Annaly Capital Management, Inc. (NYSE: NLY) (“Annaly” or the
“Company”) today announced its financial results for the quarter
ended March 31, 2023.
Financial Highlights
- GAAP net income (loss) of ($1.79) per average common share for
the quarter
- Earnings available for distribution (“EAD”) of $0.81 per
average common share for the quarter
- Economic return of 3.0% for the first quarter
- Annualized GAAP return (loss) on average equity of (28.8%) and
annualized EAD return on average equity of 14.8%
- Book value per common share of $20.77
- GAAP leverage of 5.9x, down from 6.0x in the prior quarter;
economic leverage of 6.4x, up from 6.3x in the prior quarter
- Declared quarterly common stock cash dividend of $0.65 per
share
Business Highlights
Investment and Strategy
- Total assets of $85.5 billion, including $77.6 billion in
highly liquid Agency portfolio(1)
- Annaly Agency Group represents 67% of dedicated equity
capital(2) with portfolio growth driven by deployment of accretive
equity raised early in the quarter while portfolio distribution
migrated marginally up in coupon
- Added swap hedges to correspond with assets purchased
throughout the quarter as we maintained a defensive duration
position amid elevated volatility in yields
- Annaly’s Mortgage Servicing Rights (“MSR”) portfolio was
relatively unchanged quarter-over-quarter with $1.8 billion(3) in
assets representing 15% of dedicated equity capital(2)
- Annaly Residential Credit Group grew assets modestly to $5.2
billion(1), representing 18% of dedicated equity capital(2), driven
by ~$100 million of OBX retained securities across three deals
settled in the first quarter
- Received a 2022 SHARP award from Freddie Mac, recognizing
superior mortgage servicing portfolio performance
Financing and Capital
- $5.7 billion of unencumbered assets(4), including cash and
unencumbered Agency MBS of $3.8 billion
- Average GAAP cost of interest bearing liabilities increased 81
basis points to 4.52% and average economic cost of interest bearing
liabilities increased 23 basis points to 2.34%
quarter-over-quarter
- Annaly Residential Credit Group priced four whole loan
securitizations totaling $1.5 billion in proceeds since the
beginning of the first quarter(5), remaining the largest non-bank
issuer of Prime Jumbo and Expanded Credit MBS from 2022 to
2023(6)
- Annaly Residential Credit Group upsized an existing credit
facility by approximately $200 million during the quarter and
closed a new $250 million facility subsequent to quarter end
- Annaly Mortgage Servicing Rights Group added a new $250 million
credit facility in the first quarter
- Raised $563 million of accretive common equity through the
Company’s at-the-market (“ATM”) sales program(7)
Corporate Responsibility & Governance
- Expanded Board of Directors with election of new Independent
Director Martin Laguerre
- Following the completion of the 2023 Annual Meeting of
Stockholders, 80% of Annaly’s Directors will be independent and 60%
of Directors will identify as women and/or racially/ethnically
diverse(8)
“Despite significant volatility in interest rates and mortgage
spreads throughout the first quarter, Annaly was able to
proactively navigate this challenging environment with book value
effectively unchanged, generating an economic return of 3%,”
remarked David Finkelstein, Annaly’s Chief Executive Officer and
Chief Investment Officer. “As we noted at the start of the year,
Annaly was prepared for market turmoil with prudent leverage,
substantial liquidity and optimal asset allocation. This
conservative positioning enabled us to preserve capital and
liquidity during the quarter, while maintaining the flexibility to
grow when opportunistic, including adding to our Agency portfolio
through accretive issuance under our ATM early in the quarter.
“Looking ahead, we are encouraged by the robust returns
available across our three investment strategies and believe we are
well-positioned to take advantage of opportunities as they arise.
With volatility likely to further decrease as the Federal Reserve
moves closer towards the end of its hiking cycle, we are confident
in our outlook though prepared for any additional market
turbulence.”
(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
$10.3 billion, include TBA purchase contracts (market value) of
$12.0 billion, CMBX derivatives (market value) of $0.4 billion and
$1.1 billion of retained securities that are eliminated in
consolidation and are shown net of participations issued totaling
$0.7 billion.
(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
March 31, 2023 exclude commercial real estate assets.
(3) Includes limited partnership interests
in a MSR fund, which is reported in Other Assets.
(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 $408 million residential
whole loan securitization that priced in April 2023.
