Annaly Capital Management, Inc. Reports 4th Quarter 2015 Results

• GAAP net income of $669.7 million, $0.69 per average common share
• Normalized core earnings of $0.31 per average common share, excludes $0.02 of PAA
• Common stock book value of $11.73, economic leverage of 6.0:1
• Executed share repurchases to date totaling $217.0 million since November 2015
• Credit investment portfolio represents 23% of stockholders’ equity
• Updated capital allocation policy in support of diversification strategy
• Enhanced disclosure of Commercial Real Estate, Residential Credit and Middle Market Lending businesses

NEW YORK--(BUSINESS WIRE)-- Annaly Capital Management, Inc. (NYSE:NLY) (the “Company”) today announced its financial results for the quarter and year ended December 31, 2015.

“In the challenging market environment of 2015, Annaly delivered over $1.2 billion in dividend distributions to shareholders while producing an attractive return on equity with the lowest leverage in the industry” commented Kevin Keyes, Chief Executive Officer and President. “Annaly is not only the largest and most liquid mortgage REIT in the world, the Company now operates a more efficient and diverse investment platform positioned to uniquely benefit from investment opportunities across numerous markets and asset classes.

“Also this quarter, in an effort to continue to provide increased transparency into our evolving business strategy and capital allocation options, we have included enhanced disclosure of our sizeable commercial real estate, residential credit and middle market lending portfolios. As we have stated, these three businesses complement our core Agency MBS strategies and now comprise approximately 23% of our total equity capital.”

Updated Capital Allocation Policy

As part of the Company’s diversification strategy, in February 2016, the Company’s board of directors (“Board”) adopted an updated capital allocation policy. The updated policy allows the Company greater flexibility to generate attractive returns for the Company’s stockholders. Under the Company’s capital allocation policy, subject to oversight by the Board, the Company may allocate investments within its target asset classes as it determines is appropriate from time to time. The following target assets have been approved for investment under the Company’s capital allocation policy.

The Board may make changes to the Company’s capital allocation policy and targeted assets as it deems appropriate at its discretion.

Enhanced Financial Disclosure

Beginning with the third quarter 2015, the Company introduced a series of non-GAAP “normalized” financial metrics intended to provide investors more details on the various components of the Company’s financial performance. The Company’s traditional non-GAAP “core earnings” measure includes a component of premium amortization representing the change in estimated long-term constant prepayment rates (“CPR”) (referred to herein as the premium amortization adjustment (“PAA”)). Normalized core earnings presents the Company’s core earnings excluding the PAA. Additionally, under the title “normalized” the Company discloses other measures (such as net interest margin, annualized yield on interest earning assets, net interest spread and core return on average equity) which exclude the effect of the PAA. Discussions of period-over-period fluctuations within the following ‘Financial Performance’ section are presented based on GAAP and normalized results.

The Company’s GAAP and core earnings metrics (that are not normalized) include the PAA because in accordance with GAAP the Company recognizes income under the retrospective method on a substantial portion of its Residential Investment Securities classified as available-for-sale. Premiums and discounts associated with the purchase of Residential Investment Securities are amortized or accreted into income over the remaining projected lives of the securities. Using a third-party supplied model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the security’s acquisition. The amortized cost of the investment is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.

The following table illustrates the impact of adjustments to long-term CPR estimates on premium amortization expense for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014:

In addition to the enhanced disclosures described above, the Company is also providing additional and more detailed information on its commercial real estate, residential credit and corporate debt businesses in its Fourth Quarter 2015 Supplemental Information available on the Company’s website www.annaly.com.

Financial Performance

The following table summarizes certain key performance indicators as of and for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014:

The Company reported GAAP net income for the quarter ended December 31, 2015 of $669.7 million, or $0.69 per average common share, compared to a GAAP net loss of ($627.5) million, or ($0.68) per average common share, for the quarter ended September 30, 2015, and a GAAP net loss of ($658.3) million, or ($0.71) per average common share, for the quarter ended December 31, 2014. The increase for the quarter ended December 31, 2015 compared to each of the quarters ended September 30, 2015 and December 31, 2014 is primarily the result of favorable market value changes on interest rate swaps.

