Annaly Capital Management, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Annaly is an internally managed mortgage REIT investing mainly in Agency mortgage-backed securities (MBS), residential credit, mortgage servicing rights (MSR), and middle-market corporate loans. This filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. Annaly announced it would exit its commercial real estate (CRE) business.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Interest income | $383.9 million | $584.8 million | $1,147.3 million | $1,139.8 million |
| Net interest income | $322.9 million | $398.8 million | $1,010.3 million | $450.3 million |
| Net income (loss) attributable to common stockholders | $(322.5) million | $820.7 million | $1,401.4 million | $(2,855.1) million |
| GAAP diluted earnings (loss) per common share | $(0.23) | $0.58 | $1.00 | $(2.00) |
| Non-GAAP earnings available for distribution (EAD) per common share | $0.30 | $0.27 | $0.59 | $0.48 |
| Net interest margin, GAAP | 1.66% | 1.89% | 2.54% | 0.90% |
| Net interest margin excluding PAA, non-GAAP | 2.09% | 1.88% | 2.00% | 1.50% |
At June 30, total assets were $82.4 billion, down from $88.5 billion at year-end 2020; total liabilities were $68.7 billion and total equity was $13.6 billion. Repurchase agreements totaled $60.2 billion, compared with $64.8 billion at year-end. Cash and cash equivalents were $1.38 billion, and reported unencumbered financial assets were $9.65 billion. Six-month operating cash flow was $1.57 billion, versus cash used of $1.34 billion in the prior-year period.
Common book value was $8.37 per share at quarter-end. Management reported a Q2 economic return of negative 4.0% and a $0.58 decline in book value per share during the quarter. The quarterly common dividend declared was $0.22 per share. GAAP leverage was 4.7:1 and economic leverage was 5.8:1 at quarter-end; economic leverage is a non-GAAP measure.
Material changes and management commentary
- Q2 GAAP results swung to a loss from prior-year profit, reflecting weaker derivative and investment fair-value results. In Q2 2020, large swap termination losses and offsetting unrealized gains also made the comparison unusually volatile.
- Despite lower GAAP net interest income year over year in Q2, EAD per share rose to $0.30 from $0.27. Management attributed the improvement mainly to lower borrowing costs and higher TBA dollar-roll income, partly offset by lower coupon income and less favorable swap net interest.
- Management said 10-year Treasury yields fell nearly 30 basis points in Q2, Agency MBS spreads widened, and higher-coupon MBS faced elevated prepayments. Annaly said it reduced leverage, added interest-rate hedges, and shifted capital toward credit investments it viewed as having more attractive risk-adjusted returns. Credit investments increased from 27% to 29% of the aggregate portfolio.
- Annaly agreed to sell substantially all of its CRE business to Slate for $2.33 billion. The six-month results included $248.0 million of business-divestiture-related losses, including a $71.8 million goodwill impairment and held-for-sale valuation and transaction-cost adjustments. A significant majority of assets transferred in the first closing in July 2021; the company reported receiving over 80% of the capital by the filing date. Remaining transfers were expected in the second half of 2021, subject to customary conditions and regulatory approvals.
- Annaly issued 45.5 million common shares through its at-the-market program for net proceeds of $420.4 million during the first half. No shares were repurchased under its $1.5 billion repurchase authorization during the period.
Outlook, risks, and unusual items
The filing provides no specific earnings or dividend guidance. Management expected to continue financing Residential Securities largely through repurchase agreements and said it could also use securitizations, credit facilities, or other term financing. It described the CRE sale as on track for completion in the second half of 2021.
Key risks include interest-rate and yield-curve changes, MBS spread widening, mortgage prepayments, collateral calls and repo-market access, credit losses in non-Agency and lending portfolios, counterparty performance, and the timing and completion of the CRE sale. Management’s sensitivity analysis estimated that an immediate 25-basis-point rate increase would raise projected economic net interest income by 10.3% but reduce portfolio value by 0.1%; a 25-basis-point MBS spread widening was estimated to reduce NAV by 1.8%. These are model estimates, not forecasts, and assume no management actions. Annaly also noted LIBOR-related contracts extending beyond June 30, 2023 will need replacement rates; it said its transition work was on track.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no pending material legal proceedings or material contingencies at June 30, 2021.
Important facts for investors to verify
- Reconcile GAAP losses and book-value changes with EAD, a non-GAAP measure whose definition and adjustments differ from GAAP results.
- Track completion of the CRE divestiture, final proceeds, remaining asset transfers, and any further valuation or transaction adjustments.
- Assess Agency MBS spread, prepayment, interest-rate, and hedging exposures, including the effect of collateral requirements on liquidity.
- Review repo funding concentration and maturities, available unencumbered assets, and the sustainability of the $0.22 quarterly common dividend.
- Evaluate dilution from the 45.5 million shares issued and the impact of planned CRE capital redeployment on portfolio mix and leverage.