NLY Annaly Capital Management Inc

Annaly Capital Management, Inc. (NYSE: NLY) ("Annaly" or the "Company") today announced its financial results for the quarter ended September 30, 2023.

Financial Highlights

• GAAP net income (loss) of ($1.21) per average common share for the quarter
• Earnings available for distribution ("EAD") of $0.66 per average common share for the quarter
• Economic return (loss) of (8.8%) for the third quarter
• Book value per common share of $18.25
• GAAP leverage of 7.1x, up from 6.1x in the prior quarter; economic leverage of 6.4x, up from 5.8x in the prior quarter
• Declared quarterly common stock cash dividend of $0.65 per share

Business Highlights

Investment and Strategy

• Total portfolio of $76.2 billion, including $68.5 billion in highly liquid Agency portfolio(1)
• Annaly's Agency portfolio decreased modestly by 4%, with portfolio activity focused on further gravitation up in coupon
  • Annaly's Agency portfolio represents 64% of dedicated equity capital(2), down from 69% in the prior quarter
• Maintained a conservative hedge position and actively managed portfolio duration by adding longer-dated hedges; hedge ratio increased from 105% to 115% during the quarter
• Annaly's Residential Credit portfolio increased 6% to $5.3 billion(1), representing 17% of dedicated equity capital(2)
  • Continued growth driven by strong performance from our residential whole loan correspondent channel, with $2.4 billion of quarterly lock volume and $1.5 billion of whole loans settled during the third quarter
• Annaly's Mortgage Servicing Rights ("MSR") portfolio grew 4% quarter-over-quarter to $2.3 billion(3) in assets, representing 19% of dedicated equity capital(2)

Financing and Capital

• $4.7 billion of unencumbered assets(4), including cash and unencumbered Agency MBS of $2.8 billion
• Average GAAP cost of interest bearing liabilities increased 27 basis points to 5.27% and average economic cost of interest bearing liabilities increased 51 basis points to 3.28% quarter-over-quarter
• Extended weighted average days to maturity for repurchase agreements to 52 days, up from 44 days in the prior quarter, amidst healthy funding market conditions
• Annaly Residential Credit Group priced ten whole loan securitizations totaling $3.9 billion in proceeds since the beginning of the year(5)
  • Annaly remains the largest non-bank issuer and the second largest issuer overall of Prime Jumbo and Expanded Credit MBS from the beginning of 2022 through 2023 year-to-date(6)

Corporate Responsibility & Governance

• Expanded Board of Directors with election of two new Independent Directors, Manon Laroche and Scott Wede
  • Annaly’s Board of Directors is currently comprised of twelve members, ten of whom are independent and seven of whom identify as women and/or racially/ethnically diverse

"The third quarter of 2023 marked a challenging period for fixed income markets driven by a rapid rise in global yields. Agency MBS spreads widened amidst ongoing supply, MBS runoff from Federal Reserve and bank portfolios as well as elevated volatility," commented David Finkelstein, Annaly’s Chief Executive Officer and Chief Investment Officer. "Annaly entered the quarter with lower leverage and substantial liquidity, which, along with our dynamic hedging, enabled us to remain nimble. Despite our active portfolio management, higher rates and spreads weighed on our book value and economic return for the quarter.

"While risks to the operating environment persist, we expect to benefit from attractive investment returns across our three businesses and a supportive financing environment. Within Agency MBS, historically wide spreads provide ample compensation for above average volatility and technical challenges. Meanwhile, our Residential Credit business continues to grow, bolstered by strong performance from our whole loan correspondent channel, and our MSR portfolio is strengthened by stable cash flows and rising yields supporting valuations."

(1)

Total portfolio represents Annaly’s investments that are on-balance sheet as well as investments that are off-balance sheet in which Annaly has economic exposure. Assets exclude assets transferred or pledged to securitization vehicles of $11.5 billion, include TBA purchase contracts (market value) of $1.9 billion and $1.2 billion of retained securities that are eliminated in consolidation and are shown net of participations issued totaling $0.8 billion.

(2)

Capital allocation for each of the investment strategies is calculated as the difference between each investment strategy’s allocated assets, which include TBA purchase contracts, and liabilities. Dedicated capital allocations as of September 30, 2023 exclude commercial real estate assets.

(3)

Includes limited partnership interests in a MSR fund, which is reported in Other Assets.

(4)

Represents Annaly’s excess liquidity and defined as assets that have not been pledged or securitized (generally including cash and cash equivalents, Agency MBS, CRT, Non-Agency MBS, residential mortgage loans, MSR, reverse repurchase agreements, other unencumbered financial assets and capital stock).

(5)

Includes a $407 million residential whole loan securitization that priced in October 2023.

(6)

Issuer ranking data from Inside Nonconforming Markets for 2022 through 2023 YTD (October 6, 2023 issue).

