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Annaly Capital Management, Inc. Reports 2nd Quarter 2022 Results

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NEW YORK, July 27, 2022--(BUSINESS WIRE)--Annaly Capital Management, Inc. (NYSE: NLY) ("Annaly" or the "Company") today announced its financial results for the quarter ended June 30, 2022.

Financial Highlights

  • GAAP net income of $0.55 per average common share for the quarter

  • Earnings available for distribution ("EAD") of $0.30 per average common share for the quarter; up $0.02 from the prior quarter with dividend coverage of over 135%

  • Economic return (loss) of (9.6%) for the second quarter

  • Annualized GAAP return on average equity of 30.6% and annualized EAD return on average equity of 17.5%

  • Book value per common share of $5.90

  • GAAP leverage of 5.4x, up from 5.3x in the prior quarter; economic leverage of 6.6x, up from 6.4x in the prior quarter

  • Declared quarterly common stock cash dividend of $0.22 per share

Business Highlights

Investment and Strategy

  • Total assets of $82.3 billion, including $74.9 billion in highly liquid Agency portfolio(1)

  • Annaly's Agency portfolio decreased modestly during the quarter, while capital allocation was roughly unchanged at 71%

    • Reduced exposure to lower coupons (2.0% - 3.0%) through TBA and specified pool sales and rotated into higher coupons (3.5% - 5.0%) primarily through TBA purchases

  • Annaly's Mortgage Servicing Rights ("MSR") platform grew assets by 41% to $1.7 billion(2) during the second quarter with MSR representing 15% of dedicated equity capital, up from 9% in the prior quarter

  • Annaly’s Residential Credit portfolio increased 10% during the quarter to $4.8 billion(1), driven by opportunistic CRT and NPL/RPL purchases within its securities portfolio

  • Closed previously announced sale of Annaly's Middle Market Lending portfolio(3)

Financing and Capital

  • $6.3 billion of unencumbered assets, including cash and unencumbered Agency MBS of $4.5 billion

  • Average GAAP cost of interest bearing liabilities increased 64 basis points to 1.12% and average economic cost of interest bearing liabilities increased 22 basis points to 1.11%

  • Annaly's Residential Credit Group closed five whole loan securitizations totaling $2.0 billion during the second quarter and is the largest non-bank issuer of Prime Jumbo and Expanded Credit MBS(4)

  • Annaly's Residential Credit Group added $500 million of credit facility capacity during the second quarter

  • Annaly's Mortgage Servicing Rights platform closed a $500 million credit facility subsequent to quarter end(5)

  • Raised nearly $1 billion of accretive common equity in the first half of 2022, including $742 million through a common stock follow-on offering in May(6)

Corporate Responsibility & Governance

  • Published third Corporate Responsibility Report, demonstrating Annaly’s continued progress on its ESG goals and initiatives

  • Included in the FTSE4Good Index for the fourth consecutive year, recognizing our strong ESG practices

"The operating environment remained challenging during the second quarter as persistent spread widening and rate volatility roiled financial markets while intensifying concerns about global economic growth contributed to risk-off sentiment," remarked David Finkelstein, Annaly’s Chief Executive Officer and President. "These pressures weighed on our book value, though our portfolio again generated earnings that exceeded our dividend. Despite these challenges, we remain constructive on the outlook for Agency MBS given historically attractive new investment returns and increased clarity from the Federal Reserve on the path forward for interest rate hikes and quantitative tightening.

"Additionally, we were pleased to close the sale of our Middle Market Lending business during the quarter, which completes our transition to a dedicated housing finance REIT. Our Residential Credit and Mortgage Servicing Rights businesses continue to grow market share and make progress towards long-term strategic objectives, which ultimately should enhance the durability and quality of our returns."

(1)

Total portfolio represents Annaly’s investments that are on-balance sheet as well as investments that are off-balance sheet in which Annaly has economic exposure. Total assets include commercial real estate related assets, including CMBX derivatives (market value) of $0.4 billion, which are excluded from capital allocation calculations. Agency assets exclude assets transferred or pledged to securitization vehicles of $0.5 billion and include TBA purchase contracts (market value) of $19.3 billion and $30 million of retained securities that are eliminated in consolidation. Residential Credit assets exclude assets transferred or pledged to securitization vehicles of $8.4 billion, include $1.0 billion of retained securities that are eliminated in consolidation and are shown net of participations issued totaling $0.7 billion. MSR assets include limited partnership interests in two MSR funds, one of which is reported in Other Assets, and unsettled commitments of $190 million.

(2)

Includes limited partnership interests in two MSR funds, one of which is reported in Other Assets, and unsettled commitments of $190 million. MSR commitments represent the market value of deals where Annaly has executed a letter of intent. There can be no assurance whether these deals will close or when they will close.

