Dismal Q3 Earnings at Annaly Capital

Zacks

Annaly Capital Management Inc. (NLY) – the mortgage real estate investment trust (mREIT) reported disappointing third-quarter 2013 results. The company’s core earnings per share came in at 28 cents, 6 cents below the Zacks Consensus Estimate of 34 cents and a cent down from the prior quarter. As a result, the shares slumped nearly 1.5% in after-hours trading on the New York Stock Exchange.

Results continue to reflect the impact of the monetary policy on the mortgage market and the uncertainties tied to the future course of the policy. The company’s book value per share continued to fall. It came in at $12.70 as of Sep 30, 2013, reflecting a 2.5% sequential decrease and a 23.5% year-over-year decline.

Net interest income came in at $551.7 million, down 4.8% year over year. However, it was up 0.5% sequentially and well ahead of the Zacks Consensus Estimate of $333 million.

Nevertheless, amid the headwinds in the mortgage market, the company is boosting its commercial investments portfolio. This portfolio, which includes commercial real estate investments and corporate debt, represented 11% of stockholders’ equity as of Sep 30, 2013, compared with 8% as of Jun 30, 2013. Commercial real estate investments increased 30% sequentially to $1.3 billion as of Sep 30, 2013, from $1.0 billion as of Jun 30, 2013.

Quarter in Detail

For the reported quarter, annualized yield on average interest-earning assets was 2.82% while annualized cost of funds on average interest-bearing liabilities (including the net interest payments on interest rate swaps) was 1.81%. This led to an average interest rate spread for the quarter of 1.01%, reflecting a 3 basis points increase from the prior quarter.

The uptick, primarily driven by higher annualized yield on average interest-earning assets, was helped by lower amortization expense on its investment securities. This resulted from lower prepayment speeds experienced during the reported quarter. The constant prepayment rate for the quarter was 13% compared with 16% in the prior quarter.

The benefit was partly dwarfed by an increase in annualized cost of funds on average interest-bearing liabilities, mainly due to lower repurchase agreement balances combined with increased interest rate swap notional amounts.

Annaly Capital’s Investment Securities (includes Agency mortgage-backed securities, Agency debentures and corporate debt) were $83.1 billion as of Sep 30, 2013, reflecting a decline from $95.9 billion in the prior quarter.

Notably, as of Sep 30, 2013, fixed-rate agency mortgage-backed securities and debentures comprised 91% of its investment securities portfolio while the remaining consisted of adjustable-rate agency mortgage-backed securities and debentures.

Annaly Capital recognized a gain of $43.6 million by disposing $13.0 billion of investment securities during the reported quarter, while it experienced a gain of $148.0 million from disposing $14.8 billion of investment securities in the prior quarter.

As of Sep 30, 2013, the company’s capital ratio (representing the ratio of stockholders’ equity to total assets) was 13.9%, compared with 12.9% in the prior quarter. Leverage was 5.4:1 as of Sep 30, 2013, compared with 6.2:1 at Jun 30, 2013. Annaly Capital offered an annualized return on average equity, on a core earnings basis, of 8.62% for third-quarter 2013, up from 8.24% in the prior quarter.

Our Take

The volatility in the interest rates and mortgage spreads continue to affect the results of mREITs. Moreover, the uncertainty surrounding the future course of monetary policy seems to negatively affect the performance of these companies. Last month, American Capital Agency Corp. (AGNC) also reported disappointing third-quarter 2013 results with its net spread income per share coming in at 61 cents, significantly lagging the Zacks Consensus Estimate of 84 cents. The company’s book value also continued to descend.

However, we believe that the diversification of Annaly Capital into the commercial assets is encouraging and this would help mitigate a part of this negative impact.

Annaly Capital currently has a Zacks Rank #3 (Hold). Other mREIT stocks which are performing well and deserve a look are Apollo Commercial Real Estate Finance Inc. (ARI) and CYS Investments, Inc. (CYS), both carrying a Zacks Rank #2 (Buy).
 

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Read the Full Research Report on ARI
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Read the Full Research Report on CYS


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