Annaly Capital Management, Inc. (NYSE: NLY) ("Annaly" or the "Company") today announced its financial results for the quarter ended June 30, 2023.
Financial Highlights
- GAAP net income of $0.27 per average common share for the quarter
- Earnings available for distribution ("EAD") of $0.72 per average common share for the quarter
- Economic return of 2.9% for the second quarter
- Annualized GAAP return on average equity of 5.4% and annualized EAD return on average equity of 13.2%
- Book value per common share of $20.73
- GAAP leverage of 6.1x, up from 5.9x in the prior quarter; economic leverage of 5.8x, down from 6.4x in the prior quarter
- Declared quarterly common stock cash dividend of $0.65 per share
Business Highlights
Investment and Strategy
- Total portfolio of $78.9 billion, including $71.4 billion in highly liquid Agency portfolio(1)
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Annaly's Agency portfolio declined by 8%, predominantly through reductions to its TBA position early in the quarter, to proactively manage leverage ahead of expected volatility events; portfolio additions focused on increasing exposure to higher coupon specified pools
- Annaly's Agency portfolio represents 69% of dedicated equity capital(2), up from 67% in the prior quarter
- Maintained a conservative hedge position amidst elevated macroeconomic uncertainty and actively managed yield curve exposure in line with a modest flattening bias throughout the quarter
- Annaly's Mortgage Servicing Rights ("MSR") portfolio grew 19% quarter-over-quarter to $2.2 billion(3) in assets, representing 15% of dedicated equity capital(2)
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Annaly's Residential Credit portfolio declined modestly to $4.9 billion(1), representing 16% of dedicated equity capital(2), driven by robust securitization issuance
- Annaly Residential Credit Group's whole loan correspondent channel continued to expand market share with the second quarter representing its highest quarterly loan lock volume since inception, nearly 20% higher than the prior highest quarter
Financing and Capital
- $6.0 billion of unencumbered assets(4), including cash and unencumbered Agency MBS of $4.4 billion
- Average GAAP cost of interest bearing liabilities increased 48 basis points to 5.00% and average economic cost of interest bearing liabilities increased 43 basis points to 2.77% quarter-over-quarter
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Annaly Residential Credit Group priced eight whole loan securitizations totaling over $3.0 billion in proceeds since the beginning of the year(5)
- Annaly remains the largest non-bank issuer and is now the second largest issuer overall of Prime Jumbo and Expanded Credit MBS from the beginning of 2022 through the second quarter of 2023(6)
Corporate Responsibility & Governance
- Published fourth ESG Report, titled 25 Years of Purposeful Housing Finance Leadership, demonstrating Annaly's continued progress on its environmental, social and governance initiatives
"We were pleased to generate a 3% economic return in the second quarter of 2023 driven by our proactive portfolio management and an improved operating environment," remarked David Finkelstein, Annaly’s Chief Executive Officer and Chief Investment Officer. "As we have noted for some time, Annaly is well-prepared for volatility and strategically managed our leverage position during the quarter given uncertainties emanating from the regional banking turbulence and debt ceiling negotiations. These efforts enabled book value to end the quarter effectively unchanged while our portfolio out-earned our dividend. Overall, we have generated a 6% economic return for the first half of the year despite substantial market volatility – demonstrating the stability and efficacy of our diversified housing finance model.
"As we begin the second half of the year, our outlook is optimistic given strong investment returns, declining volatility, a stable financing environment and a likely end to the Federal Reserve's rate hiking cycle. We remain overweight Agency MBS given the relative attractiveness of the sector, though we continue to actively pursue opportunities across our Residential Credit and MSR portfolios to enhance risk-adjusted returns."
