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Lower Asset Yield, High Prepayments to Ail Annaly (NLY) in Q4

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Zacks Equity Research
·5 min read
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Annaly Capital Management Inc. NLY is scheduled to report fourth-quarter 2020 results on Feb 10, after market close. The company’s results are expected to reflect a year-over-year decline in net interest income (NII), while earnings are likely to improve.

In the last reported quarter, this mortgage real estate investment trust (mREIT) posted core earnings (excluding premium amortization adjustment) of 32 cents per share, which that outpaced the Zacks Consensus Estimate of 26 cents. The stability in the mortgage-backed securities (MBS) sector and an accommodative monetary policy supported the company’s performance. It also registered a sequential improvement in book value per share.

Over the last four quarters, the company’s earnings beat the Zacks Consensus Estimate on three occasions and met the mark in the other quarter. The average surprise was 12.20%. The graph below depicts this surprise history:

Annaly Capital Management Inc Price and EPS Surprise

Annaly Capital Management Inc Price and EPS Surprise
Annaly Capital Management Inc Price and EPS Surprise

Annaly Capital Management Inc price-eps-surprise | Annaly Capital Management Inc Quote

Let’s see how things have shaped up prior to this announcement.

During the fourth quarter, the mortgage market continued to show decent strength, backed by a strong housing market and credit spreads tightening as fiscal stimulus and coronavirus vaccines steered the economy toward recovery. Also, the yield curve started to steepen, with the long-term rates increasing modestly.

Given tighter spreads in the agency residential MBS market, Annaly is expected to have registered growth in its book value for the fourth quarter.

Moreover, the Federal Reserve continued to consistently purchase Treasury securities and agency MBS during the fourth quarter. This is expected to have helped lift valuations of Agency MBS securities held by Annaly. Moreover, to-be-announced (TBA) dollar rolls are expected to have continued to be an attractive investment option. Anticipating that TBA specialness and the prevalence of lower-coupon specified pools have continued in the fourth quarter, Annaly’s prudent selection of assets is likely to have enabled it to generate attractive returns.

In fact, the company has been shifting its investment portfolio to low-coupon TBA securities and specified pools, which have compelling prepayment characteristics. This is likely to aid fourth-quarter results.

Additionally, a near-zero interest rate environment has facilitated a reduction in funding costs. In fact, with declining repo costs and strong dollar roll funding levels, the funding curve flattened in fourth-quarter 2020. Given this favorable backdrop, we anticipate the company to witness a drop in the cost of interest-bearing liabilities, thereby, driving net interest margin expansion.

However, yields across all asset classes are expected to have declined in the fourth quarter. Given Annaly’s significant Agency MBS balance, declining asset yields are likely to have dented its fourth-quarter performance. Notably, the Zacks Consensus Estimate for fourth-quarter average yield on interest-earning assets is pegged at 2.36%, indicating a decline from 2.70% recorded in the prior quarter. This is likely to result in net interest margin contractions as well.

Also, during fourth-quarter 2020, mortgage rates continued with the decreasing trend, making mortgage refinancing more attractive. As such, a significant portion of Annaly’s MBS holdings is anticipated to have continued witnessing elevated levels of constant prepayment rate.This is likely to have adversely impacted the company’s NII and asset yield.

Notably, the consensus estimate for fourth-quarter NII of $421 million indicates a 7.3% year-over-year decline.

Additionally, the company’s activities during the December-end quarter were inadequate to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate for fourth-quarter earnings has been unchanged at 30 cents in a month. Nonetheless, it indicates 15.4% year-over-year growth.

Similarly, the consensus estimate for 2020 earnings is pinned at $1.09, suggesting a year-over-year rise of 9% on NII estimates of $1.32 billion.

Earnings Whispers

Our proven model does not conclusively predict an earnings beat for Annaly this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), which is not the case here as you will see below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Annaly’s Earnings ESP is 0.00%.

Zacks Rank: The company currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a surprise this quarter:

Healthpeak Properties, Inc. PEAK, scheduled to report earnings figures on Feb 9, has an Earnings ESP of +5.66% and a Zacks Rank of 3 at present.

Hudson Pacific Properties, Inc. HPP, slated to release quarterly earnings on Feb 17, currently has an Earnings ESP of +0.76% and a Zacks Rank of 3.

Rexford Industrial Realty, Inc. REXR, slated to release fourth-quarter earnings on Feb 10, has an Earnings ESP of +2.13% and a Zacks Rank of 3 at present.

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