Annaly Capital Management, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Annaly is an internally managed mortgage REIT investing in Agency mortgage-backed securities (MBS), residential credit and mortgage servicing rights (MSR). This filing covers the quarter and nine months ended September 30, 2023; comparisons below are with the corresponding 2022 periods unless otherwise stated. Amounts are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $1.001 billion | $678.5 million | $2.741 billion | $1.980 billion |
| Interest expense | $1.047 billion | $400.5 million | $2.799 billion | $645.9 million |
| GAAP net interest income (loss) | ($45.3 million) | $278.0 million | ($57.8 million) | $1.334 billion |
| Net servicing income | $88.0 million | $66.7 million | $239.3 million | $147.4 million |
| Net income (loss) | ($569.1 million) | ($274.0 million) | ($1.247 billion) | $2.613 billion |
| Common-stockholder earnings (loss) | ($599.1 million) | ($302.1 million) | ($1.344 billion) | $2.533 billion |
| GAAP diluted loss per common share | ($1.21) | ($0.70) | ($2.73) | $6.45 |
| Non-GAAP earnings available for distribution (EAD) per average common share | $0.66 | $1.06 | $2.18 | $3.37 |
- Q3 net interest margin was negative 0.20% under GAAP; the company’s non-GAAP margin excluding the premium amortization adjustment (PAA) was 1.48%, versus 1.98% in Q3 2022. Non-GAAP economic net interest income excluding PAA was $343.3 million, versus $373.7 million. These measures include swap economics and are not GAAP measures.
- Q3 total other loss was $559.4 million, including $2.713 billion of investment and other losses, partly offset by $2.127 billion of derivative gains. For the nine months, total other loss was $1.267 billion, with $2.702 billion of derivative gains offset by $4.020 billion of investment and other losses.
- At September 30, total assets were $89.65 billion, total equity $10.68 billion and cash and cash equivalents $1.24 billion. Common-stock book value was $18.25 per share, compared with $19.94 at September 30, 2022.
- Repurchase agreements totaled $64.69 billion, at a weighted-average rate of 5.54% and with a 52-day weighted-average remaining maturity. Other secured financing was $500 million, at 8.08%. Debt issued by securitization vehicles was $9.98 billion and participations issued were $788 million; these are described as non-recourse.
- GAAP leverage was 7.1:1 and the GAAP capital ratio was 11.9%. Non-GAAP economic leverage was 6.4:1 and the economic capital ratio was 13.1%. Unencumbered financial assets were $4.69 billion; cash and liquid assets were $71.79 billion, including assets already pledged as collateral.
- Operating cash flow for the first nine months was $1.99 billion; investing cash flow was negative $9.62 billion and financing cash flow was positive $7.29 billion. Cash declined by $335.6 million to $1.24 billion.
Material changes and management commentary
- Management attributed the year-over-year decline in Q3 EAD primarily to higher borrowing costs and lower TBA dollar-roll income, partly offset by higher swap income, coupon income, servicing income and lower premium amortization excluding PAA.
- Long-term rates rose sharply in Q3: the 10-year Treasury yield increased from 3.84% at June 30 to 4.57% at September 30. Agency MBS spreads widened approximately 15–20 basis points, and management reported a negative 8.8% economic return for the quarter.
- Management said the Agency portfolio’s notional value was relatively unchanged during the quarter and described a continued move toward higher coupons and specified pools. The Residential Credit portfolio ended the quarter at $5.3 billion in market value; the company settled $1.5 billion of expanded-credit loans and completed two Non-QM securitizations totaling $812 million.
- MSR fair value reached $2.23 billion, up from $1.75 billion at year-end 2022. Management reported low prepayment speeds and minimal delinquencies in its MSR portfolio. MSR valuations rely on models and significant unobservable assumptions.
- The common dividend declared was $0.65 per share for Q3. No common or preferred shares were repurchased during the quarter. The company issued 26.2 million common shares through its at-the-market program in the first nine months, for net proceeds of $580.5 million.
Outlook, risks and unusual items
- The filing gives no specific earnings, margin, book-value or dividend guidance. Management expects to continue financing Residential Securities largely through repurchase agreements, while potentially using securitizations and credit facilities for certain assets.
- Management described elevated interest-rate volatility, a wide Agency MBS basis, Treasury supply-demand pressures and tighter financial conditions. It noted possible economic headwinds, including higher long-term rates, tighter credit and resumed student-loan payments.
- Risk disclosures emphasize interest-rate and spread movements, prepayments, collateral calls, short-term funding renewal, counterparty performance, credit exposures in residential loans and non-Agency assets, and operational and third-party servicer risks. The company reported that about 96% of repurchase agreements and other secured financing matured within one year; repo counterparties generally may require same-day collateral for margin calls.
- At September 30, Agency MBS had $2.70 billion of gross unrealized losses in the available-for-sale portfolio. Management attributed the decline to market conditions rather than credit quality and said it did not intend, nor expect to be required, to sell before recovery. Changes in fair value can nevertheless affect equity and borrowing capacity.
- October subsequent events included a $406.7 million residential-loan securitization, a new $300 million residential-loan credit facility and exercise of a $250 million accordion in an existing MSR financing facility. Management reported no material pending legal proceedings or material contingencies.
Important facts for investors to verify
- How sustained funding-cost increases affect GAAP and economic net interest income, EAD, and the $0.65 common dividend.
- Whether book value and collateral capacity remain resilient if Treasury yields or MBS spreads rise further; review the company’s sensitivity scenarios and hedge positions.
- Repo refinancing, maturity concentration, haircuts, available unencumbered assets and potential margin-call requirements.
- Assumptions underpinning MSR and residential-loan fair values, including prepayment, delinquency, discount-rate and servicing-cost estimates.
- The effect of continued at-the-market share issuance on per-share book value, EAD and dividend coverage; compare non-GAAP EAD with GAAP results.