Annaly Capital Management, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with 2021. Annaly is an internally managed mortgage REIT investing mainly in Agency mortgage-backed securities (MBS), residential credit, and mortgage servicing rights (MSR), using leverage and hedging to earn investment spreads.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Interest income | $2.78 billion | $1.98 billion |
| Net interest income | $1.47 billion | $1.73 billion |
| Net income | $1.73 billion | $2.40 billion |
| Net income available to common stockholders | $1.61 billion; $3.93 per basic share | $2.28 billion; $6.40 per basic share |
| Net interest margin (GAAP) | 1.92% | 2.28% |
| Net interest spread (GAAP) | 1.61% | 2.24% |
| Earnings available for distribution (EAD, non-GAAP) | $1.85 billion; $4.23 per average common share | $1.77 billion; $4.65 per average common share |
| Net interest margin excluding PAA (non-GAAP) | 2.03% | 2.02% |
| Operating cash flow | $5.37 billion | $3.08 billion |
| Cash and cash equivalents at year-end | $1.58 billion | $1.34 billion |
| Total assets / total equity | $81.85 billion / $11.37 billion | $76.76 billion / $13.20 billion |
| Common book value per share | $20.79 | $31.88 |
Cash flow from investing activities was negative $14.53 billion and financing activities provided $9.39 billion; cash increased by $234.6 million over the year. EAD is a company-defined non-GAAP measure and is not equivalent to GAAP net income or cash flow.
Portfolio, debt, and liquidity
- Year-end investment portfolio was $78.47 billion. Agency assets represented 90% of portfolio composition and 66% of allocated equity; residential credit represented 7% and 19%, respectively; MSR represented 2% and 14%.
- Repurchase agreements totaled $59.51 billion. Total GAAP debt was $68.31 billion, including securitization debt and participations. GAAP leverage was 6.0:1, up from 4.7:1; economic leverage was 6.3:1, up from 5.7:1.
- Annaly reported $6.26 billion of unencumbered financial assets and $1.58 billion of cash, of which $1.42 billion was pledged. Repo weighted-average maturity was 27 days, compared with 52 days a year earlier; year-end weighted-average repo rate was 4.29%.
- Accumulated other comprehensive loss was $3.71 billion, versus income of $958 million in 2021, reflecting substantial fair-value declines in available-for-sale securities.
Material changes versus 2021
- Rising rates and wider mortgage spreads drove significant portfolio mark-to-market pressure. Net losses on investments and other were $4.60 billion, compared with net gains of $121 million in 2021; derivative gains were $4.86 billion, compared with $808 million.
- Net interest income fell as financing costs rose. GAAP interest expense increased to $1.31 billion from $249 million; average economic funding cost rose to 1.46% from 0.79%. Lower prepayments and reduced premium amortization helped support EAD, but EAD per share declined.
- Common book value per share fell from $31.88 to $20.79. Annaly reported a full-year economic return of negative 23.7%, followed by a positive 8.7% in the fourth quarter.
- MSR fair value grew to $1.75 billion from $545 million. Residential mortgage loans, including loans transferred to securitization vehicles, had a fair value of $10.93 billion, up from $7.77 billion.
- Annaly completed the sale of its Middle Market Lending portfolio during 2022 and transferred the remaining Commercial Real Estate assets and liabilities, completing its exit from that business.
- Annaly raised capital through common-stock offerings and its at-the-market program; common shares outstanding at year-end were 468.3 million versus 364.9 million in 2021. A 1-for-4 reverse stock split became effective in September 2022; historical share figures were adjusted retrospectively.
Outlook, commentary, and risks
- For Q4 2022, GAAP net loss was $1.96 per share and EAD was $0.89 per share, compared with a GAAP loss of $0.70 and EAD of $1.06 in the prior quarter. Q4 EAD covered the $0.88 common dividend, but management expected to reduce the Q1 2023 dividend to a level closer to its historical 11–12% yield on book value, citing moderated EAD and pressure on new-investment returns.
- Management described 2022 as a highly volatile year, with 425 basis points of Federal Reserve rate increases and mortgage-basis widening. It shifted Agency holdings toward higher coupons, which exceeded 50% of the portfolio at year-end versus 12% at the end of 2021, and said it expected to favor specified pools over TBAs.
- Management identified residential loans as its preferred residential-credit investment approach in a slowing housing market. The OBX residential securitization platform issued 16 securitizations backed by $6.2 billion of loans in 2022. Management also indicated it expected to grow MSR exposure.
- Key risks include leverage and short-term repo refinancing, margin calls, interest-rate and spread volatility, hedging and counterparty risks, prepayment and credit risk in non-Agency assets, MSR valuation and servicing risks, and compliance with REIT and Investment Company Act requirements. LIBOR-linked contracts, including $1.5 billion of preferred stock, required attention ahead of the June 30, 2023 LIBOR cessation.
- The filing reports no pending material legal proceedings or material contingencies at year-end. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Track common dividends against EAD per share, taxable income, and cash generation; the anticipated Q1 2023 dividend reduction was management’s expectation, not a fixed commitment.
- Review book value, mortgage-spread exposure, leverage, unencumbered collateral, and repo maturities as rates and funding conditions change.
- Assess the sustainability and valuation assumptions of the expanded MSR portfolio, including prepayment, delinquency, discount-rate, and servicing-cost inputs; MSR valuation was the audit’s critical audit matter.
- Reconcile GAAP results with EAD and other non-GAAP measures, and account for the effects of share issuance and the reverse split when comparing per-share figures.
- Confirm execution and economic effects of LIBOR fallback arrangements for preferred stock, derivatives, and other affected contracts.