Annaly Capital Management, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Annaly is an internally managed mortgage REIT investing in residential and commercial real estate-related assets and middle-market loans. This unaudited filing covers the three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Annaly announced an agreement to sell and exit substantially all of its commercial real estate (CRE) business.
Key financial metrics
| Metric | Q1 2021 | Comparable period / prior date |
|---|---|---|
| Interest income | $763.4 million | $555.0 million in Q1 2020 |
| Interest expense | $76.0 million | $503.5 million in Q1 2020 |
| Net interest income | $687.4 million | $51.6 million in Q1 2020 |
| Net income attributable to Annaly | $1.751 billion | Net loss of $3.640 billion in Q1 2020 |
| Net income available to common stockholders; diluted EPS | $1.724 billion; $1.23 | Net loss of $3.676 billion; loss per share of $2.57 in Q1 2020 |
| Core earnings excluding PAA (non-GAAP); per common share | $439.5 million; $0.29 | $330.2 million; $0.21 in Q1 2020 |
| Net interest margin | 3.39% GAAP; 1.91% excluding PAA (non-GAAP) | 0.18% GAAP; 1.18% excluding PAA in Q1 2020 |
| Total assets | $85.37 billion | $88.46 billion at December 31, 2020 |
| Total equity | $14.07 billion | $14.02 billion at December 31, 2020 |
| Cash and cash equivalents | $1.12 billion | $1.24 billion at December 31, 2020 |
| Repurchase agreements | $61.20 billion | $64.83 billion at December 31, 2020 |
| Leverage | 4.6:1 debt-to-equity; 6.1:1 economic leverage | 5.1:1 and 6.2:1, respectively, at December 31, 2020 |
| Common book value per share | $8.95 | Management reports a marginal improvement during the quarter; the filing excerpt does not state the prior-quarter per-share value clearly |
| Cash flows | $1.06 billion operating inflow; $2.44 billion investing inflow; $3.63 billion financing outflow; cash decreased $120.9 million | Q1 2020 cash decreased $2.02 billion from operations, with substantial offsetting investing and financing flows |
Material changes and interpretation
- GAAP earnings rebounded sharply from the pandemic-disrupted Q1 2020 loss. Annaly attributed the change primarily to improved unrealized results on interest-rate swaps and other instruments, plus higher net interest income.
- Q1 2021 net income included $772.3 million of unrealized interest-rate-swap gains and a $139.6 million net loan-loss reversal. Results also included a $249.6 million CRE divestiture-related loss, including a $71.8 million goodwill impairment and held-for-sale valuation adjustments and estimated transaction costs.
- Other comprehensive income was negative $1.372 billion, largely reflecting a decline in unrealized gains on available-for-sale securities. Comprehensive income attributable to Annaly was $378.7 million, substantially below GAAP net income attributable to Annaly.
- Residential securities fell to $71.85 billion from $75.57 billion at year-end; Agency MBS exposure declined, while residential credit risk-transfer securities and non-Agency MBS increased. Management said the total portfolio, net of securitized debt, decreased 2% to $100.1 billion and credit investments rose from 22% to 27% of the aggregate portfolio.
- Net interest income and core earnings improved year over year as funding costs fell and TBA dollar-roll income increased, partly offset by lower coupon income and higher net interest costs on swaps. Core earnings and PAA-adjusted measures are non-GAAP and are not substitutes for GAAP results.
Outlook, risks and unusual items
- CRE sale: The March 25 agreement provides for a $2.33 billion sale to Slate, subject to customary conditions and regulatory approvals; completion was expected by Q3 2021. The disposal group had $4.40 billion of assets and $3.32 billion of liabilities at quarter-end. Annaly also intended to sell nearly all remaining CRE assets not included in the agreement. The company cautioned that the sale may be delayed, fail to close, or deliver less than anticipated.
- Market environment: The 10-year Treasury yield rose from 0.91% to 1.74% during the quarter, while the Agency mortgage basis tightened to 30 basis points. Management cited favorable financing conditions and tight asset spreads, but noted uncertainty around inflation, rates, and economic recovery. No specific company earnings or return guidance was provided.
- Rate and funding exposure: Annaly relies heavily on short-term repurchase funding; repo agreements had an 88-day weighted-average remaining maturity and generally require same-day collateral for margin calls. A decline in collateral values, higher haircuts, reduced lender availability, or counterparty failure could pressure liquidity and force asset sales.
- Sensitivity: Company models estimate that an immediate 50-basis-point rate increase would raise projected 12-month economic net interest income by 9.5% but reduce portfolio value by 0.6% (3.5% of NAV). A 25-basis-point widening in MBS spreads was estimated to reduce portfolio value by 1.8% (10.2% of NAV). These are model estimates, assume no management actions, and actual outcomes may differ materially.
- Other risks: Prepayment speeds, mortgage spreads, credit losses in residential and corporate credit, derivative valuation and collateral requirements, COVID-19 impacts, LIBOR transition, REIT qualification, and maintaining the Investment Company Act exemption are identified as risks. Management reported no material pending legal proceedings or material contingencies at quarter-end, and concluded disclosure controls were effective.
- Annaly declared a $0.22 common dividend per share for the quarter, payable April 30, 2021. In April, it closed an additional $353.8 million residential-loan securitization.
Important facts for investors to verify
- Whether the CRE sale closed on schedule and on the announced terms, including final proceeds, costs, and any remaining CRE exposure.
- How much reported earnings depended on unrealized derivative gains, loan-loss reversals, and other one-time or valuation-sensitive items; compare GAAP results with the company’s non-GAAP core earnings and PAA reconciliations.
- Changes in book value, accumulated other comprehensive income, Agency MBS spreads, and collateral values after quarter-end.
- Repo funding availability, maturity profile, haircuts, unencumbered liquidity, and potential margin-call needs under stressed markets.
- Credit quality and reserve adequacy across residential credit, corporate loans, and assets classified as held for sale, including the effects of the CRE sale accounting.