Annaly Capital Management, Inc. Reports 3rd Quarter 2014 Results

Annaly Capital Management, Inc. (NYSE:NLY) today announced its financial results for the quarter ended September 30, 2014.

Financial Performance

GAAP net income for the quarter ended September 30, 2014 was $354.9 million, or $0.36 per average common share, compared to a GAAP net loss of $335.5 million, or $0.37 per average common share, for the quarter ended June 30, 2014, and GAAP net income of $192.5 million, or $0.18 per average common share, for the quarter ended September 30, 2013. The increase in net income from the quarter ended June 30, 2014 to the quarter ended September 30, 2014 was primarily attributable to net losses on terminations of interest rate swaps incurred in the prior quarter, partially offset by lower unrealized gains on swaps for the current quarter. The increase from the quarter ended September 30, 2013 to the quarter ended September 30, 2014 was largely driven by higher unrealized gains on interest rate swaps and lower realized losses on interest rate swaps during the current quarter. Core earnings for the quarter ended September 30, 2014 was $308.6 million, or $0.31 per average common share, compared to $300.4 million, or $0.30 per average common share, for the quarter ended June 30, 2014, and $282.3 million, or $0.28 per average common share, for the quarter ended September 30, 2013. "Core earnings" represents a non-GAAP measure and is defined as net income (loss) excluding gains or losses on disposals of investments and termination of interest rate swaps, unrealized gains or losses on interest rate swaps and Agency interest-only mortgage-backed securities, net gains and losses on trading assets, impairment losses, and certain other non-recurring gains or losses.

Net interest margin for the quarters ended September 30, 2014, June 30, 2014 and September 30, 2013 was 1.61%, 1.57% and 1.34%, respectively. Net interest margin represents the Company’s annualized economic net interest income, inclusive of interest expense on interest rate swaps, divided by its average interest-earning assets. For the quarter ended September 30, 2014, the average yield on interest earning assets was 2.99% and the average cost of interest bearing liabilities, including the net interest payments on interest rate swaps, was 1.64%, which resulted in a net interest spread of 1.35%. Our average yield on interest earning assets decreased for the quarter ended September 30, 2014 when compared to the quarter ended June 30, 2014 as a result of higher amortization expense in the current quarter driven by faster prepayment speeds experienced quarter over quarter due to loan seasonality. Our average cost of interest bearing liabilities decreased for the quarter ended September 30, 2014 when compared to the quarter ended June 30, 2014 due to interest rate swap unwinds throughout the prior quarter.

Wellington J. Denahan, Chairman and Chief Executive Officer of Annaly, commented on the Company’s results. “We welcome the end of Quantitative Easing and look forward to the opportunities it presents as the mortgage market begins to adjust to fewer direct policy impacts on fundamentals. We expect the market to endure higher levels of volatility but remain comfortable in our continued ability to deliver attractive relative returns.”

Asset Portfolio

Investment Securities, which are comprised of Agency mortgage-backed securities and Agency debentures, were $82.8 billion at September 30, 2014, compared to $82.4 billion at June 30, 2014 and $83.0 billion at September 30, 2013. As of September 30, 2014, substantially all of the Company’s Investment Securities were Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities and debentures. Fixed-rate Agency mortgage-backed securities and debentures comprised 95% of the Company’s Investment Securities portfolio at September 30, 2014. Adjustable-rate Agency mortgage-backed securities and debentures comprised 5% of the Company’s Investment Securities portfolio. During the quarter ended September 30, 2014, the Company disposed of $4.2 billion of Investment Securities, resulting in a realized gain of $4.7 million. During the quarter ended June 30, 2014, the Company disposed of $6.1 billion of Investment Securities, resulting in a realized gain of $5.9 million. During the quarter ended September 30, 2013, the Company disposed of $13.0 billion of Investment Securities, resulting in a realized gain of $43.6 million.