(6) Issuer ranking data from Inside
Nonconforming Markets for 2022 to 2023 YTD as of April 7, 2023.
(7) Net of sales agent commissions and
excluding other offering expenses.
(8) Statistics assume all Directors up for
nomination at the 2023 Annual Meeting of Stockholders are
elected.
Financial Performance
The following table summarizes certain key performance
indicators as of and for the quarters ended March 31, 2023,
December 31, 2022 and March 31, 2022:
March 31, 2023
December 31, 2022
March 31, 2022
Book value per common share
$
20.77
$
20.79
$
27.08
GAAP leverage at period-end (1)
5.9:1
6.0:1
5.3:1
GAAP net income (loss) per average common
share (2)
$
(1.79)
$
(1.96)
$
5.46
Annualized GAAP return (loss) on average
equity
(28.84%)
(31.78%)
65.62%
Net interest margin (3)
0.09%
0.65%
3.20%
Average yield on interest earning assets
(4)
3.96%
3.86%
3.61%
Average GAAP cost of interest bearing
liabilities (5)
4.52%
3.71%
0.48%
Net interest spread
(0.56%)
0.15%
3.13%
Non-GAAP metrics *
Earnings available for distribution per
average common share (2)
$
0.81
$
0.89
$
1.11
Annualized EAD return on average
equity
14.82%
16.19%
14.01%
Economic leverage at period-end (1)
6.4:1
6.3:1
6.4:1
Net interest margin (excluding PAA)
(3)
1.76%
1.90%
2.04%
Average yield on interest earning assets
(excluding PAA) (4)
3.96%
3.82%
2.62%
Average economic cost of interest bearing
liabilities (5)
2.34%
2.11%
0.89%
Net interest spread (excluding PAA)
1.62%
1.71%
1.73%
* 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, participations issued and mortgages
payable 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 (excluding
certain non-recourse credit facilities). Certain credit facilities
(included within other secured financing), debt issued by
securitization vehicles, participations issued, and mortgages
payable 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 (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 First Quarter
2023 Investor Presentation and the First 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 first quarter 2023 earnings conference
call on April 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/10177180/f8da7e9f2c.
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 2733167. 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, 2023
December 31, 2022 (1)
September 30,
2022
June 30, 2022
March 31, 2022
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Assets
Cash and cash equivalents
$
1,794,173
$
1,576,714
$
1,466,171
$
853,932
$
955,840
Securities
69,238,185
65,789,907
66,839,353
59,042,734
60,727,637
Loans, net
1,642,822
1,809,832
1,551,707
1,487,133
3,617,818
Mortgage servicing rights
1,790,980
1,748,209
1,705,254
1,421,420
1,108,937
Interests in MSR
—
—
—
83,622
85,653
Assets transferred or pledged to
securitization vehicles
10,277,588
9,121,912
9,202,014
8,877,247
7,809,307
Assets of disposal group held for sale
—
—
11,371
97,414
—
Derivative assets
400,139
342,064
1,949,530
748,432
964,075
Receivable for unsettled trades
679,096
575,091
2,153,895
434,227
407,225
Principal and interest receivable
773,722
637,301
262,542
300,028
246,739
Goodwill and intangible assets, net
15,921
16,679
17,437
18,195
23,110
Other assets
219,391
233,003
247,490
272,865
238,793
Total assets
$
86,832,017
$
81,850,712
$
85,406,764
$
73,637,249
$
76,185,134
Liabilities and stockholders’
equity
Liabilities
Repurchase agreements
$
60,993,018
$
59,512,597
$
54,160,731
$
51,364,097
$
52,626,503
Other secured financing
250,000
250,000
250,000
—
914,255
Debt issued by securitization vehicles
8,805,911
7,744,160
7,844,518
7,502,483
6,711,953
Participations issued
673,431
800,849
745,729
696,944
775,432
Liabilities of disposal group held for
sale
—
—
1,151
3,608
—
Derivative liabilities
473,515
204,172
764,535
379,708
826,972
Payable for unsettled trades
3,259,034
1,157,846
9,333,646
1,995,960
1,992,568
Interest payable
118,395
325,280
30,242
91,962
80,870
Dividends payable
321,023
412,113
411,762
354,027
321,423
Other liabilities
28,657
74,269
912,895
158,560
456,388
Total liabilities
74,922,984
70,481,286
74,455,209
62,547,349
64,706,364
Stockholders’ equity
Preferred stock, par value $0.01 per share
(2)
1,536,569
1,536,569
1,536,569
1,536,569
1,536,569
Common stock, par value $0.01 per share
(3)
4,939
4,683
4,679
4,023
3,653
Additional paid-in capital
23,543,091
22,981,320
22,967,665
21,293,146
20,332,909
Accumulated other comprehensive income
(loss)
(2,550,614)
(3,708,896)
(5,431,436)
(4,310,926)
(2,465,482)
Accumulated deficit
(10,741,863)
(9,543,233)
(8,211,358)
(7,496,061)
(7,980,407)
Total stockholders’ equity
11,792,122
11,270,443
10,866,119
11,026,751
11,427,242
Noncontrolling interests
116,911
98,983
85,436
63,149
51,528
Total equity
11,909,033
11,369,426
10,951,555
11,089,900
11,478,770
Total liabilities and equity
$
86,832,017
$
81,850,712
$
85,406,764
$
73,637,249
$
76,185,134
(1) Derived from the audited consolidated
financial statements at December 31, 2022.
