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Will Wider Spreads Impact Annaly Capital's (NLY) Q2 Earnings?

Zacks Equity Research

Annaly Capital Management Inc. NLY is scheduled to report second-quarter 2019 results on Aug 1, after the market closes. The company’s earnings per share (EPS) will likely decline year over year (y/y).

In the last reported quarter, this mortgage real estate investment trust (REIT) posted core earnings, excluding PAA, of 29 cents per share, in line with the Zacks Consensus Estimate. However, net interest income (NII) totaling $218.5 million, witnessed a steep decline from $512.1 million reported in second-quarter 2018.

Over the last four quarters, the company beat the Zacks Consensus Estimate on two occasions and met in the other two. It came up with an average positive surprise of 1.76% during this period. 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-eps-surprise | Annaly Capital Management Inc Quote

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Mortgage REITS witnessed expansion of pipelines, while origination activity began to pick up, during the second quarter.  Specifically, the 30-year mortgage rates declined from 4.08% at the beginning of the second quarter to 3.73% at the end of the quarter, according to figures released by Freddie Mac. This marked the lowest level of the 30-year rate since late 2016. Following suit, the 15-year fixed rates and 5-year fixed rate declined to 3.16% and 3.39%, respectively.

Lower rates boosted issuance and originations during the quarter with issuance of agency mortgage-backed securities (MBSs) surging 43% sequentially. Also, non-agency MBS backed by seasoned collateral accounted for 54.3% of new issuance during the June-end quarter. This buoyed aggregate issuance by Fan-nie Mae, Freddie Mac and Ginnie Mae that hit $330.65 billion.

These favorable industry fundamentals are anticipated to benefit Annaly’s origination business in the quarter under review. 

Although significant decline in interest rates buoyed originations, it resulted in yield-curve steepening and higher interest rate volatility. Further, prepayment activity increased owing to lower interest rates. This is expected to have negatively impacted spreads on Agency MBSs.

In fact, wider spreads on Agency MBSs as compared with the U.S. Treasury and interest rate swap hedges during the April-June quarter might have affected Annaly’s investment portfolio which primarily consists of agency MBS. Additionally, the company will likely record a decline in the second-quarter book value due to unfavorable agency and credit spreads. 

Moreover, higher MBS repo funding rates are likely to have hindered the company’s net interest margin during the June-end quarter, while lower LIBOR rates might have weighed on investment yields on loans.

In May, Annaly implemented CuriumEDM as a master data management (MDM) solution in a bid to streamline and improve data flow across the company’s existing technology platform. This comes as part of the company’s multi-phased technology initiative aimed at driving operational efficiencies and promoting transparency across its diversified operating platform. In fact, MDM is anticipated to improve data-quality controls by validation, reconciliation, and mastering of key data sets, in the days ahead.

Further, in June, Annaly’s board of directors authorized the buyback of up to $1.5 billion of its outstanding shares of common stock through Dec 31, 2020. Such shareholder-friendly moves are predicted to boost investor’s confidence in the stock.

Lastly, Annaly’s activities during the quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for second-quarter FFO remained unchanged at 26 cents in a month’s time. In addition, it indicates a 13.3% year-over-year decline.

Earnings Whispers

Our proven model does not conclusively show that Annaly is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. That 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.

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

Zacks Rank: The company currently carries a Zacks Rank of 4 (Sell), which decreases the predictive power of ESP.

Stocks That Warrant a Look

CyrusOne Inc. CONE, scheduled to release earnings on Aug 1, has an Earnings ESP of +1.37% and carries a Zacks Rank of 3, at present.

Corporate Office Properties Trust OFC, slated to report quarterly figures on Jul 29, has an Earnings ESP of +0.66% and carries a Zacks Rank of 3, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

KKR Real Estate Finance Trust Inc. KREF, set to release earnings on Aug 1, has an Earnings ESP of +10.66% and carries a Zacks Rank of 3, at present.

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