(1) | Total portfolio represents Annaly’s investments that are on-balance sheet as well as investments that are off-balance sheet in which Annaly has economic exposure. Assets exclude assets transferred or pledged to securitization vehicles of $11.3 billion, include TBA purchase contracts (market value) of $3.6 billion, unsettled MSR commitments of $126 million and $1.2 billion of retained securities that are eliminated in consolidation and are shown net of participations issued totaling $0.5 billion. MSR commitments represent the market value of deals where Annaly has executed a letter of intent. There can be no assurance whether these deals will close or when they will close. | |
(2) | Capital allocation for each of the investment strategies is calculated as the difference between each investment strategy’s allocated assets, which include TBA purchase contracts, and liabilities. Dedicated capital allocations as of June 30, 2023 exclude commercial real estate assets. | |
(3) | Includes limited partnership interests in a MSR fund, which is reported in Other Assets, and unsettled commitments of $126 million. MSR commitments represent the market value of deals where Annaly has executed a letter of intent. There can be no assurance whether these deals close or when they will close. | |
(4) | Represents Annaly’s excess liquidity and defined as assets that have not been pledged or securitized (generally including cash and cash equivalents, Agency MBS, CRT, Non-Agency MBS, residential mortgage loans, MSR, reverse repurchase agreements, other unencumbered financial assets and capital stock). | |
(5) | Includes a $401 million residential whole loan securitization that priced in July 2023. | |
(6) | Issuer ranking data from Inside Nonconforming Markets for 2022 through Q2 2023. |
Financial Performance
The following table summarizes certain key performance indicators as of and for the quarters ended June 30, 2023, March 31, 2023 and June 30, 2022:
June 30, 2023 | March 31, 2023 | June 30, 2022 | |||||||||
Book value per common share | $ | 20.73 | $ | 20.77 | $ | 23.59 | |||||
GAAP leverage at period-end (1) | 6.1:1 | 5.9:1 | 5.4:1 | ||||||||
GAAP net income (loss) per average common share (2) | $ | 0.27 | $ | (1.79 | ) | $ | 2.21 | ||||
Annualized GAAP return (loss) on average equity | 5.42 | % | (28.84 | %) | 30.60 | % | |||||
Net interest margin (3) | (0.15 | %) | 0.09 | % | 2.64 | % | |||||
Average yield on interest earning assets (4) | 4.27 | % | 3.96 | % | 3.58 | % | |||||
Average GAAP cost of interest bearing liabilities (5) | 5.00 | % | 4.52 | % | 1.12 | % | |||||
Net interest spread | (0.73 | %) | (0.56 | %) | 2.46 | % | |||||
Non-GAAP metrics * | |||||||||||
Earnings available for distribution per average common share (2) | $ | 0.72 | $ | 0.81 | $ | 1.22 | |||||
Annualized EAD return on average equity | 13.22 | % | 14.82 | % | 17.49 | % | |||||
Economic leverage at period-end (1) | 5.8:1 | 6.4:1 | 6.6:1 | ||||||||
Net interest margin (excluding PAA) (3) | 1.66 | % | 1.76 | % | 2.20 | % | |||||
Average yield on interest earning assets (excluding PAA) (4) | 4.22 | % | 3.96 | % | 2.87 | % | |||||
Average economic cost of interest bearing liabilities (5) | 2.77 | % | 2.34 | % | 1.11 | % | |||||
Net interest spread (excluding PAA) | 1.45 | % | 1.62 | % | 1.76 | % | |||||
* Represents a non-GAAP financial measure. Please refer to the "Non-GAAP Financial Measures" section for additional information. (1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles and participations issued divided by total equity. Economic leverage is 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. Debt issued by securitization vehicles and participations issued are non-recourse to the Company and are excluded from economic leverage. (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 does not include net interest component of interest rate swaps. 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. | |||||||||||
Updates to Financial Disclosures
On September 8, 2022, the Company announced that its Board of Directors had unanimously approved a reverse stock split of the Company’s common stock at a ratio of 1-for-4 (the "Reverse Stock Split"). The Reverse Stock Split was effective following the close of business on September 23, 2022 (the "Effective Time"). Accordingly, at the Effective Time, every four issued and outstanding shares of the Company’s common stock were converted into one share of the Company’s common stock. No fractional shares were issued in connection with the Reverse Stock Split. Instead, each stockholder that would have held fractional shares as a result of the Reverse Stock Split received cash in lieu of such fractional shares. The par value per share of the Company’s common stock remained unchanged at $0.01 per share after the Reverse Stock Split. Accordingly, for all historical periods presented, an amount equal to the par value of the reduced number of shares resulting from the Reverse Stock Split was reclassified from Common stock to Additional paid in capital in the Company’s Consolidated Statements of Financial Condition. All other references made to share or per share amounts in the accompanying consolidated financial statements and disclosures have also been retroactively adjusted, where applicable, to reflect the effects of the Reverse Stock Split.