Normalized core earnings for the quarter ended December 31, 2015 was $311.1 million, or $0.31 per average common share, compared to $300.7 million, or $0.30 per average common share, for the quarter ended September 30, 2015, and $330.6 million, or $0.33 per average common share, for the quarter ended December 31, 2014. Normalized core earnings increased during the quarter ended December 31, 2015 compared to the quarter ended September 30, 2015 on higher interest income earned on the Company’s commercial investment portfolio. Normalized core earnings declined during the quarter ended December 31, 2015 compared to the quarter ended December 31, 2014 due to the absence of investment advisory income and dividend income from Chimera Investment Corp. (“Chimera”) following termination of our relationship with Chimera as well as due to higher interest expense on repurchase agreements on higher weighted average rates, partially offset by lower average balances during the quarter ended December 31, 2015. Core earnings for the quarter ended December 31, 2015 was $329.2 million, or $0.33 per average common share, compared to $217.6 million, or $0.21 per average common share, for the quarter ended September 30, 2015, and $298.9 million, or $0.30 per average common share, for the quarter ended December 31, 2014.

GAAP net income for the year ended December 31, 2015 was $465.7 million, or $0.42 per average common share and a GAAP net loss for the year ended December 31, 2014 of ($842.3) million, or ($0.96) per average common share. Normalized core earnings for the years ended December 31, 2015 and 2014 were $1.3 billion, or $1.28 per average common share, and $1.2 billion, or $1.16 per average common share, respectively. Core earnings for the years ended December 31, 2015 and 2014 were $1.2 billion, or $1.20 per average common share, and $1.1 billion, or $1.14 per average common share, respectively.

The following table presents a reconciliation between GAAP net income (loss), core earnings and normalized core earnings for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014. Core earnings is defined as net income (loss) excluding gains or losses on disposals of investments and termination of interest rate swaps, unrealized gains or losses on interest rate swaps and financial instruments measured at fair value through earnings, net gains and losses on trading assets, impairment losses, net income (loss) attributable to noncontrolling interest, and certain other non-recurring gains or losses, and inclusive of dollar roll income (a component of Net gains (losses) on trading assets). Normalized core earnings presents the Company’s core earnings excluding the PAA.

The following table presents a reconciliation between GAAP net income (loss), core earnings and normalized core earnings for the years ended December 31, 2015 and 2014:

Normalized net interest margin for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014 was 1.71%, 1.65% and 1.74%, respectively. For the quarter ended December 31, 2015, the normalized average yield on interest earning assets was 3.05% and the average cost of interest bearing liabilities, including interest expense on interest rate swaps used to hedge cost of funds, was 1.68%, which resulted in a normalized net interest spread of 1.37%. The normalized average yield on interest earning assets for the quarter ended December 31, 2015 increased when compared to the quarter ended September 30, 2015 on higher weighted average coupons on residential and commercial investments and decreased when compared to the quarter ended December 31, 2014 due to lower weighted average coupons on Residential Investment Securities and higher premium amortization expense exclusive of PAA, partially offset by higher interest income on commercial investments. The rise in our average cost of interest bearing liabilities for the quarter ended December 31, 2015 when compared to the quarter ended September 30, 2015 is primarily attributable to higher average costs of repurchase agreements, partially offset by a reduction in interest expense on swaps. Our average cost of interest bearing liabilities for the quarter ended December 31, 2015 when compared to the quarter ended December 31, 2014 was relatively unchanged.

Asset Portfolio

Residential Investment Securities

Residential Investment Securities, which are comprised of Agency mortgage-backed securities, Agency debentures, credit risk transfer securities and Non-Agency mortgage-backed securities, totaled $67.2 billion at December 31, 2015, compared to $67.0 billion at September 30, 2015 and $82.9 billion at December 31, 2014. The Company’s Residential Investment Securities portfolio at December 31, 2015 was comprised of 93% fixed-rate assets with the remainder constituting adjustable or floating-rate investments.

The Company uses a third-party model and market information to project prepayment speeds for purposes of determining amortization of premiums and discounts on Residential Investment Securities. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model may cause changes to the results. The net amortization of premiums and accretion of discounts on Residential Investment Securities for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014, was $159.7 million (which included PAA benefit of $18.1 million), $255.1 million (which included PAA cost of $83.1 million), and $198.0 million (which included PAA cost of $31.7 million), respectively. The total net premium balance on Residential Investment Securities at December 31, 2015, September 30, 2015, and December 31, 2014, was $5.0 billion, $4.8 billion, and $5.3 billion, respectively. The weighted average amortized cost basis of the Company’s non-interest-only Residential Investment Securities at each of December 31, 2015, September 30, 2015, and December 31, 2014, was 105.3. The weighted average amortized cost basis of the Company’s interest-only Residential Investment Securities at December 31, 2015, September 30, 2015, and December 31, 2014, was 16.0%, 16.1%, and 15.4%, respectively. The weighted average experienced CPR on our Agency mortgage-backed securities for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014, was 9.7%, 11.5% and 8.4%, respectively. The weighted average projected long-term CPR on our Agency mortgage-backed securities at December 31, 2015, September 30, 2015, and December 31, 2014, was 8.8%, 9.2% and 8.7%, respectively.

