Annaly Capital Management, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; year-to-date figures cover the nine months ended that date. Annaly is a mortgage REIT and diversified capital manager investing in Agency and non-Agency mortgage assets, mortgage servicing rights (MSR), residential loans and middle-market corporate debt. It announced the sale of substantially all its commercial real estate (CRE) business.
Financial performance
| Metric | Q3 2021 | Q3 2020 |
|---|---|---|
| Interest income | $413.0 million | $562.4 million |
| Net interest income | $362.5 million | $447.3 million |
| Net income | $521.5 million | $1,015.5 million |
| Net income available to common stockholders | $492.4 million | $980.2 million |
| GAAP diluted EPS | $0.34 | $0.70 |
| Earnings available for distribution (EAD, non-GAAP), per common share | $437.5 million; $0.28 | $482.3 million; $0.32 |
| GAAP net interest margin | 2.01% | 2.15% |
| Net interest margin excluding PAA (non-GAAP) | 2.04% | 2.05% |
For the nine months, net income was $2.0 billion versus a $1.8 billion loss in 2020; diluted EPS was $1.33 versus a $1.32 loss. EAD was $1.33 billion, or $0.88 per common share, compared with $1.24 billion, or $0.80, in 2020. Management attributes the nine-month EAD increase mainly to lower funding costs and higher TBA dollar-roll income, partly offset by lower coupon income and less favorable swap net interest.
Cash flow: For the nine months, operating cash flow was $2.22 billion, investing cash flow was $6.34 billion and financing cash flow was negative $8.76 billion. Cash and cash equivalents ended at $1.05 billion, down from $1.24 billion at year-end 2020.
Financial position and material changes
- Total assets were $76.7 billion, down from $88.5 billion at December 31, 2020; total equity was $13.7 billion versus $14.0 billion.
- Securities were $65.6 billion, down from $75.7 billion. Agency MBS declined, while residential credit securities and residential mortgage loans grew. Residential mortgage loans, including those in securitizations, had $5.83 billion fair value.
- Repurchase agreements were $55.5 billion, down from $64.8 billion. GAAP leverage was 4.4:1, compared with 5.1:1 at year-end; economic leverage was 5.8:1, compared with 6.2:1. Repurchase agreements had a 75-day weighted-average remaining maturity.
- Reported unencumbered financial assets were $9.82 billion. Management reported $69.45 billion of liquid assets and said these represented 98.59% of the specified encumbered and unencumbered financial-asset base; that measure uses the company’s stated exclusions and is not equivalent to unrestricted cash.
- Common book value per share was $8.39, versus $8.70 at September 30, 2020. Common dividends declared were $0.22 per share for Q3; the nine-month total was $0.66, compared with $0.69 in 2020.
- Annaly issued 51.1 million shares through its at-the-market program during the first nine months, raising $469.5 million net. It repurchased no shares under its authorization during the period.
Outlook, management commentary and risks
- Management reported a 2.9% positive economic return for Q3 and described Agency MBS conditions as modestly improved. It increased the Agency portfolio by nearly $3 billion during the quarter, primarily through TBA securities, and reported economic leverage unchanged quarter over quarter at 5.8:1. No specific earnings or dividend guidance was provided.
- The Fed announced after quarter-end that tapering asset purchases would begin in November 2021. Management noted inflation, supply constraints and the Delta variant as economic uncertainties, and described markets as anticipating possible rate increases in 2022.
- The CRE sale to Slate was agreed at $2.33 billion. Most assets and associated liabilities had transferred during Q3; remaining transfers were expected by year-end, subject to regulatory approvals. Nine-month CRE pretax loss was $24.8 million, and the company recorded $262.0 million of business-divestiture-related losses.
- Interest-rate, mortgage-spread, prepayment, funding, collateral and counterparty risks are central exposures. Company scenario estimates show that an immediate 75-basis-point rate increase could raise projected economic net interest income by 18.7% while reducing portfolio value by 1.3% and NAV by 7.5%; a 25-basis-point MBS spread widening could reduce NAV by 10.0%. These are model scenarios, not forecasts, and assume no management response.
- Annaly was repositioning swaps to reduce LIBOR exposure. It said approximately $1.5 billion of LIBOR-linked preferred stock could remain outstanding beyond the June 2023 cessation date and that it was considering liability-management options.
- Management reported no material pending legal proceedings or material contingencies. It concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Reconcile GAAP earnings with EAD, a company-defined non-GAAP measure; Q3 EAD per share declined year over year despite positive GAAP earnings.
- Track completion and final economics of the CRE disposal, including regulatory approvals, remaining asset transfers and any further divestiture-related charges.
- Assess how higher rates, wider MBS spreads, prepayments and collateral calls could affect book value, financing access and dividend capacity; stress-test outputs are estimates.
- Monitor repo funding maturities, unencumbered collateral and leverage, as well as the company’s exposure to counterparties and derivatives.
- Evaluate dilution from at-the-market share issuance and the sustainability of the $0.22 quarterly common dividend against distributable earnings and REIT distribution requirements.
- Follow LIBOR transition plans for derivatives and preferred shares, including replacement-rate terms and any liability-management actions.