The Constant Prepayment Rate for the quarters ended September 30, 2014, June 30, 2014, and September 30, 2013, was 9%, 7% and 13%, respectively. The net amortization of premiums and accretion of discounts on Investment Securities for the quarters ended September 30, 2014, June 30, 2014, and September 30, 2013, was $197.7 million, $149.6 million, and $201.9 million, respectively. The total net premium balance on Investment Securities at September 30, 2014, June 30, 2014, and September 30, 2013, was $5.5 billion, $5.4 billion, and $4.7 billion, respectively. The weighted average amortized cost basis of the Company’s non-interest-only Investment Securities at September 30, 2014, June 30, 2014, and September 30, 2013, was 105.4%, 105.5%, and 104.7%, respectively. The weighted average amortized cost basis of the Company’s interest-only Investment Securities at September 30, 2014, June 30, 2014, and June 30, 2013, was 15.2%, 15.1%, and 13.8%, respectively.

The Company’s commercial investment portfolio consists of commercial real estate investments and corporate debt. Commercial real estate debt and preferred equity, including securitized loans, totaled $1.6 billion and investments in commercial real estate totaled $73.8 million at September 30, 2014. Commercial real estate debt and preferred equity, including securitized loans, totaled $1.6 billion and investments in commercial real estate totaled $74.4 million at June 30, 2014. The commercial investment portfolio, net of financing, represented 11% of stockholders’ equity at September 30, 2014, compared to 11% at June 30, 2014. The weighted average yield on commercial real estate debt and preferred equity as of September 30, 2014, June 30, 2014, and September 30, 2013, was 9.23%, 8.93% and 9.71%, respectively. The weighted average levered equity yield on investments in commercial real estate, excluding real estate held-for-sale, as of September 30, 2014, June 30, 2014, and September 30, 2013, was 8.33%, 9.23% and 14.13%, respectively.

Capital and Funding

At September 30, 2014, total stockholders’ equity was $13.1 billion. Leverage at September 30, 2014, June 30, 2014, and September 30, 2013, was 5.4:1, 5.3:1 and 5.4:1, respectively. Leverage includes repurchase agreements, Convertible Senior Notes, securitized debt, loan participation and mortgages payable. Securitized debt, loan participation and mortgages payable are non-recourse to the Company. At September 30, 2014, June 30, 2014, and September 30, 2013, the Company’s capital ratio, which represents the ratio of stockholders’ equity to total assets, was 15.0%, 15.4%, and 13.9%, respectively. At September 30, 2014, June 30, 2014, and September 30, 2013, the Company’s net capital ratio was 15.0%, 15.4%, and 14.8%, respectively. The Company’s net capital ratio takes into account the net balances of its U.S Treasury securities and U.S Treasury securities sold, not yet purchased, reverse repurchase agreements and repurchase agreements, and securities borrowed and securities loaned. On a GAAP basis, the Company produced an annualized return (loss) on average equity for the quarters ended September 30, 2014, June 30, 2014, and September 30, 2013 of 10.69%, (10.32%), and 5.87%, respectively. On a Core earnings basis, the Company provided an annualized return on average equity for the quarters ended September 30, 2014, June 30, 2014, and September 30, 2013, of 9.30%, 9.24%, and 8.62%, respectively.

At September 30, 2014, June 30, 2014, and September 30, 2013 the Company had outstanding $69.6 billion, $70.4 billion, and $69.2 billion of repurchase agreements, respectively, with weighted average remaining maturities of 159 days, 173 days, and 200 days, respectively, and with weighted average borrowing rates of 1.61%, 1.59%, and 2.02%, respectively, after giving effect to the Company’s interest rate swaps.

At September 30, 2014, June 30, 2014, and September 30, 2013, the Company had a common stock book value per share of $12.87, $13.23 and $12.70, respectively.