Financial Performance

The following table summarizes certain key performance indicators as of and for the quarters ended September 30, 2023, June 30, 2023 and September 30, 2022:

 

 

September 30, 2023

 

June 30, 2023

 

September 30, 2022

Book value per common share

 

$ 18.25

 

$ 20.73

 

$ 19.94

GAAP leverage at period-end (1)

 

7.1:1

 

6.1:1

 

5.8:1

GAAP net income (loss) per average common share (2)

 

$ (1.21)

 

$ 0.27

 

$ (0.70)

Annualized GAAP return (loss) on average equity(3)

 

(20.18%)

 

5.42%

 

(9.94%)

Net interest margin (4)

 

(0.20%)

 

(0.15%)

 

1.42%

Average yield on interest earning assets (5)

 

4.49%

 

4.27%

 

3.47%

Average GAAP cost of interest bearing liabilities (6)

 

5.27%

 

5.00%

 

2.38%

Net interest spread

 

(0.78%)

 

(0.73%)

 

1.09%

Non-GAAP metrics *

 

 

 

 

 

 

Earnings available for distribution per average common share (2)

 

$ 0.66

 

$ 0.72

 

$ 1.06

Annualized EAD return on average equity

 

12.96%

 

13.22%

 

17.57%

Economic leverage at period-end (1)

 

6.4:1

 

5.8:1

 

7.1:1

Net interest margin (excluding PAA) (4)

 

1.48%

 

1.66%

 

1.98%

Average yield on interest earning assets (excluding PAA) (5)

 

4.46%

 

4.22%

 

3.24%

Average economic cost of interest bearing liabilities (6)

 

3.28%

 

2.77%

 

1.54%

Net interest spread (excluding PAA)

 

1.18%

 

1.45%

 

1.70%

*

Represents a non-GAAP financial measure. Please refer to the "Non-GAAP Financial Measures" section for additional information.

(1)

GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles and participations issued divided by total equity. Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced ("TBA") and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing. Debt issued by securitization vehicles and participations issued are non-recourse to the Company and are excluded from economic leverage.

(2)

Net of dividends on preferred stock.

(3)

Annualized GAAP return (loss) on average equity annualizes realized and unrealized gains and (losses) which may not be indicative of full year performance, unannualized GAAP return (loss) on average equity is (5.04%), 1.35%, and (2.49%) for the quarters ended September 30, 2023, June 30, 2023, and September 30, 2022, respectively.

(4)

Net interest margin represents interest income less interest expense divided by average Interest Earning Assets. Net interest margin does not include net interest component of interest rate swaps. Net interest margin (excluding PAA) represents the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average Interest Earning Assets plus average outstanding TBA contract and CMBX balances. PAA represents the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to the Company’s Agency mortgage-backed securities.

(5)

Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).

(6)

Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

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. Such statements include those relating to the Company’s future performance, macro outlook, the interest rate and credit environments, tax reform and future opportunities. 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 ("MBS") and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of the Company’s assets; changes in business conditions and the general economy; the Company’s ability to grow its residential credit business; the Company's ability to grow its mortgage servicing rights business; credit risks related to the Company’s investments in credit risk transfer securities and residential mortgage-backed securities and related residential mortgage credit assets; risks related to investments in mortgage servicing rights; the Company’s ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting the Company’s business; the Company’s ability to maintain its qualification as a REIT for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; and risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions. 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. The Company does not undertake, and specifically disclaims 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 is a leading diversified capital manager with investment strategies across mortgage finance. Annaly’s principal business objective is to generate net income for distribution to its stockholders and to optimize its returns through prudent management of its diversified investment strategies. Annaly is internally managed and has elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. Additional information on the company can be found at www.annaly.com.

We use our website (www.annaly.com) and LinkedIn account (www.linkedin.com/company/annaly-capital-management) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about Annaly when you enroll your email address by visiting the "Investors" section of our website, then clicking on "Investor Resources" and selecting "Email Alerts" to complete the email notification form. Our website, any alerts and social media channels are not incorporated by reference into, and are not a part of, this document.

The Company prepares an investor presentation and supplemental financial information for the benefit of its shareholders. Please refer to the investor presentation for definitions of both GAAP and non-GAAP measures used in this news release. Both the Third Quarter 2023 Investor Presentation and the Third Quarter 2023 Supplemental Information 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 third quarter 2023 earnings conference call on October 26, 2023 at 9:00 a.m. Eastern Time. Participants are encouraged to pre-register for the conference call to receive a unique PIN to gain immediate access to the call and bypass the live operator. Pre-registration may be completed by accessing the pre-registration link found on the homepage or "Investors" section of the Company's website at www.annaly.com, or by using the following link: https://dpregister.com/sreg/10183128/fa9aa400b0. Pre-registration may be completed at any time, including up to and after the call start time.