(3)

Annaly announced the sale of its Middle Market Lending portfolio for approximately $2.4 billion on April 25, 2022. The transaction represents substantially all of the Middle Market Lending assets held on balance sheet as well as assets managed for third parties. The majority of these assets were legally transferred during the second quarter of 2022 and the remaining assets are expected to be transferred by the third quarter of 2022. For more information, please see the 8-K filing.

(4)

Issuer ranking data from Inside Nonconforming Markets as of June 30, 2022. Reflects 1H'22 data.

(5)

Represents a $250 million committed credit facility and a $250 million accordion for total capacity of $500 million.

(6)

These amounts include ~$220 million raised through the Company’s at-the-market sales program for its common stock net of sales agent commissions and other offering expenses. The May 2022 common equity offering excludes any applicable underwriting discounts and other estimated offering expenses and includes the underwriters’ full exercise of their overallotment option to purchase additional shares of stock.

Financial Performance

The following table summarizes certain key performance indicators as of and for the quarters ended June 30, 2022, March 31, 2022 and June 30, 2021:

June 30, 2022

March 31, 2022

June 30, 2021

Book value per common share

$

5.90

$

6.77

$

8.37

GAAP leverage at period-end (1)

5.4:1

5.3:1

4.7:1

GAAP net income (loss) per average common share (2)

$

0.55

$

1.37

$

(0.23

)

Annualized GAAP return (loss) on average equity

30.60

%

65.62

%

(8.51

%)

Net interest margin (3)

2.64

%

3.20

%

1.66

%

Average yield on interest earning assets (4)

3.58

%

3.61

%

1.97

%

Average GAAP cost of interest bearing liabilities (5)

1.12

%

0.48

%

0.35

%

Net interest spread

2.46

%

3.13

%

1.62

%

Non-GAAP metrics *

Earnings available for distribution per average common share (2)

$

0.30

$

0.28

$

0.30

Annualized EAD return on average equity

17.49

%

14.01

%

13.05

%

Economic leverage at period-end (1)

6.6:1

6.4:1

5.8:1

Net interest margin (excluding PAA) (3)

2.20

%

2.04

%

2.09

%

Average yield on interest earning assets (excluding PAA) (4)

2.87

%

2.62

%

2.76

%

Average economic cost of interest bearing liabilities (5)

1.11

%

0.89

%

0.83

%

Net interest spread (excluding PAA)

1.76

%

1.73

%

1.93

%

*

Represents a non-GAAP financial measure. Please refer to the "Non-GAAP Financial Measures" section for additional information.

(1)

GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable divided by total equity. Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced ("TBA") and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to the Company and are excluded from economic leverage.

(2)

Net of dividends on preferred stock.

(3)

Net interest margin represents interest income less interest expense divided by average Interest Earning Assets. Net interest margin (excluding PAA) represents the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average Interest Earning Assets plus average outstanding TBA contract and CMBX balances. PAA represents the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to the Company’s Agency mortgage-backed securities.

(4)

Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).

(5)

Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

Updates to Financial Disclosures

Beginning with the quarter ended March 31, 2022, in light of the continued growth of its mortgage servicing rights portfolio, the Company enhanced its financial disclosures by separately reporting servicing income and servicing expense in its Consolidated Statements of Comprehensive Income (Loss). Servicing income and servicing expense were previously included within Other income (loss). As a result of this change, prior periods have been adjusted to conform to the current presentation.

In addition, beginning with the quarter ended March 31, 2022, the Company consolidated certain line items in its Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation. Amounts previously reported under Net interest component of interest rate swaps, Realized gains (losses) on termination or maturity of interest rate swaps, Unrealized gains (losses) on interest rate swaps and Net gains (losses) on other derivatives are combined into a single line item titled Net gains (losses) on derivatives. Similarly, amounts previously reported under Net gains (losses) on disposal of investments and other and Net unrealized gains (losses) on instruments measured at fair value through earnings are combined into a single line item titled Net gains (losses) on investments and other. As a result of these changes, prior periods have been adjusted to conform to the current presentation.

Other Information

This news release and our public documents to which we refer contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "anticipate," "continue," or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions; changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; our ability to grow our residential credit business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities, and related residential mortgage credit assets; risks related to investments in mortgage servicing rights; our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; and our ability to maintain our exemption from registration under the Investment Company Act. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law.

Annaly is a leading diversified capital manager with investment strategies across mortgage finance. Annaly’s principal business objective is to generate net income for distribution to its stockholders and to optimize its returns through prudent management of its diversified investment strategies. Annaly is internally managed and has elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. Additional information on the company can be found at www.annaly.com.

