,834
Subtotal $
113,921,820 $ 111,601,254
$ 108,544,928 Net interest margin (excluding PAA) * 1.50 %
1.56 % 1.47 %
* Represents a non-GAAP financial
measure.
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Annaly Capital Management, Inc.Investor
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