The following table presents the principal balance and weighted average rate of repurchase agreements by maturity at September 30, 2014:

Hedge Portfolio

At September 30, 2014, the Company had outstanding interest rate swaps with a net notional amount of $31.5 billion and interest rate swaptions with a net notional amount of $1.9 billion, representing 48% of the Company’s repurchase agreements. Interest rate swaps and swaptions represented 48% of the Company’s repurchase agreements at June 30, 2014 and 85% of the Company’s repurchase agreements at September 30, 2013. Changes in the unrealized gains or losses on the interest rate swaps are reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The purpose of the interest rate swaps is to mitigate the risk of rising interest rates that affect the Company’s cost of funds. Since the Company pays a fixed rate and receives a floating rate on the notional amount of the swaps, the intended effect of the swaps is to lock in a cost of financing. As of September 30, 2014, the swap portfolio, excluding forward starting swaps, had a weighted average pay rate of 2.48%, a weighted average receive rate of 0.21% and weighted average maturity of 8.61 years.

At September 30, 2014, the Company had entered into interest rate swaptions with a net notional amount of $1.9 billion. Changes in the unrealized gains or losses on the interest rate swaptions are reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The interest rate swaptions provide the Company with the option to enter into an interest rate swap agreement for a specified notional amount, duration, and pay and receive rates. As of September 30, 2014, the long swaption portfolio had a weighted average pay rate of 3.13% and weighted average maturity of 4.82 months. As of September 30, 2014, there were no short swaption positions.

The following table summarizes certain characteristics of the Company’s interest rate swaps at September 30, 2014:

The following table summarizes certain characteristics of the Company’s interest rate swaptions at September 30, 2014:

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 September 30, 2014, June 30, 2014, and September 30, 2013:

The following table presents a reconciliation between GAAP net income and Core earnings for the quarters ended September 30, 2014, June 30, 2014, and September 30, 2013:

The following table presents the components of the Company’s interest income and interest expense for the quarters ended September 30, 2014, June 30, 2014, and September 30, 2013:

Dividend Declarations

Common dividends declared for the quarters ended September 30, 2014, June 30, 2014, and September 30, 2013 were $0.30, $0.30, and $0.35 per common share, respectively. The Company distributes dividends based on its current estimate of taxable earnings per common share, not GAAP net income. Taxable earnings and GAAP net income will typically differ due to items such as non-taxable unrealized and realized gains and losses, differences in premium amortization and discount accretion, non-deductible general and administrative expenses and other GAAP to tax differences. The annualized dividend yield on the Company’s common stock for the quarter ended September 30, 2014, based on the September 30, 2014 closing price of $10.68, was 11.24%, compared to 10.50% for the quarter ended June 30, 2014, and 12.09% for the quarter ended September 30, 2013.

Other Information

Annaly’s principal business objective is to generate net income for distribution to its shareholders from its investments. Annaly is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”). Annaly is managed and advised by Annaly Management Company LLC.

The Company prepares a supplement to provide additional quarterly information for the benefit of its shareholders. The supplement can be found at the Company’s website in the Investor Relations section under “Quarterly Supplemental Information”.

Conference Call

The Company will hold the third quarter 2014 earnings conference call on November 6, 2014 at 10:00 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 7019208. There will also be an audio webcast of the call on www.annaly.com. The replay of the call is 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 10054796. If you would like to be added to the e-mail distribution list, please visit www.annaly.com, click on Investor Relations, then select Email Alerts and complete the email notification form.

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 financings; changes in the market value of our assets; changes in business conditions and the general economy; our ability to grow the commercial mortgage business; credit risks related to our investments in commercial real estate assets and corporate debt; our ability to consummate any contemplated investment opportunities; changes in government regulations affecting our business; our ability to maintain our qualification as a REIT for federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended; risks associated with the businesses of our subsidiaries, including the investment advisory business of a wholly-owned subsidiary and the broker-dealer business of a wholly-owned subsidiary. 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.