Annaly Capital's 4th quarter 2013 earnings: Must-know takeaways (Part 2 of 3)
Highlights of the quarter
Annaly reported core earnings of $0.35 a share, which were higher than the Street estimate of $0.26 per share. Book value per share declined 4.5%, to $12.13 per share. Fixed-rate agency mortgage-backed securities accounted for 91% of the portfolio. Annaly was relatively less leveraged than its peer group, with a debt-to-equity ratio of 5:1. At the end of Q2, the leverage ratio was 6.2:1, so Annaly de-levered pretty aggressively. Annaly cut its agency MBS exposure by nearly 13%, or $12 billion, for a realized gain of almost $50 million. Total assets declined by 11.86%, to just over $73.4 billion. The average interest rate spread was 1.43%—a big jump from the 1.03% the company reported in the previous quarter and the 94 basis points it reported a year ago. Still, this is lower than the non-agency REITs. This is typical of an agency REIT—low interest rate spreads because they bear mainly interest rate risk and not credit risk. Prepays fell as a result of higher interest rates and prepayment burnout.
Annaly spent a lot of the quarter repositioning its portfolio. It made a slight adjustment to increase adjustable-rate mortgages versus fixed-rate mortgages. Annaly also increased its commercial investment portfolio, which now accounts for 14% of shareholder’s equity.
The commercial real estate yield is in the low teens, which was a big reason why the average annualized yield on Annaly’s portfolio increased from 2.88% to 3.5%. Of course, with commercial real estate, the company is now taking credit risk.
Chief executive officer Wellington Denahan said:
“We are encouraged by the reduced uncertainty in the fixed income markets with the introduction of monetary policy tapering. Our commercial assets continue to build momentum, with commercial investments now representing 14% of our stockholders’ equity. The lower leverage stance permits us to be opportunistic with capital deployment allowing us to strengthen earnings in future periods.”
The company paid a quarterly dividend for the fourth quarter of 30 cents a share—a decrease of a nickel from the third quarter and a drop of 15 cents from a year ago. Given that REITs must pay out 90% of their income as dividends, they tend to have volatile dividend streams.
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