(2) 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 17,000,000 shares authorized, issued and outstanding.
6.75% Series I Preferred Stock - Includes 17,700,000 shares
authorized, issued and outstanding.
(3) Includes 2,936,500,000 shares
authorized. Includes 493,880,938 shares issued and outstanding at
March 31, 2023; 468,309,810 shares issued and outstanding at
December 31, 2022; 467,911,144 shares issued and outstanding at
September 30, 2022; 402,303,874 shares issued and outstanding at
June 30, 2022; 365,253,063 shares issued and outstanding at March
31, 2022.
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, 2023
December 31,
2022
September 30,
2022
June 30, 2022
March 31, 2022
Net interest income
Interest income
$
818,250
$
798,934
$
678,488
$
645,615
$
655,850
Interest expense
798,787
663,847
400,491
170,475
74,922
Net interest income
19,463
135,087
277,997
475,140
580,928
Net servicing income
Servicing and related income
84,273
82,040
74,486
55,685
34,715
Servicing and related expense
7,880
7,659
7,780
5,949
3,757
Net servicing income
76,393
74,381
66,706
49,736
30,958
Other income (loss)
Net gains (losses) on investments and
other
1,712
(1,124,924)
(2,702,512)
(615,216)
(159,804)
Net gains (losses) on derivatives
(900,752)
84,263
2,117,240
1,015,643
1,642,028
Loan loss (provision) reversal
219
(7,258)
1,613
26,913
(608)
Business divestiture-related gains
(losses)
—
(13,013)
(2,936)
(23,955)
(354)
Other, net
15,498
7,569
1,526
(5,486)
3,058
Total other income (loss)
(883,323)
(1,053,363)
(585,069)
397,899
1,484,320
General and administrative
expenses
Compensation expense
29,391
29,714
27,744
22,243
33,002
Other general and administrative
expenses
11,437
13,291
10,178
13,795
12,762
Total general and administrative
expenses
40,828
43,005
37,922
36,038
45,764
Income (loss) before income
taxes
(828,295)
(886,900)
(278,288)
886,737
2,050,442
Income taxes
11,033
(86)
(4,311)
23,420
26,548
Net income (loss)
(839,328)
(886,814)
(273,977)
863,317
2,023,894
Net income (loss) attributable to
noncontrolling interests
4,928
1,548
1,287
(3,379)
1,639
Net income (loss) attributable to
Annaly
(844,256)
(888,362)
(275,264)
866,696
2,022,255
Dividends on preferred stock
31,875
29,974
26,883
26,883
26,883
Net income (loss) available (related)
to common stockholders
$
(876,131)
$
(918,336)
$
(302,147)
$
839,813
$
1,995,372
Net income (loss) per share available
(related) to common stockholders
Basic
$
(1.79)
$
(1.96)
$
(0.70)
$
2.21
$
5.46
Diluted
$
(1.79)
$
(1.96)
$
(0.70)
$
2.20
$
5.46
Weighted average number of common
shares outstanding
Basic
489,688,364
468,250,672
429,858,876
380,609,192
365,340,909
Diluted
489,688,364
468,250,672
429,858,876
380,898,750
365,612,991
Other comprehensive income
(loss)
Net income (loss)
$
(839,328)
$
(886,814)
$
(273,977)
$
863,317
$
2,023,894
Unrealized gains (losses) on
available-for-sale securities
675,374
445,896
(2,578,509)
(2,503,250)
(3,568,679)
Reclassification adjustment for net
(gains) losses included in net income (loss)
482,908
1,276,644
1,457,999
657,806
144,787
Other comprehensive income
(loss)
1,158,282
1,722,540
(1,120,510)
(1,845,444)
(3,423,892)
Comprehensive income (loss)
318,954
835,726
(1,394,487)
(982,127)
(1,399,998)
Comprehensive income (loss) attributable
to noncontrolling interests
4,928
1,548
1,287
(3,379)
1,639
Comprehensive income (loss)
attributable to Annaly
314,026
834,178
(1,395,774)
