Annaly Capital Management, Inc. Reports 2nd Quarter 2016 Results

• GAAP net loss of ($278.5) million, ($0.32) per average common share
• Core earnings of $0.29 per average common share^*
• Common stock book value per share of $11.50, economic leverage of 6.1:1
• Credit investment portfolio represents 24% of stockholders’ equity
• Completed approximately $1.5 billion acquisition of Hatteras Financial Corp. on July 12, 2016

NEW YORK--(BUSINESS WIRE)-- Annaly Capital Management, Inc. (NYSE:NLY) (the “Company”) today announced its financial results for the quarter ended June 30, 2016.

“During heightened market volatility and amidst a difficult operating environment, Annaly continued to deliver strong performance and durable core earnings and book value,” commented Kevin Keyes, Chief Executive Officer and President. “Our diversified platform has provided our shareholders with the most consistent core earnings over the past two years – earnings that have proven to be approximately two-thirds more stable than other industry participants.”

On July 12, 2016, Annaly completed the acquisition of Hatteras Financial Corp., for aggregate consideration of approximately $1.5 billion, marking the largest mortgage REIT acquisition in history. “The Hatteras transaction provides portfolio diversity and size while also adding to the earnings and capital base of the Company,” Mr. Keyes remarked. “This strategic milestone is evidence of Annaly’s unique financial flexibility and demonstrates our ability to grow opportunistically in this challenging market environment. Annaly’s shareholders continue to benefit from the increased scale, liquidity, asset and business diversification of the industry’s leading hybrid REIT.”

Enhanced Disclosures

Beginning with the second quarter 2016, the Company is separately providing a supplemental investor presentation on the Company’s business profile, strategy, capital allocation and performance. This information is in addition to the quarterly supplemental financial information, which the Company will continue to provide in a separate financial presentation. Both the Second Quarter 2016 Investor Presentation and the Second Quarter 2016 Financial Summary are available on the Company’s website (www.annaly.com).

Additionally, the Company periodically reviews its use of non-GAAP financial measures to ensure only those measures relied upon by the Company’s management in assessing the financial performance of the business are disclosed. This review also considers regulatory interpretations and guidance. Beginning with the second quarter 2016 results as reported herein, the Company has modified its non-GAAP disclosures to discontinue use of normalized financial metrics. The Company will continue disclosing core financial metrics, with core earnings redefined to also exclude the component of premium amortization representing the quarter-over-quarter change in estimated long-term constant prepayment rates (“CPR”) (referred to herein as premium amortization adjustment (“PAA”)). The Company believes these non-GAAP financial measures are useful for management, investors, analysts, and other interested parties in evaluating the Company’s performance but should not be viewed in isolation and are not a substitute for financial measurements computed in accordance with GAAP. Please refer to the “Non-GAAP Financial Measures” section for additional information.

Financial Performance

The following table summarizes certain key performance indicators as of and for the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015:

The Company reported a GAAP net loss for the quarter ended June 30, 2016 of ($278.5) million, or ($0.32) per average common share, compared to a GAAP net loss of ($868.1) million, or ($0.96) per average common share, for the quarter ended March 31, 2016, and GAAP net income of $900.1 million, or $0.93 per average common share, for the quarter ended June 30, 2015. The change for the quarter ended June 30, 2016 compared to the quarter ended March 31, 2016 is primarily due to lower realized and unrealized losses on interest rate swaps during the quarter ended June 30, 2016. The decrease for the quarter ended June 30, 2016 compared to the quarter ended June 30, 2015 is attributable to realized and unrealized losses on interest rate swaps during the quarter ended June 30, 2016 compared to realized and unrealized gains on interest rate swaps during the quarter ended June 30, 2015, as well as higher interest expense on repurchase agreements during the current quarter.

In accordance with GAAP, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities, excluding interest-only securities, considering estimates of future principal prepayment in the calculation of the effective yield because they are probable and the timing and amount of prepayments can be reasonably estimated. The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third-party 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 date of 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 Company’s GAAP metrics include the unadjusted impact of amortization and accretion associated with this method. The Company’s non-GAAP metrics exclude the effect of the PAA representing the quarter-over-quarter change in estimated long-term CPR.

