Annaly Capital Management, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with 2022. This is an annual report, not a quarterly filing. Annaly is an internally managed mortgage REIT investing mainly in Agency mortgage-backed securities (MBS), residential credit and mortgage servicing rights (MSR).
Financial and operating highlights
| Metric | 2023 | 2022 |
|---|---|---|
| Interest income | $3.73 billion | $2.78 billion |
| GAAP net interest income | $(111) million | $1.47 billion |
| GAAP net income (loss) | $(1.64) billion | $1.73 billion |
| GAAP loss available to common stockholders | $(1.78) billion; $(3.61) per diluted share | Income of $1.61 billion; $3.92 per diluted share |
| Earnings available for distribution (EAD), non-GAAP | $1.55 billion; $2.86 per average common share | $1.85 billion; $4.23 per average common share |
| Net interest margin | GAAP: (0.13)%; excluding PAA: 1.62% (non-GAAP) | GAAP: 1.92%; excluding PAA: 2.03% (non-GAAP) |
| Net interest spread | GAAP: (0.81)%; excluding PAA: 1.32% (non-GAAP) | GAAP: 1.61%; excluding PAA: 1.70% (non-GAAP) |
| Total assets / total equity | $93.2 billion / $11.35 billion | $81.9 billion / $11.37 billion |
| Common book value per share | $19.44 | $20.79 |
| GAAP / economic leverage | 6.8:1 / 5.7:1 | 6.0:1 / 6.3:1 |
EAD, economic leverage, and related “excluding PAA” measures are non-GAAP metrics and should be considered alongside—not as substitutes for—GAAP results. The GAAP loss chiefly reflected volatile investment and derivative marks and a negative GAAP net interest result. Management reported a 6.0% economic return for 2023.
Cash flow, funding and portfolio
- Cash and cash equivalents were $1.41 billion at year-end, down from $1.58 billion. Cash from operations was $2.37 billion; investing activities used $8.42 billion; financing activities provided $5.88 billion.
- Repurchase agreements totaled $62.2 billion; total GAAP debt was $77.5 billion. Repo weighted-average maturity was 44 days and weighted-average rate was 5.70%. Reported unencumbered financial assets were $5.17 billion; much of the broader liquid-asset pool was pledged as collateral.
- Investment portfolio at period-end was $87.4 billion. Agency MBS represented 88% of portfolio allocation and 61% of allocated equity; Residential Credit and MSR together represented 38% of allocated equity, up five percentage points year over year.
- Agency MBS assets declined to $65.7 billion from $72.9 billion, as Annaly sold assets and reduced leverage in that strategy. It shifted toward higher coupons: 48% of Agency holdings were in coupons of 5.0% or higher, up 17 percentage points. TBA exposure moved from $10.6 billion of net purchases to $0.6 billion of net sales.
- Residential Credit portfolio market value reached $5.7 billion, up 14%; loan acquisitions were $4.7 billion. MSR market value increased 50% to $2.7 billion. Annaly issued 13 residential-loan securitizations backed by $4.9 billion of loans during 2023.
- Common dividends declared were $2.60 per share for 2023; the board has not set a minimum dividend. Annaly issued 31.4 million common shares through its at-the-market program for net proceeds of $0.7 billion. It repurchased no common or preferred shares during 2023.
Material changes, outlook and risks
- Higher borrowing costs and balances drove GAAP interest expense to $3.84 billion from $1.31 billion. Economic interest expense, which includes swap interest, rose to $2.26 billion from $0.94 billion. The non-GAAP EAD decline was attributed mainly to higher funding costs and lower TBA dollar-roll income, partly offset by higher asset coupons, servicing income and other income.
- Net servicing income rose to $326.5 million from $221.8 million. AOCI loss narrowed to $1.34 billion from $3.71 billion, while common book value per share declined to $19.44 from $20.79. The filing attributes unrealized losses on available-for-sale securities to market conditions, not credit quality, and says it did not expect to be required to sell them before recovery.
- Management described a resilient economy, moderating inflation and a constructive housing outlook if labor markets and consumers remain resilient. It reported the Federal Funds target range at 5.25%–5.50% at year-end 2023. No specific earnings, dividend or return guidance is provided. The company expected to continue financing Residential Securities largely through repo and disclosed an expectation to increase MSR exposure in 2024.
- Illustrative year-end risk sensitivities, assuming instantaneous shocks and no management response, show that a 75-basis-point rate increase could reduce projected economic net interest income by 10.5%; a 25-basis-point widening in MBS spreads could reduce portfolio market value by 1.2% (9.9% of NAV). Actual results may differ materially.
- Key risks include short-term repo dependence, leverage, collateral calls and forced sales; rate, spread, prepayment and reinvestment risk; credit exposure in non-Agency loans and securities; MSR valuation and servicing risks; counterparty, regulatory and REIT qualification risks; and cybersecurity and third-party operational risks. MSR is valued using significant unobservable assumptions and was identified as the auditor’s critical audit matter. No pending material legal proceedings or material contingencies were reported at year-end.
- Subsequent to year-end, Annaly closed three residential-loan securitizations in January and February 2024 with aggregate face value of approximately $1.32 billion.
Important facts for investors to verify
- Reconcile the large GAAP loss with positive EAD and the reported economic return; review the company’s non-GAAP definitions and reconciliations.
- Assess the sensitivity of earnings, book value and liquidity to rates, MBS spreads, prepayments and repo funding terms, including the short maturity profile and collateral requirements.
- Review the composition and availability of unencumbered assets, rather than relying only on total liquid assets, much of which is pledged.
- Evaluate whether growth in Residential Credit and MSR offsets pressure in Agency MBS, including credit performance, servicing costs and Level 3 MSR valuation assumptions.
- Confirm the sustainability and tax character of distributions, the impact of ATM share issuance on per-share results, and any developments in regulatory, counterparty or cybersecurity exposures.