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. Such statements include those relating to the Company’s future performance, macro outlook, the interest rate and credit environments, tax reform and future opportunities. 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 ("MBS") and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of the Company’s assets; changes in business conditions and the general economy; the Company’s ability to grow its residential credit business; the Company's ability to grow its mortgage servicing rights business; credit risks related to the Company’s investments in credit risk transfer securities and residential mortgage-backed securities and related residential mortgage credit assets; risks related to investments in mortgage servicing rights; the Company’s ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting the Company’s business; the Company’s ability to maintain its qualification as a REIT for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; and risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law.
Annaly is a leading diversified capital manager with investment strategies across mortgage finance. 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 is internally managed and has elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. Additional information on the company can be found at www.annaly.com.
We use our website (www.annaly.com) and LinkedIn account (www.linkedin.com/company/annaly-capital-management) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about Annaly when you enroll your email address by visiting the "Investors" section of our website, then clicking on "Investor Resources" and selecting "Email Alerts" to complete the email notification form. Our website, any alerts and social media channels are not incorporated by reference into, and are not a part of, this document.
The Company prepares an investor presentation and supplemental financial information for the benefit of its shareholders. Please refer to the investor presentation for definitions of both GAAP and non-GAAP measures used in this news release. Both the Second Quarter 2023 Investor Presentation and the Second Quarter 2023 Supplemental Information 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 2023 earnings conference call on July 27, 2023 at 9:00 a.m. Eastern Time. Participants are encouraged to pre-register for the conference call to receive a unique PIN to gain immediate access to the call and bypass the live operator. Pre-registration may be completed by accessing the pre-registration link found on the homepage or "Investors" section of the Company's website at www.annaly.com, or by using the following link: https://dpregister.com/sreg/10180570/f9db28395a. 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 4465075. 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,
| March 31,
| December 31,
| September 30,
| June 30,
| |||||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||
Assets | |||||||||||||||||||
Cash and cash equivalents | $ | 1,236,872 | $ | 1,794,173 | $ | 1,576,714 | $ | 1,466,171 | $ | 853,932 | |||||||||
Securities | 71,202,461 | 69,238,185 | 65,789,907 | 66,839,353 | 59,042,734 | ||||||||||||||
Loans, net | 1,154,320 | 1,642,822 | 1,809,832 | 1,551,707 | 1,487,133 | ||||||||||||||
Mortgage servicing rights | 2,018,896 | 1,790,980 | 1,748,209 | 1,705,254 | 1,421,420 | ||||||||||||||
Interests in MSR | — | — | — | — | 83,622 | ||||||||||||||
Assets transferred or pledged to securitization vehicles | 11,318,419 | 10,277,588 | 9,121,912 | 9,202,014 | 8,877,247 | ||||||||||||||
Assets of disposal group held for sale | — | — | — | 11,371 | 97,414 | ||||||||||||||
Derivative assets | 457,119 | 400,139 | 342,064 | 1,949,530 | 748,432 | ||||||||||||||
Receivable for unsettled trades | 787,442 | 679,096 | 575,091 | 2,153,895 | 434,227 | ||||||||||||||
Principal and interest receivable | 944,537 | 773,722 | 637,301 | 262,542 | 300,028 | ||||||||||||||
Intangible assets, net | 15,163 | 15,921 | 16,679 | 17,437 | 18,195 | ||||||||||||||
Other assets | 195,248 | 219,391 | 233,003 | 247,490 | 272,865 | ||||||||||||||