(978,748)
(1,401,637)
Dividends on preferred stock
31,875
29,974
26,883
26,883
26,883
Comprehensive income (loss)
attributable to common stockholders
$
282,151
$
804,204
$
(1,422,657)
$
(1,005,631)
$
(1,428,520)
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, 2023, December 31, 2022, and
March 31, 2022:
March 31, 2023
December 31, 2022
March 31, 2022
Portfolio related metrics
Fixed-rate Residential Securities as a
percentage of total Residential Securities
98%
98%
97%
Adjustable-rate and floating-rate
Residential Securities as a percentage of total Residential
Securities
2%
2%
3%
Weighted average experienced CPR for the
period
5.5%
7.5%
16.7%
Weighted average projected long-term CPR
at period-end
8.4%
7.8%
9.5%
Liabilities and hedging metrics
Weighted average days to maturity on
repurchase agreements outstanding at period-end
59
27
68
Hedge ratio (1)
106%
107%
106%
Weighted average pay rate on interest rate
swaps at period-end (2)
2.13%
1.74%
0.70%
Weighted average receive rate on interest
rate swaps at period-end (2)
4.87%
4.28%
0.50%
Weighted average net rate on interest rate
swaps at period-end (2)
(2.74%)
(2.54%)
0.20%
GAAP leverage at period-end (3)
5.9:1
6.0:1
5.3:1
GAAP capital ratio at period-end (4)
13.7%
13.9%
15.1%
Performance related metrics
Book value per common share
$
20.77
$
20.79
$
27.08
GAAP net income (loss) per average common
share (5)
$
(1.79)
$
(1.96)
$
5.46
Annualized GAAP return (loss) on average
equity
(28.84%)
(31.78%)
65.62%
Net interest margin (6)
0.09%
0.65%
3.20%
Average yield on interest earning assets
(7)
3.96%
3.86%
3.61%
Average GAAP cost of interest bearing
liabilities (8)
4.52%
3.71%
0.48%
Net interest spread
(0.56%)
0.15%
3.13%
Dividend declared per common share
$
0.65
$
0.88
$
0.88
Annualized dividend yield (9)
13.61%
16.70%
12.50%
Non-GAAP metrics *
Earnings available for distribution per
average common share (5)
$
0.81
$
0.89
$
1.11
Annualized EAD return on average equity
(excluding PAA)
14.82%
16.19%
14.01%
Economic leverage at period-end (3)
6.4:1
6.3:1
6.4:1
Economic capital ratio at period end
(4)
13.2%
13.4%
13.1%
Net interest margin (excluding PAA)
(6)
1.76%
1.90%
2.04%
Average yield on interest earning assets
(excluding PAA) (7)
3.96%
3.82%
2.62%
Average economic cost of interest bearing
liabilities (8)
2.34%
2.11%
0.89%
Net interest spread (excluding PAA)
1.62%
1.71%
1.73%
* 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 and
net forward purchases (sales) of investments; excludes MSR 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. Prior to the quarter ended September 30, 2022, the
hedge ratio excluded the impact of net forward purchases (sales) of
investments from the calculation; all prior periods have been
updated to conform to the current presentation resulting in a
reduction of 3% to the hedge ratio for the quarter ended March 31,
2022.
(2) Excludes forward starting swaps.
(3) GAAP leverage is computed as the sum
of repurchase agreements, other secured financing, debt issued by
securitization vehicles, participations issued and mortgages
payable 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 (excluding
certain non-recourse credit facilities). Certain credit facilities
(included within other secured financing), debt issued by
securitization vehicles, participations issued, and mortgages
payable are non-recourse to the Company and are excluded from
economic leverage.