Annaly routinely posts important information for investors on the Company’s website, www.annaly.com. Annaly intends to use this webpage as a means of disclosing material, non-public information, for complying with the Company’s disclosure obligations under Regulation FD and to post and update investor presentations and similar materials on a regular basis. Annaly encourages investors, analysts, the media and others interested in Annaly to monitor the Company’s website, in addition to following Annaly’s press releases, SEC filings, public conference calls, presentations, webcasts and other information it posts from time to time on its website. To sign-up for email-notifications, please visit the "Investors" section of our website, www.annaly.com, then click on "Investor Resources" and select "Email Alerts" to complete the email notification form. The information contained on, or that may be accessed through, the Company’s webpage is not incorporated by reference into, and is not a part of, this document.

The Company prepares a supplemental investor presentation and a financial summary for the benefit of its shareholders. Both the Second Quarter 2022 Investor Presentation and the Second Quarter 2022 Financial Summary can be found at the Company’s website (www.annaly.com) in the Investors section under Investor Presentations.

Conference Call

The Company will hold the second quarter 2022 earnings conference call on July 28, 2022 at 9:00 a.m. Eastern Time. Participants are encouraged to pre-register for the conference call to receive a unique PIN to gain immediate access to the call and bypass the live operator. Pre-registration may be completed by accessing the pre-registration link found on the homepage or "Investors" section of the Company's website at www.annaly.com, or by using the following link: https://dpregister.com/sreg/10168431/f37809757b. Pre-registration may be completed at any time, including up to and after the call start time.

For participants who would like to join the call but have not pre-registered, access is available by dialing 844-735-3317 within the U.S., or 412-317-5703 internationally, and requesting the "Annaly Earnings Call."

There will also be an audio webcast of the call on www.annaly.com. A replay of the call will be available for one week following the conference call. The replay number is 877-344-7529 for domestic calls and 412-317-0088 for international calls and the conference passcode is 8286631. If you would like to be added to the e-mail distribution list, please visit www.annaly.com, click on Investors, then select Email Alerts and complete the email notification form.

Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

June 30,
2022

March 31,
2022

December 31,
2021 (1)

September 30,
2021

June 30, 2021

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Assets

Cash and cash equivalents

$

853,932

$

955,840

$

1,342,090

$

1,046,300

$

1,380,456

Securities

59,042,734

60,727,637

63,655,674

65,622,352

69,032,335

Loans, net

1,487,133

3,617,818

4,242,043

3,580,521

3,563,008

Mortgage servicing rights

1,421,420

1,108,937

544,562

572,259

202,616

Interests in MSR

83,622

85,653

69,316

57,530

49,035

Assets transferred or pledged to securitization vehicles

8,877,247

7,809,307

6,086,308

4,738,481

4,073,156

Assets of disposal group held for sale

97,414

194,138

238,042

3,302,001

Derivative assets

748,432

964,075

170,370

331,395

181,889

Receivable for unsettled trades

434,227

407,225

2,656

42,482

14,336

Principal and interest receivable

300,028

246,739

234,983

234,810

250,210

Goodwill and intangible assets, net

18,195

23,110

24,241

25,371

26,502

Other assets

272,865

238,793

197,683

172,890

300,761

Total assets

$

73,637,249

$

76,185,134

$

76,764,064

$

76,662,433

$

82,376,305

Liabilities and stockholders’ equity

Liabilities

Repurchase agreements

$

51,364,097

$

52,626,503

$

54,769,643

$

55,475,420

$

60,221,067

Other secured financing

914,255

903,255

729,555

909,655

Debt issued by securitization vehicles

7,502,483

6,711,953

5,155,633

3,935,410

3,315,087

Participations issued

696,944

775,432

1,049,066

641,006

315,810

Liabilities of disposal group held for sale

3,608

154,956

159,508

2,362,690

Derivative liabilities

379,708

826,972

881,537

912,134

900,259

Payable for unsettled trades

1,995,960

1,992,568

147,908

571,540

154,405

Interest payable

91,962

80,870

91,176

109,586

173,721

Dividends payable

354,027

321,423

321,142

318,986

317,714

Other liabilities

158,560

456,388

94,423

91,421

66,721

Total liabilities

62,547,349

64,706,364

63,568,739

62,944,566

68,737,129

Stockholders’ equity

Preferred stock, par value $0.01 per share (2)

1,536,569

1,536,569

1,536,569

1,536,569

1,536,569

Common stock, par value $0.01 per share (3)

16,092

14,610

14,597

14,499

14,442

Additional paid-in capital

21,281,077

20,321,952

20,313,832

20,228,366

20,178,692

Accumulated other comprehensive income (loss)

(4,310,926

)

(2,465,482

)

958,410

1,638,638

1,780,275

Accumulated deficit

(7,496,061

)

(7,980,407

)

(9,653,582

)

(9,720,270

)

(9,892,863

)

Total stockholders’ equity

11,026,751

11,427,242

13,169,826

13,697,802

13,617,115

Noncontrolling interests

63,149

51,528

25,499