Annaly Capital Management, Inc. (NYSE:NLY) (the “Company” or “Annaly”)
today announced its financial results for the quarter ended June 30,
2018.
Quarterly Financial Highlights
Business Highlights
“Amidst a challenging market environment, Annaly delivered another
strong quarter demonstrating the durability of our business model,”
commented Kevin Keyes, Chairman, Chief Executive Officer and President.
“We continued to further expand our investments into lower levered,
floating rate credit cash flows while producing core earnings of $0.30
per share and core ROE at its highest return since our diversification
strategy began in 2014. The ongoing expansion of our proprietary
partnerships in Residential Credit, Commercial Real Estate and Middle
Market Lending enable us to source unique and complementary investment
opportunities at attractive risk adjusted returns.
“During the quarter we also successfully continued our acquisition
strategy with the announcement of the $900 million purchase of MTGE
Investment Corp. The transaction further enhances the scale and
diversification of our investment platform, is accretive to earnings,
provides immediate cost savings, increases our equity base for continued
growth and reinforces Annaly’s stature as a market leading industry
consolidator.”
Financial Performance
The following table summarizes certain key performance indicators as of
and for the quarters ended June 30, 2018, March 31, 2018 and June 30,
2017:
Core Earnings Metrics: *
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; our ability to maintain our exemption
from registration under the Investment Company Act of 1940, as amended;
and our ability to consummate the proposed MTGE Acquisition on a timely
basis or at all, and potential business disruption following the MTGE
Acquisition. 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,
in the Investors section. 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, the media and others interested in Annaly
to monitor the Investors section of 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. The information contained on, or that may be
accessed through, the Company’s webpage is not incorporated by reference
into, and is not a part of, this document.
The Company prepares a supplemental investor presentation and a
financial summary for the benefit of its shareholders. Both the Second
Quarter 2018 Investor Presentation and the Second 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 second quarter 2018 earnings conference call
on August 2, 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 1905089. 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
10121993. If you would like to be added to the e-mail distribution list,
please visit www.annaly.com,
click on Investors, then select Email Alerts and complete the email
notification form.
Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)
June 30, 2018
March 31, 2018
December 31, 2017 (1)
September 30, 2017
June 30, 2017
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(dollars in thousands, except per share data)
June 30, 2018
March 31, 2018
December 31,2017
September 30, 2017
June 30, 2017
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(dollars in thousands, except per share data)
Key Metrics
The following table presents key metrics of the Company’s portfolio,
liabilities and hedging positions, and performance as of and for the
quarters ended June 30, 2018, March 31, 2018, and June 30, 2017:
Portfolio Related Metrics:
Liabilities and Hedging Metrics:
Performance Related Metrics:
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:
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 comprised of interest income plus TBA dollar roll
incomei, less financing and hedging costs and general and
administrative expenses, and core earnings (excluding PAA), 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 defines “core earnings”, a non-GAAP measure, as net income
(loss) excluding gains or losses on disposals of investments and
termination or maturity of interest rate swaps, unrealized gains or
losses on interest rate swaps and instruments measured at fair value
through earnings, net gains and losses on other derivatives, impairment
losses, net income (loss) attributable to noncontrolling interest,
transaction expenses and certain other non-recurring gains or losses,
and inclusive of TBA dollar roll income (a component of Net gains
(losses) on other derivatives) and realized amortization of MSRs (a
component of net unrealized gains (losses) on instruments measured at
fair value through earnings). Core earnings (excluding PAA) excludes 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.
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.
i TBA dollar roll transactions are accounted for as
derivatives, with gains and losses reflected as a component of Net gains
(losses) on other derivatives in the Company’s Consolidated Statements
of Comprehensive Income (Loss). TBA dollar roll income represents the
economic equivalent of interest income on the underlying security less
the implied cost of financing.
The following table presents a reconciliation of GAAP financial results
to non-GAAP core earnings for the periods presented:
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).
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 Investment Securities
portfolio for the quarters ended June 30, 2018, March 31, 2018, and
June 30, 2017:
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.
Interest Income (Excluding PAA)
Reconciliation
Economic Interest Expense
Reconciliation
Economic Net Interest Income
(Excluding PAA) Reconciliation
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 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 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.
Economic Metrics (Excluding PAA)
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