The following table illustrates the impact of quarter-over-quarter adjustments to long-term CPR estimates on premium amortization expense for the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015:

Core earnings for the quarter ended June 30, 2016 were $282.2 million, or $0.29 per average common share, compared to $291.8 million, or $0.30 per average common share, for the quarter ended March 31, 2016, and $331.5 million, or $0.33 per average common share, for the quarter ended June 30, 2015. Core earnings decreased during the quarter ended June 30, 2016 compared to the quarter ended March 31, 2016 due to lower interest income earned on the Company’s commercial investment portfolio during the quarter ended June 30, 2016. Core earnings declined during the quarter ended June 30, 2016 compared to the quarter ended June 30, 2015 due to higher borrowing costs and a reduction in TBA dollar roll income, partially offset by lower interest expense on swaps during the quarter ended June 30, 2016.

The following table presents a reconciliation between GAAP net income (loss) and non-GAAP core earnings for the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015.

Net interest margin for the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015 was 1.15%, 0.79% and 2.06%, respectively. Core net interest margin for the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015 was 1.54%, 1.54% and 1.70%, respectively. For the quarter ended June 30, 2016, the average yield on interest earning assets was 2.48% 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 net interest spread of 0.80%. The average yield on interest earning assets for the quarter ended June 30, 2016 increased when compared to the quarter ended March 31, 2016 and decreased when compared to the quarter ended June 30, 2015 due to differences in premium amortization expense on Residential Investment Securities resulting from changes in long-term CPR estimates. The decline in our average cost of interest bearing liabilities for the quarter ended June 30, 2016 when compared to the quarter ended March 31, 2016 is primarily attributable to a reduction in interest expense on swaps, partially offset by higher average rates on repurchase agreements during the quarter ended June 30, 2016. The rise in our average cost of interest bearing liabilities for the quarter ended June 30, 2016 when compared to the quarter ended June 30, 2015 was driven by an increase in borrowing rates on repurchase agreements and other secured borrowings, partially offset by a decline in interest expense on swaps during the quarter ended June 30, 2016. For the quarter ended June 30, 2016, the core average yield on interest earning assets was 2.95%, which resulted in a core net interest spread of 1.27%. The core average yield on interest earning assets for the quarter ended June 30, 2016 decreased when compared to the quarter ended March 31, 2016 primarily due to lower interest income on the commercial investment portfolio during the quarter ended June 30, 2016 and increased when compared to the quarter ended June 30, 2015 due to higher weighted average coupons on Residential Investment Securities, partially offset by higher weighted average premium amortization expense, exclusive of the PAA, on Residential Investment Securities.

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 $66.6 billion at June 30, 2016, compared to $67.3 billion at March 31, 2016 and $68.2 billion at June 30, 2015. The Company’s Residential Investment Securities portfolio at June 30, 2016 was comprised of 92% fixed-rate assets with the remainder constituting adjustable or floating-rate investments.

The Company uses 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 model revisions may cause changes to the results. The net amortization of premiums and accretion of discounts on Residential Investment Securities for the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015, was $265.5 million (which included PAA cost of $85.6 million), $355.7 million (which included PAA cost of $168.4 million), and $94.0 million (which included a PAA benefit of $79.6 million), respectively. The total net premium balance on Residential Investment Securities at June 30, 2016, March 31, 2016, and June 30, 2015, was $4.6 billion, $4.7 billion, and $4.8 billion, respectively. The weighted average amortized cost basis of the Company’s non interest-only Residential Investment Securities at June 30, 2016, March 31, 2016, and June 30, 2015, was 105.0%, 105.0% and 105.4%, respectively. The weighted average amortized cost basis of the Company’s interest-only Residential Investment Securities at June 30, 2016, March 31, 2016, and June 30, 2015, was 15.8%, 15.6%, and 16.0%, respectively. The weighted average experienced CPR on our Agency mortgage-backed securities for the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015, was 12.7%, 8.8% and 12.1%, respectively. The weighted average projected long-term CPR on our Agency mortgage-backed securities at June 30, 2016, March 31, 2016, and June 30, 2015, was 13.0%, 11.8% and 7.7%, respectively.