(4) GAAP capital ratio is computed as
total equity divided by total assets. Economic capital ratio is
computed as total equity divided by total economic assets. Total
economic assets include the implied market value of TBA derivatives
and are net of debt issued by securitization vehicles.
(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 $19.11, $21.08 and $28.16 at March 31,
2023, December 31, 2022 and March 31, 2022, respectively.
The following table contains additional information on our
investment portfolio as of the dates presented:
For the quarters ended
March 31, 2023
December 31, 2022
March 31, 2022
Agency mortgage-backed securities
$
65,623,534
$
62,274,895
$
57,787,141
Residential credit risk transfer
securities
1,085,384
997,557
845,809
Non-agency mortgage-backed securities
2,028,656
1,991,146
1,737,333
Commercial mortgage-backed securities
500,611
526,309
357,354
Total securities
$
69,238,185
$
65,789,907
$
60,727,637
Residential mortgage loans
$
1,642,822
$
1,809,832
$
1,650,151
Corporate debt
—
—
1,967,667
Total loans, net
$
1,642,822
$
1,809,832
$
3,617,818
Mortgage servicing rights
$
1,790,980
$
1,748,209
$
1,108,937
Interests in MSR
$
—
$
—
$
85,653
Agency mortgage-backed securities
transferred or pledged to securitization vehicles
$
—
$
—
$
544,991
Residential mortgage loans transferred or
pledged to securitization vehicles
10,277,588
9,121,912
7,264,316
Assets transferred or pledged to
securitization vehicles
$
10,277,588
$
9,121,912
$
7,809,307
Total investment portfolio
$
82,949,575
$
78,469,860
$
73,349,352
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:
- earnings available for distribution (“EAD”);
- earnings available for distribution attributable to common
stockholders;
- earnings available for distribution per average common
share;
- annualized EAD return on average equity;
- economic leverage;
- economic capital ratio;
- 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 earnings available for distribution, 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.
Earnings available for distribution, earnings available for
distribution attributable to common stockholders, earnings
available for distribution per average common share and annualized
EAD return on average equity
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. Earnings available for distribution,
which is defined as the sum of (a) economic net interest income,
(b) TBA dollar roll income and CMBX coupon income, (c) net
servicing income less realized amortization of MSR, (d) other
income (loss) (excluding depreciation expense related to commercial
real estate and amortization of intangibles, non-EAD income
allocated to equity method investments and other non-EAD 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-EAD income
(loss) items) and excludes (g) 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 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. In addition, EAD
serves as a useful indicator for investors in evaluating the
Company's performance and ability to pay dividends. Annualized EAD
return on average equity, which is calculated by dividing earnings
available for distribution over average stockholders’ equity,
provides investors with additional detail on the earnings available
for distribution generated by the Company’s invested equity
capital.
The following table presents a reconciliation of GAAP financial
results to non-GAAP earnings available for distribution for the
periods presented:
For the quarters ended
March 31, 2023
December 31, 2022
March 31, 2022
(dollars in thousands, except
per share data)
GAAP net income (loss)
$
(839,328)
$
(886,814)
$
2,023,894
Adjustments to exclude reported
realized and unrealized (gains) losses
Net (gains) losses on investments and
other
(1,712)
1,124,924
159,804
Net (gains) losses on derivatives (1)
1,286,458
202,337
(1,704,569)
Loan loss provision (reversal) (2)
(219)
7,258
812
Business divestiture-related (gains)
losses
—
13,013
354
Other adjustments
Depreciation expense related to commercial
real estate and amortization of intangibles (3)
758
758
1,130
Non-EAD (income) loss allocated to equity
method investments (4)
(244)
(306)
(9,920)
Transaction expenses and non-recurring
items (5)
1,358
807
3,350
Income tax effect of non-EAD income (loss)
items
8,278
(418)
27,091
TBA dollar roll income and CMBX coupon
income (6)
18,183
34,767
129,492
MSR amortization (7)
(43,423)
(38,633)
(19,652)
EAD attributable to noncontrolling
interests
(3,470)
(1,548)
(1,639)
Premium amortization adjustment cost
(benefit)
491
(8,136)
(179,516)
Earnings available for distribution
*
427,130
448,009
430,631
Dividends on preferred stock
31,875
29,974
26,883
Earnings available for distribution
attributable to common stockholders *
$
395,255
$
418,035
$
403,748
GAAP net income (loss) per average
common share
$
(1.79)
$
(1.96)
$
5.46
Earnings available for distribution per
average common share *
$
0.81
$
0.89
$
1.11
Annualized GAAP return (loss) on
average equity
(28.84%)
(31.78%)
65.62%
Annualized EAD return on average equity
*
14.82%
16.19%
14.01%
* Represents a non-GAAP financial
measure.