At December 31, 2015, the Company had outstanding $13.8 billion in notional balances of TBA derivative positions. Realized and unrealized gains (losses) on TBA derivatives are recorded in Net gains (losses) on trading assets in the Company’s Consolidated Statements of Comprehensive Income (Loss). The following table summarizes certain characteristics of the Company’s TBA derivatives at December 31, 2015:

During the quarter ended December 31, 2015, the Company disposed of $2.7 billion of Residential Investment Securities, resulting in a net realized loss of ($7.5) million. During the quarter ended September 30, 2015, the Company disposed of $3.7 billion of Residential Investment Securities, resulting in a net realized gain of $4.5 million. During the quarter ended December 31, 2014, the Company disposed of $7.3 billion of Residential Investment Securities, resulting in a net realized gain of $3.2 million.

During the year ended December 31, 2015, the Company disposed of $23.9 billion of Residential Investment Securities, resulting in a net realized gain of $63.3 million. During the year ended December 31, 2014, the Company disposed of $22.5 billion of Residential Investment Securities, resulting in a net realized gain of $94.5 million.

Commercial Investments Portfolio

The Company’s commercial investments portfolio consists of commercial real estate debt and equity investments and corporate debt. Commercial real estate debt and preferred equity, including securitized loans of consolidated variable interest entities (“VIEs”) and loans held for sale of $278.6 million, totaled $4.5 billion and investments in commercial real estate totaled $535.9 million at December 31, 2015. Commercial real estate debt and preferred equity, including securitized loans of consolidated VIEs and loans held for sale of $476.6 million, totaled $4.7 billion and investments in commercial real estate totaled $301.4 million at September 30, 2015. Corporate debt investments totaled $488.5 million as of December 31, 2015, up from $425.0 million at September 30, 2015. The weighted average levered return on commercial real estate debt and preferred equity, which includes loans held for sale, as of December 31, 2015, September 30, 2015, and December 31, 2014, was 7.60%, 6.79% and 9.54%, respectively. Excluding loans held for sale, the weighted average levered return on commercial real estate debt and preferred equity was 9.23% and 9.31% at December 31, 2015 and September 30, 2015, respectively. The weighted average levered return on investments in commercial real estate, excluding real estate held-for-sale, as of December 31, 2015, September 30, 2015, and December 31, 2014, was 10.59%, 11.36% and 12.98%, respectively.

During the fourth quarter, the Company originated or provided additional funding on pre-existing commercial real estate debt commitments totaling $412.8 million with a weighted average coupon of 3.70%, of which $280.0 million ($278.6 million net of unamortized origination fees) is held for sale at December 31, 2015. During the quarter, the Company received cash from its commercial real estate investments of $578.6 million from loan sales, partial paydowns, prepayments and maturities with a weighted average coupon of 3.24%. During the quarter, the Company, through joint venture arrangements, acquired two retail properties and a multifamily property for a combined gross purchase price of $244.7 million and a net equity investment for $76.6 million. The Company also acquired AAA-rated commercial mortgage-backed securities during the quarter for a gross purchase price of $43.0 million and a net equity investment for $7.3 million. During the quarter, the Company grew its corporate debt portfolio by $63.5 million.

At December 31, 2015, September 30, 2015, and December 31, 2014, residential and commercial credit assets (including loans held for sale) comprised 23%, 22% and 11% of stockholders’ equity.

Capital and Funding

At December 31, 2015, total stockholders’ equity was $11.9 billion. Leverage at December 31, 2015, September 30, 2015, and December 31, 2014, was 5.1:1, 4.8:1 and 5.4:1, respectively. For purposes of calculating the Company’s leverage ratio, debt consists of repurchase agreements, other secured financing, Convertible Senior Notes, securitized debt, participation sold and mortgages payable. Securitized debt, participation sold and mortgages payable are non-recourse to the Company. Economic leverage, which excludes non-recourse debt and includes other forms of financing such as TBA dollar roll transactions, was 6.0:1 at December 31, 2015, compared to 5.8:1 at September 30, 2015, and 5.4:1 at December 31, 2014. At December 31, 2015, September 30, 2015, and December 31, 2014, the Company’s capital ratio, which represents the ratio of stockholders’ equity to total assets (inclusive of total market value of TBA derivatives), was 13.3%, 13.7%, and 15.1%, respectively. On a GAAP basis, the Company produced an annualized return (loss) on average equity for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014 of 22.15%, (20.18%), and (19.91%), respectively. On a normalized core earnings basis, the Company provided an annualized return on average equity for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014, of 10.30%, 9.67%, and 10.00%, respectively.