At June 30, 2016, the Company had outstanding $12.7 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 June 30, 2016:

During the quarter ended June 30, 2016, the Company disposed of $1.8 billion of Residential Investment Securities, resulting in a net realized gain of $11.9 million. During the quarter ended March 31, 2016, the Company disposed of $3.5 billion of Residential Investment Securities, resulting in a net realized loss of ($1.7) million. During the quarter ended June 30, 2015, the Company disposed of $2.5 billion of Residential Investment Securities, resulting in a net realized gain of $3.9 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, including preferred equity, AAA-rated commercial mortgage-backed securities, securitized loans of consolidated variable interest entities (“VIEs”) and loans held for sale totaled $5.7 billion at June 30, 2016 compared to $5.9 billion at March 31, 2016. Loans held for sale, net totaled $164.2 million at June 30, 2016, compared to $278.6 million at March 31, 2016. Investments in commercial real estate totaled $504.6 million at June 30, 2016, down slightly from $527.8 million at March 31, 2016. Corporate debt investments totaled $669.6 million as of June 30, 2016, up from $639.5 million at March 31, 2016. The weighted average levered return on commercial real estate debt and preferred equity, including loans held for sale, as of June 30, 2016, March 31, 2016, and June 30, 2015, was 8.25%, 7.53% and 9.78%, respectively. Excluding loans held for sale, the weighted average levered return on commercial real estate debt and preferred equity was 9.09%, 8.57% and 9.78% at June 30, 2016, March 31, 2016, and June 30, 2015, respectively. The weighted average levered returns on investments in commercial real estate equity as of June 30, 2016, March 31, 2016, and June 30, 2015, was 10.63%, 10.59% and 12.48%, respectively.

During the second quarter 2016, the Company provided additional funding on pre-existing commercial real estate debt commitments totaling $10.0 million with a weighted average coupon of 6.5%. During the second quarter 2016, the Company received cash from its commercial real estate investments of $225.2 million from loan sales (including loans held for sale), partial pay-downs, prepayments and maturities with a weighted average coupon of 3.7%, in addition to $12.75 million in proceeds from real estate sales.

At June 30, 2016, March 31, 2016, and June 30, 2015, residential and commercial credit assets (including loans held for sale) comprised 24%, 25% and 14% of stockholders’ equity, respectively.

Capital and Funding

At June 30, 2016, total stockholders’ equity was $11.6 billion. Leverage at June 30, 2016, March 31, 2016, and June 30, 2015, was 5.3:1, 5.3:1 and 4.8:1, 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 6.1:1 at June 30, 2016, compared to 6.2:1 at March 31, 2016, and 5.6:1 at June 30, 2015. At June 30, 2016, March 31, 2016, and June 30, 2015, the Company’s capital ratio, which represents the ratio of stockholders’ equity to total assets (inclusive of total market value of TBA derivatives and exclusive of consolidated VIEs associated with B Piece commercial mortgage-backed securities), was 13.2%, 13.2%, and 14.6%, respectively. On a GAAP basis, the Company produced an annualized return (loss) on average equity for the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015 of (9.60%), (29.47%) and 28.00%, respectively. On a core earnings basis, the Company provided an annualized return on average equity for the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015, of 9.73%, 9.91%, and 10.31%, respectively.

At June 30, 2016, March 31, 2016, and June 30, 2015, the Company had a common stock book value per share of $11.50, $11.61 and $12.32, respectively.

At June 30, 2016, March 31, 2016, and June 30, 2015, the Company had outstanding $53.9 billion, $54.4 billion, and $57.5 billion of repurchase agreements, with weighted average remaining maturities of 129 days, 136 days, and 149 days, and with weighted average borrowing rates of 1.81%, 1.87%, and 1.73%, after giving effect to the Company’s interest rate swaps used to hedge cost of funds, respectively. The weighted average rate on repurchase agreements during the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015, was 1.00%, 0.95%, and 0.67%, respectively.

At June 30, 2016 and March 31, 2016, the Company had outstanding $3.6 billion of advances from the Federal Home Loan Bank of Des Moines, with weighted average remaining maturities of 1,644 days and 1,735 days, respectively, and with weighted average borrowing rates of 0.60% and 0.59%, respectively.

The following table presents the principal balance and weighted average rate of repurchase agreements and FHLB advances by maturity at June 30, 2016:

The following table presents the principal balance, weighted average rate and weighted average days to maturity on outstanding debt at June 30, 2016:

Hedge Portfolio

At June 30, 2016, the Company had outstanding interest rate swaps with a net notional amount of $26.2 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 June 30, 2016, the swap portfolio had a weighted average pay rate of 2.28%, a weighted average receive rate of 0.74% and a weighted average maturity of 7.04 years. There were no forward starting swaps at June 30, 2016.