(1) The adjustment to add back Net (gains)
losses on derivatives does not include the net interest component
of interest rate swaps which is reflected in earnings available for
distribution. The net interest component of interest rate swaps
totaled $385.7 million, $286.6 million and ($62.5) million for the
quarters ended March 31, 2023, December 31, 2022 and March 31,
2022, respectively.
(2) Includes $0.0 million, $0.0 million
and $0.2 million of loss provision (reversal) on the Company’s
unfunded loan commitments for the quarters ended March 31, 2023,
December 31, 2022 and March 31, 2022, respectively, which is
reported in Other, net in the Company’s Consolidated Statements of
Comprehensive Income (Loss).
(3) Includes depreciation and amortization
expense related to equity method investments.
(4) The Company excludes non-EAD (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, net.
(5) The quarters ended March 31, 2023,
December 31, 2022, and March 31, 2022 include costs incurred in
connection with securitizations of residential whole loans.
(6) TBA dollar roll income and CMBX coupon
income each represent a component of Net gains (losses) on
derivatives. CMBX coupon income totaled $1.1 million, $1.1 million
and $1.1 million for the quarters ended March 31, 2023, December
31, 2022 and March 31, 2022, respectively.
(7) MSR amortization utilizes purchase
date cash flow assumptions and actual unpaid principal balances and
is calculated as the difference between projected MSR yield income
and net servicing income for the period.
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 derivatives in the Consolidated Statements
of Comprehensive Income (Loss), which includes both unrealized and
realized gains and losses on derivatives.
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 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 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 earnings available for distribution.
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, 2023,
December 31, 2022, and March 31, 2022:
For the quarters ended
March 31, 2023
December 31, 2022
March 31, 2022
(dollars in thousands)
Premium amortization expense
(accretion)
$
56,534
$
38,829
$
(25,353)
Less: PAA cost (benefit)
491
(8,136)
(179,516)
Premium amortization expense (excluding
PAA)
$
56,043
$
46,965
$
154,163
Economic leverage and economic capital ratios
The Company uses capital coupled with borrowed funds to invest
primarily in real estate related investments, earning the spread
between the yield on its assets and the cost of its borrowings and
hedging activities. The Company’s capital structure is designed to
offer an efficient complement of funding sources to generate
positive risk-adjusted returns for its stockholders while
maintaining appropriate liquidity to support its business and meet
the Company’s financial obligations under periods of market stress.
To maintain its desired capital profile, the Company utilizes a mix
of debt and equity funding. Debt funding may include the use of
repurchase agreements, loans, securitizations, participations
issued, lines of credit, asset backed lending facilities, corporate
bond issuance, convertible bonds, mortgages payable or other
liabilities. Equity capital primarily consists of common and
preferred stock.
The Company’s economic leverage ratio is computed as the sum of
recourse debt, cost basis of TBA and CMBX derivatives outstanding,
and net forward purchases (sales) of investments divided by total
equity. Recourse debt consists of repurchase agreements and other
secured financing (excluding certain non-recourse credit
facilities). Certain credit facilities (included within other
secured financing), debt issued by securitization vehicles,
participations issued, and mortgages payable are non-recourse to
the Company and are excluded from economic leverage.
The following table presents a reconciliation of GAAP debt to
economic debt for purposes of calculating the Company’s economic
leverage ratio for the periods presented:
As of
March 31, 2023
December 31, 2022
March 31, 2022
Economic leverage ratio
reconciliation
(dollars in thousands)
Repurchase agreements
$
60,993,018
$
59,512,597
$
52,626,503
Other secured financing
250,000
250,000
914,255
Debt issued by securitization vehicles
8,805,911
7,744,160
6,711,953
Participations issued
673,431
800,849
775,432
Total GAAP debt
$
70,722,360
$
68,307,606
$
61,028,143
Less Non-Recourse Debt:
Credit facilities (1)
$
—
$
—
$
(914,255)
Debt issued by securitization vehicles
(8,805,911)
(7,744,160)
(6,711,953)
Participations issued
(673,431)
(800,849)
(775,432)
Total recourse debt
$
61,243,018
$
59,762,597
$
52,626,503
Plus / (Less):
Cost basis of TBA and CMBX derivatives
$
12,241,647
$
11,050,351
$
19,006,949
Payable for unsettled trades
3,259,034
1,157,846
1,992,568
Receivable for unsettled trades
(679,096)
(575,091)
(407,225)
Economic debt *
$
76,064,603
$
71,395,703
$
73,218,795
Total equity
$
11,909,033
$
11,369,426
$
11,478,770
Economic leverage ratio *
6.4:1
6.3:1
6.4:1
* Represents a non-GAAP financial
measure.
