Annaly Capital Management, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Annaly is a mortgage REIT investing principally in Agency mortgage-backed securities, residential credit assets and mortgage servicing rights (MSR). It uses secured borrowing and derivatives to finance and manage its portfolio.
Financial results and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $818.3 million | $655.9 million in Q1 2022 |
| Interest expense; net interest income | $798.8 million; $19.5 million | $74.9 million; $580.9 million in Q1 2022 |
| Net servicing income | $76.4 million | $31.0 million in Q1 2022 |
| Net derivative gains (losses) | $(900.8) million | $1.642 billion in Q1 2022 |
| Net income (loss) attributable to common stockholders; diluted EPS | $(876.1) million; $(1.79) | $1.995 billion; $5.46 in Q1 2022 |
| Earnings available for distribution (EAD), a non-GAAP measure; per average common share | $427.1 million; $0.81 | $430.6 million; $1.11 in Q1 2022 |
| Net interest margin; economic net interest margin excluding premium amortization adjustment (PAA) | 0.09%; 1.76% | 3.20%; 2.04% in Q1 2022 |
| Total assets; total equity | $86.8 billion; $11.9 billion | $81.9 billion; $11.4 billion at December 31, 2022 |
| Repurchase agreements; total GAAP debt | $61.0 billion; $70.7 billion | Repurchase agreements were $59.5 billion at December 31, 2022 |
| Cash and cash equivalents, including pledged cash | $1.8 billion | $1.6 billion at December 31, 2022 |
| Unencumbered financial assets; economic leverage | $5.7 billion; 6.4:1 | Economic leverage 6.3:1 at December 31, 2022 |
| Common book value per share; common dividend declared | $20.77; $0.65 per share | Book value $27.08 in Q1 2022; dividend $0.88 per share in Q1 2022 |
GAAP results swung sharply year over year, reflecting the derivative loss and much higher funding costs. Economic net interest income excluding PAA was $405.7 million, up from $338.9 million in Q1 2022, while the economic cost of interest-bearing liabilities rose to 2.34% from 0.89%. EAD was broadly stable in dollars but lower per share, alongside a substantially larger weighted-average share count.
Operating cash flow was $(1.0) billion, investing cash flow $(1.1) billion and financing cash flow $2.3 billion. The company raised $562.7 million net through its at-the-market common stock program, issuing 25.3 million shares during the quarter.
Material changes and portfolio developments
- Agency securities increased to $65.6 billion from $62.3 billion at year-end; total securities increased to $69.2 billion from $65.8 billion. Total assets rose to $86.8 billion.
- Accumulated other comprehensive loss improved to $(2.6) billion from $(3.7) billion at year-end, while common book value per share was $20.77.
- Net derivative results moved from a $1.6 billion gain in Q1 2022 to a $900.8 million loss in Q1 2023. Management attributed the change chiefly to unrealized swap losses as forward rates declined, as well as weaker futures results.
- Repurchase agreements carried a 5.03% weighted-average rate at quarter-end, versus 4.29% at year-end. Their weighted-average remaining maturity was 59 days; the weighted-average haircut was approximately 3%.
- Management reported a $5.2 billion residential credit portfolio, representing 18% of firm capital, and an MSR portfolio of nearly $2 billion fair value and approximately $130 billion unpaid principal balance. MSR serious delinquencies remained below 50 basis points, according to the filing.
Outlook, risks and unusual items
Management described Q1 as volatile, citing banking-sector turmoil, high rate volatility and widening Agency MBS spreads. It expected the Federal Reserve to be near the end of its rate-hiking cycle and potentially to hold rates for an extended period, while emphasizing uncertainty and a conservative approach to leverage and liquidity. This is management commentary, not quantified earnings guidance.
Management noted that Agency MBS spreads widened approximately 5–15 basis points during the quarter and that private-market supply could approach $500 billion during 2023, including Federal Reserve runoff and anticipated bank sales. It said it modestly grew the Agency portfolio, shifted exposure away from lower coupons, and rotated some hedges from Treasury futures into SOFR swaps. The quarter included three residential securitizations totaling $1.1 billion.
Key exposures include interest-rate and mortgage-spread movements, prepayment speeds, repo refinancing and collateral calls, credit and counterparty risk, and valuation uncertainty—particularly for MSR, which uses significant unobservable inputs. Annaly estimated that an instantaneous 25-basis-point increase in MBS spreads would reduce portfolio market value by 1.5%, or 10.9% of NAV; a 75-basis-point rate increase was estimated to raise projected economic net interest income by 1.1%, while a 75-basis-point decrease was estimated to reduce it by 1.7%. Actual outcomes may differ, and the estimates assume no management response.
Relevant transition item: LIBOR tenors used by the company were scheduled to cease or become non-representative after June 30, 2023. At March 31, $1.5 billion of preferred stock remained LIBOR-linked and could remain outstanding beyond that date. The company reported that its remaining CME-cleared LIBOR swaps were converted to SOFR swaps after quarter-end. Subsequent events also included an April residential securitization with $407.5 million face value and a new $250 million residential-loan credit facility.
The filing reported no material contingencies at March 31 and no pending material legal proceedings. Management said it expected no material effect from ordinary-course claims and legal actions.
Important facts for investors to verify
- How much of the GAAP loss and book-value movement reflects market-driven derivative and security valuation changes, and how those differ from EAD and other non-GAAP measures.
- Whether higher repo costs, short repo maturities and collateral requirements affect future net interest income or liquidity; assess the $5.7 billion of unencumbered financial assets in context of pledged collateral and stress scenarios.
- Whether MBS spread widening, rate volatility, prepayments or mortgage-market supply alter portfolio values, hedging effectiveness and management’s stated outlook.
- How the LIBOR transition affects the $1.5 billion of preferred stock and any remaining contracts, including applicable replacement rates and dividend terms.
- The effect of the 25.3 million shares issued through the at-the-market program on per-share results, book value and future distributions, and whether the $0.65 common dividend is supported by ongoing earnings.