The following table summarizes certain characteristics of the Company’s interest rate swaps at June 30, 2016:

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 June 30, 2016:

At June 30, 2016, March 31, 2016, and June 30, 2015, the Company’s hedge ratio was 49%, 51% and 53%, respectively. Our hedge ratio measures total notional balances of interest rate swaps, interest rate swaptions and futures relative to repurchase agreements, other secured financing and TBA notional outstanding.

Dividend Declarations

Common dividends declared for each of the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015 were $0.30 per common share. The annualized dividend yield on the Company’s common stock for the quarter ended June 30, 2016, based on the June 30, 2016 closing price of $11.07, was 10.84%, compared to 11.70% for the quarter ended March 31, 2016, and 13.06% for the quarter ended June 30, 2015.

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 June 30, 2016, March 31, 2016, and June 30, 2015:

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, 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; risks related to investments in mortgage servicing rights and ownership of a servicer; any potential business disruption following the acquisition of Hatteras Financial Corp.; our ability to consummate any contemplated investment opportunities; changes in government regulations affecting our business; our ability to maintain our qualification as a REIT; 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, except as required by law.

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 supplemental investor presentation and a financial summary for the benefit of its shareholders. Both the Second Quarter 2016 Investor Presentation and the Second Quarter 2016 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 2016 earnings conference call on August 4, 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 2103129. 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 10090067. 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.

Non-GAAP Financial Measures

This news release contains analysis and discussion of non-GAAP financial measures. The Company’s presentation of non-GAAP financial measures has important limitations. Other market participants may calculate non-GAAP financial measures differently than the Company calculates them, making comparative analysis difficult.

Although the Company believes its presentation of non-GAAP financial measures provides insight into the Company’s financial position and performance excluding the effects of certain transactions, non-GAAP financial measures may have limited usefulness as an analytical tool. Therefore, the non-GAAP financial measures should not be viewed in isolation and are not a substitute for financial measures computed in accordance with GAAP.

The Company’s non-GAAP financial measures include the following:

• core earnings;
• core earnings per common share;
• annualized core return on average equity;
• core interest income;
• economic interest expense;
• economic core net interest income;
• core average yield on interest earning assets;
• core net interest margin; and
• core net interest spread

The Company’s management relies on non-GAAP financial measures to evaluate the performance of the business. Further, the Company’s management relies on these performance metrics, which exclude the effect of the PAA, in its consideration of dividend payments to shareholders. Given the quarter-over-quarter volatility of premium amortization cost (benefit), the Company believes that quantifying the component of premium amortization expense associated with the change in estimated long-term prepayment speeds provides investors with better visibility into the underlying performance of the business. Quantifying this component and disclosing the long-term CPR for investors on a quarterly basis eliminates the need for extrapolation and guesswork. These metrics are also useful in comparing performance versus industry peers as similar financial measures are disclosed by certain peers, and are frequently relied upon by analysts, investors and other interested parties to evaluate companies in our industry.

Economic interest expense is comprised of interest expense, as computed in accordance with GAAP, plus interest expense on interest rate swaps used to hedge cost of funds, a component of Realized gains (losses) on interest rate swaps in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company uses interest rate swaps to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. Presenting the contractual interest payments in interest rate swaps with the interest paid on interest-bearing liabilities reflects total contractual interest payments. This presentation depicts the economic cost of our financing strategy.

TBA dollar roll income, a component of Net gains (losses) on trading assets in the Company’s Consolidated Statements of Comprehensive Income (Loss), is defined as the difference in price between two TBA contracts with the same terms but different settlement dates. Dollar roll income represents the equivalent of interest income on the underlying security less an implied cost of financing and is included in the Company’s determination of core earnings.

A reconciliation of GAAP net income (loss) to non-GAAP core earnings is provided in a previous section of this news release. The following tables present a reconciliation of the Company’s other non-GAAP financial measures to the most directly comparable GAAP financial measures for the quarters ended June 30, 2016, March 31, 2016, and June 30, 2015:

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

Source: Annaly Capital Management, Inc.