(1) Included in Other secured financing in
the Company’s Consolidated Statements of Financial Condition.
The following table presents a reconciliation of GAAP total
assets to economic total assets for purposes of calculating the
Company’s economic capital ratio for the periods presented:
As of
March 31, 2023
December 31, 2022
March 31, 2022
Economic capital ratio
reconciliation
(dollars in thousands)
Total GAAP assets
$
86,832,017
$
81,850,712
$
76,185,134
Less:
Gross unrealized gains on TBA derivatives
(1)
(167,065)
(17,056)
(24,757)
Debt issued by securitization vehicles
(8,805,911)
(7,744,160)
(6,711,953)
Plus:
Implied market value of TBA
derivatives
12,020,810
10,578,676
18,284,708
Total economic assets *
$
89,879,851
$
84,668,172
$
87,733,132
Total equity
$
11,909,033
$
11,369,426
$
11,478,770
Economic capital ratio *
13.2 %
13.4 %
13.1 %
* Represents a non-GAAP financial
measure.
(1) Included in Derivative assets in the
Company’s Consolidated Statements of Financial Condition.
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, multifamily and reverse mortgages), 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, 2023.
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, 2023
December 31, 2022
March 31, 2022
Interest income (excluding PAA)
reconciliation
(dollars in thousands)
GAAP interest income
$
818,250
$
798,934
$
655,850
Premium amortization adjustment
491
(8,136)
(179,516)
Interest income (excluding PAA)
*
$
818,741
$
790,798
$
476,334
Economic interest expense
reconciliation
GAAP interest expense
$
798,787
$
663,847
$
74,922
Add:
Net interest component of interest rate
swaps
(385,706)
(286,600)
62,541
Economic interest expense *
$
413,081
$
377,247
$
137,463
Economic net interest income (excluding
PAA) reconciliation
Interest income (excluding PAA) *
$
818,741
$
790,798
$
476,334
Less:
Economic interest expense *
413,081
377,247
137,463
Economic net interest income (excluding
PAA) *
$
405,660
$
413,551
$
338,871
* 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, 2023
December 31, 2022
March 31, 2022
Economic metrics (excluding
PAA)
(dollars in thousands)
Average interest earning assets
$
82,644,998
$
82,859,799
$
72,590,876
Interest income (excluding PAA) *
$
818,741
$
790,798
$
476,334
Average yield on interest earning assets
(excluding PAA) *
3.96 %
3.82 %
2.62 %
Average interest bearing liabilities
$
70,635,632
$
69,981,694
$
61,865,292
Economic interest expense *
$
413,081
$
377,247
$
137,463
Average economic cost of interest bearing
liabilities *
2.34 %
2.11 %
0.89 %
Economic net interest income (excluding
PAA) *
$
405,660
$
413,551
$
338,871
Net interest spread (excluding PAA) *
1.62 %
1.71 %
1.73 %
Interest income (excluding PAA) *
$
818,741
$
790,798
$
476,334
TBA dollar roll income and CMBX coupon
income
18,183
34,767
129,492
Economic interest expense *
(413,081)
(377,247)
(137,463)
Subtotal
$
423,843
$
448,318
$
468,363
Average interest earnings assets
$
82,644,998
$
82,859,799
$
72,590,876
Average TBA contract and CMBX balances
13,949,884
11,499,881
19,229,537
Subtotal
$
96,594,882
$
94,359,680
$
91,820,413
Net interest margin (excluding PAA)
*
1.76 %
1.90 %
2.04 %
* Represents a non-GAAP financial
measure.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230425006169/en/
Annaly Capital Management, Inc. Investor Relations 1-888-8Annaly
www.annaly.com
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