Annaly Capital Management, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Annaly is a mortgage-focused REIT with Agency MBS, residential credit, and mortgage servicing rights (MSR) businesses. It uses borrowing and derivatives to finance and manage its portfolio.
Financial results and key metrics
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Interest income | $1.094 billion | $818.3 million |
| Interest expense | $1.101 billion | $798.8 million |
| Net interest income (GAAP) | $(6.5) million | $19.5 million |
| Net servicing income | $102.9 million | $76.4 million |
| Net gains (losses) on investments and other | $(994.1) million | $1.7 million |
| Net gains (losses) on derivatives | $1.377 billion | $(900.8) million |
| Net income (loss) | $465.2 million | $(839.3) million |
| Net income (loss) available to common stockholders | $425.8 million; $0.85/share | $(876.1) million; $(1.79)/share |
| Earnings available for distribution (EAD, non-GAAP) | $358.0 million; $0.64/share | $427.1 million; $0.81/share |
| Net interest margin (excluding PAA, non-GAAP) | 1.43% | 1.76% |
| Economic net interest spread (excluding PAA, non-GAAP) | 1.09% | 1.62% |
GAAP results turned positive year over year largely because derivative results improved sharply; investment marks and net interest income were unfavorable. EAD per share declined 21% year over year, reflecting higher funding costs and a lower net interest contribution from swaps, partly offset by higher coupon income and net servicing income. EAD is a company-defined non-GAAP measure and is not a substitute for GAAP results.
- Cash flow: Operating cash flow was $1.698 billion, versus cash used of $1.019 billion in Q1 2023; investing cash flow was $(166.5) million and financing cash flow was $(1.278) billion. Cash and cash equivalents ended at $1.665 billion. The filing’s large gross financing and investing flows include substantial transaction turnover.
- Balance sheet: Total assets were $91.5 billion, down from $93.2 billion at December 31, 2023; total equity was $11.5 billion. Securities were $66.5 billion, down from $69.6 billion year-end, while loans, MSR, and assets pledged to securitization vehicles increased.
- Debt and leverage: Repurchase agreements were $59.0 billion, down from $62.2 billion year-end. GAAP leverage was 6.7x, compared with 6.8x at year-end and 5.9x a year earlier. Economic leverage (non-GAAP) was 5.6x, versus 5.7x at year-end and 6.4x a year earlier.
- Liquidity: Unencumbered financial assets totaled $5.34 billion; $63.8 billion of financial assets and cash were pledged against existing liabilities. Management reported liquid assets equal to 96.27% of the stated carrying amount of encumbered and unencumbered financial assets.
- Capital and distributions: Common book value was $19.73 per share, compared with $20.77 at March 31, 2023. The company declared a $0.65 common dividend per share, unchanged from Q1 2023. No common or preferred shares were repurchased in the quarter.
Changes, outlook, and risks
Management reported a 4.8% positive economic return for the quarter, with all three businesses contributing, and described economic leverage of 5.6x as the lowest in several years. Agency MBS spreads tightened modestly, while the 10-year Treasury yield rose to 4.20% from 3.88% at year-end. Management said stronger-than-expected economic data and persistent inflation had delayed market expectations for Fed rate cuts. It highlighted continued Agency portfolio rotation toward higher coupons, growth in residential credit, and a record $3.7 billion of Onslow Bay rate locks. MSR purchases were $515.7 million; management said it remained selective and committed to purchase one package after quarter-end.
The filing provides no specific company earnings or dividend guidance. Key sensitivities include interest rates, yield-curve shape, MBS spreads, prepayments, collateral values, financing availability and margin calls, credit performance, and counterparty or operational risks. At March 31, the company’s modeled scenarios estimated that a 50-basis-point rate increase would reduce projected 12-month economic net interest income by 5.5%; a 25-basis-point MBS spread widening would reduce portfolio market value by 1.2%, or 9.6% of NAV. These are model estimates, not forecasts, and actual results could differ materially. Agency MBS unrealized losses were attributed to market conditions rather than credit quality; management stated it did not expect to be required to sell them before recovery. No material contingencies or pending material legal proceedings were reported. Two additional residential-loan securitizations closed in April, after quarter-end.
Important facts for investors to verify
- How much of the GAAP profit reflects derivative and fair-value movements versus recurring portfolio earnings; compare GAAP results with EAD and its reconciliation.
- Whether higher financing costs continue to pressure EAD, net interest spread, and dividend coverage.
- Changes in repo funding rates, maturity profile, collateral haircuts, unencumbered assets, and exposure to margin calls.
- Effects of rate and spread movements on MBS valuations, book value, hedges, and MSR assumptions, including prepayment speeds.
- Growth and credit performance in residential loans and securitizations, including the post-quarter-end transactions and Onslow Bay pipeline.
- Whether the $0.65 common dividend remains supported by future earnings and liquidity; EAD is non-GAAP and may not equal taxable income or cash available for distributions.