At December 31, 2015, September 30, 2015, and December 31, 2014, the Company had a common stock book value per share of $11.73, $11.99 and $13.10, respectively.

As previously announced, the Company’s Board authorized the repurchase of up to $1 billion of its outstanding common shares through December 31, 2016. Since the beginning of the fourth quarter 2015, the Company repurchased 23.1 million shares of its outstanding common stock for total proceeds of $217.0 million, representing an average price per share of $9.40, of which 11.9 million shares for total proceeds of $114.3 million had settled as of December 31, 2015.

At December 31, 2015, September 30, 2015, and December 31, 2014, the Company had outstanding $56.2 billion, $56.4 billion, and $71.4 billion of repurchase agreements, with weighted average remaining maturities of 151 days, 147 days, and 141 days, respectively, and with weighted average borrowing rates of 1.83%, 1.75%, and 1.62%, after giving effect to the Company’s interest rate swaps used to hedge cost of funds. During the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014, the weighted average rate on repurchase agreements was 0.78%, 0.73%, and 0.60%, respectively.

The following table presents the principal balance and weighted average rate of repurchase agreements by maturity at December 31, 2015:

The following table presents the principal balance, weighted average rate and weighted average days to maturity on outstanding debt at December 31, 2015:

Hedge Portfolio

At December 31, 2015, the Company had outstanding interest rate swaps with a net notional amount of $30.2 billion. Changes in the unrealized gains or losses on the interest rate swaps are reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company enters into interest rate swaps to mitigate the risk of rising interest rates that affect the Company’s cost of funds or its dollar roll transactions. As of December 31, 2015, the swap portfolio, excluding forward starting swaps, had a weighted average pay rate of 2.26%, a weighted average receive rate of 0.53% and a weighted average maturity of 7.02 years.

The following table summarizes certain characteristics of the Company’s interest rate swaps at December 31, 2015:

The Company enters into U.S. Treasury and Eurodollar futures contracts to hedge a portion of its interest rate risk. The following table summarizes outstanding futures positions as of December 31, 2015:

At December 31, 2015, September 30, 2015, and December 31, 2014, the Company’s hedge ratio was 57%, 58% and 48%, respectively. Our hedge ratio measures total notional balances of interest rate swaps, interest rate swaptions and futures relative to repurchase agreements and TBA notional outstanding.

Dividend Declarations

Common dividends declared for each of the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014 were $0.30 per common share. The annualized dividend yield on the Company’s common stock for the quarter ended December 31, 2015, based on the December 31, 2015 closing price of $9.38, was 12.79%, compared to 12.16% for the quarter ended September 30, 2015, and 11.10% for the quarter ended December 31, 2014.

Key Metrics

The following table presents key metrics of the Company’s portfolio, liabilities and hedging positions, and performance as of and for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014:

Other Information

Annaly’s principal business objectives are to generate net income for distribution to its shareholders from its investments and capital preservation. Annaly is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”). Annaly is managed and advised by Annaly Management Company LLC.

The Company prepares a supplement to provide additional quarterly information for the benefit of its shareholders. The supplement can be found at the Company’s website in the Investors section under Investor Presentations.

Conference Call

The Company will hold the fourth quarter 2015 earnings conference call on February 25, 2016 at 10:00 a.m. Eastern Time. The number to call is 888-317-6003 for domestic calls and 412-317-6061 for international calls. The conference passcode is 3130649. There will also be an audio webcast of the call on www.annaly.com. The replay of the call is 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 10080365. If you would like to be added to the e-mail distribution list, please visit www.annaly.com, click on Investor Relations, then select Email Alerts and complete the email notification form.

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, 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 financings; changes in the market value of our assets; changes in business conditions and the general economy; our ability to grow our commercial business; our ability to grow our residential mortgage credit business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, commercial real estate assets and corporate debt; our ability to consummate any contemplated investment opportunities; changes in government regulations affecting our business; our ability to maintain our qualification as a REIT for federal income tax purposes; and our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended. 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. We do not undertake, and specifically disclaim 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.

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Annaly Capital Management, Inc.
Investor Relations
1-888-8Annaly
www.annaly.com

Source: Annaly Capital Management, Inc.