Annaly Capital Management, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with 2020. Annaly is an internally managed mortgage REIT investing mainly in Agency mortgage-backed securities (MBS), residential credit and middle-market loans.
Financial results and position
| Metric | 2021 | 2020 |
|---|---|---|
| Interest income | $1.98 billion | $2.23 billion |
| Net interest income | $1.73 billion | $1.33 billion |
| GAAP net income (loss) | $2.40 billion | ($890 million) |
| GAAP earnings per common share | $1.60 | ($0.73) |
| Earnings available for distribution (EAD), non-GAAP | $1.77 billion; $1.16 per share | $1.70 billion; $1.10 per share |
| Net interest margin | 2.28% | 1.46% |
| Net interest spread | 2.24% | 1.35% |
| Total assets | $76.8 billion | $88.5 billion |
| Total equity | $13.2 billion | $14.0 billion |
| Common book value per share | $7.97 | $8.92 |
| Repurchase agreements outstanding | $54.8 billion | $64.8 billion |
| GAAP / economic leverage | 4.7:1 / 5.7:1 | 5.1:1 / 6.2:1 |
Net interest income rose despite lower interest income, reflecting sharply lower borrowing costs and reduced average liabilities. GAAP profit also benefited from a large swing in derivative valuations: net unrealized gains on interest rate swaps were $2.2 billion, compared with losses of $905 million in 2020. EAD, a company-defined non-GAAP measure, increased 4%; it exceeded the $0.88 per-share aggregate common dividend declared for the year.
Operating cash flow was $3.08 billion; investing cash flow was $4.90 billion; financing cash flow was negative $7.88 billion. Cash and cash equivalents increased $98 million to $1.34 billion. Financing cash flows include very large gross repo borrowings and repayments; they should not be read as equivalent to net debt issuance. The filing reports $9.3 billion of unencumbered financial assets at year-end.
Material changes and unusual items
- Total assets declined by approximately $11.7 billion, mainly as Agency MBS holdings fell; residential mortgage loans increased. Management said it reduced portfolio size and leverage amid expected spread widening.
- Annaly agreed to sell and exit its commercial real estate (CRE) business for $2.33 billion. Most assets and associated liabilities transferred in 2021; remaining transfers were expected by the end of Q1 2022, subject to regulatory approval. The transaction produced a $278.6 million divestiture-related loss, including a $71.8 million goodwill impairment. CRE business pretax loss was $31.6 million in 2021 versus $99.6 million in 2020.
- Residential credit assets grew substantially; the group reported $4.5 billion of whole-loan originations. The new MSR platform ended the year with $645 million of MSR assets. Middle-market lending originations exceeded $1.5 billion, and management reported no loans on non-accrual.
- Annaly issued 60.9 million common shares through its at-the-market program, raising $552 million net. No shares were repurchased under the prior buyback authorization in 2021.
- Available-for-sale investment marks reduced accumulated other comprehensive income to $958 million from $3.37 billion, contributing to the decline in book value. Management attributed Agency MBS unrealized losses to market conditions, not asset credit quality.
Outlook, commentary and risks
Management described a changed rate environment: elevated inflation and the Federal Reserve’s planned withdrawal of asset purchases pointed to rate hikes beginning in 2022 and possible balance-sheet runoff. The filing cites market expectations of at least five 25-basis-point hikes in 2022, not company guidance. Annaly expected to remain close to fully hedged in the near term; its year-end hedge ratio was 95%. Management anticipated continued growth in residential credit and said it expected MSR exposure to increase in 2022. The filing provides no formal earnings or dividend guidance.
Management reported a negative tangible economic return of 2.4% in Q4 2021 and 0.0% for full-year 2021. Agency MBS spread widening, higher-rate expectations and prospective changes in Federal Reserve demand were key portfolio concerns. Other principal risks include leverage and repo refinancing or margin calls, interest-rate and basis risk, prepayments and premium amortization, credit losses in non-Agency assets and loans, MSR valuation and servicing risks, counterparty exposure, LIBOR transition, cybersecurity, and maintaining REIT and Investment Company Act status.
The company reported no pending material legal proceedings or material contingencies at year-end. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified premium amortization estimates and MSR fair valuation as critical audit matters. LIBOR-linked preferred stock of approximately $1.5 billion could remain outstanding beyond the June 30, 2023 cessation date.
Key investor verification points
- Reconcile GAAP earnings with EAD, and assess how EAD’s exclusions affect dividend coverage; EAD is not a GAAP measure.
- Review sensitivity to rate and MBS spread shocks: a 25-basis-point spread widening was estimated to reduce portfolio value by 1.9% of NAV; a 75-basis-point rate increase was estimated to reduce it by 5.0% of NAV.
- Confirm completion and final economics of the CRE sale, including remaining transfers and regulatory approvals.
- Assess repo maturity and collateral exposure: $54.8 billion of repos had a 52-day weighted average maturity, with same-day collateral requirements for margin calls.
- Evaluate book-value and dividend sustainability against fair-value marks, prepayment assumptions, leverage, and taxable-income requirements; the 2021 common distribution was reported as 100% return of capital for tax purposes.
- Track execution and valuation of the growing residential credit and MSR businesses, including loan credit quality, servicing performance and key unobservable valuation assumptions.