For participants who would like to join the call but have not pre-registered, access is available by dialing 844-735-3317 within the U.S., or 412-317-5703 internationally, and requesting the "Annaly Earnings Call."

There will also be an audio webcast of the call on www.annaly.com. A replay of the call will be 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 9426626. If you would like to be added to the e-mail distribution list, please visit www.annaly.com, click on Investors, then select Email Alerts and complete the email notification form.

Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

 

 

September 30, 2023

 

June 30, 2023

 

March 31, 2023

 

December 31, 2022 (1)

 

September 30, 2022

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

 

 

(unaudited)

Assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,241,122

 

 

$

1,236,872

 

 

$

1,794,173

 

 

$

1,576,714

 

 

$

1,466,171

 

Securities

 

 

69,860,730

 

 

 

71,202,461

 

 

 

69,238,185

 

 

 

65,789,907

 

 

 

66,839,353

 

Loans, net

 

 

1,793,140

 

 

 

1,154,320

 

 

 

1,642,822

 

 

 

1,809,832

 

 

 

1,551,707

 

Mortgage servicing rights

 

 

2,234,813

 

 

 

2,018,896

 

 

 

1,790,980

 

 

 

1,748,209

 

 

 

1,705,254

 

Assets transferred or pledged to securitization vehicles

 

 

11,450,346

 

 

 

11,318,419

 

 

 

10,277,588

 

 

 

9,121,912

 

 

 

9,202,014

 

Assets of disposal group held for sale

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

11,371

 

Derivative assets

 

 

549,833

 

 

 

457,119

 

 

 

400,139

 

 

 

342,064

 

 

 

1,949,530

 

Receivable for unsettled trades

 

 

1,047,566

 

 

 

787,442

 

 

 

679,096

 

 

 

575,091

 

 

 

2,153,895

 

Principal and interest receivable

 

 

1,158,648

 

 

 

944,537

 

 

 

773,722

 

 

 

637,301

 

 

 

262,542

 

Intangible assets, net

 

 

12,778

 

 

 

15,163

 

 

 

15,921

 

 

 

16,679

 

 

 

17,437

 

Other assets

 

 

299,447

 

 

 

195,248

 

 

 

219,391

 

 

 

233,003

 

 

 

247,490

 

Total assets

 

$

89,648,423

 

 

$

89,330,477

 

 

$

86,832,017

 

 

$

81,850,712

 

 

$

85,406,764

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

$

64,693,821

 

 

$

61,637,600

 

 

$

60,993,018

 

 

$

59,512,597

 

 

$

54,160,731

 

Other secured financing

 

 

500,000

 

 

 

500,000

 

 

 

250,000

 

 

 

250,000

 

 

 

250,000

 

Debt issued by securitization vehicles

 

 

9,983,847

 

 

 

9,789,282

 

 

 

8,805,911

 

 

 

7,744,160

 

 

 

7,844,518

 

Participations issued

 

 

788,442

 

 

 

492,307

 

 

 

673,431

 

 

 

800,849

 

 

 

745,729

 

Liabilities of disposal group held for sale

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,151

 

Derivative liabilities

 

 

97,616

 

 

 

156,182

 

 

 

473,515

 

 

 

204,172

 

 

 

764,535

 

Payable for unsettled trades

 

 

2,214,319

 

 

 

4,331,315

 

 

 

3,259,034

 

 

 

1,157,846

 

 

 

9,333,646

 

Interest payable

 

 

198,084

 

 

 

140,620

 

 

 

118,395

 

 

 

325,280

 

 

 

30,242

 

Dividends payable

 

 

321,629

 

 

 

321,031

 

 

 

321,023

 

 

 

412,113

 

 

 

411,762

 

Other liabilities

 

 

173,608

 

 

 

74,795

 

 

 

28,657

 

 

 

74,269

 

 

 

912,895

 

Total liabilities

 

 

78,971,366

 

 

 

77,443,132

 

 

 

74,922,984

 

 

 

70,481,286

 

 

 

74,455,209

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share (2)

 

 

1,536,569

 

 

 

1,536,569

 

 

 

1,536,569

 

 

 

1,536,569

 

 

 

1,536,569

 

Common stock, par value $0.01 per share (3)

 

 

4,948

 

 

 

4,939

 

 

 

4,939

 

 

 

4,683

 

 

 

4,679

 

Additional paid-in capital

 

 

23,572,996

 

 

 

23,550,346

 

 

 

23,543,091

 

 

 

22,981,320

 

 

 

22,967,665

 

Accumulated other comprehensive income (loss)

 

 

(2,694,776

)

 

 

(2,382,531

)

 

 

(2,550,614

)

 

 

(3,708,896

)

 

 

(5,431,436

)

Accumulated deficit

 

 

(11,855,267

)

 

 

(10,933,044

)

 

 

(10,741,863

)

 

 

(9,543,233

)

 

 

(8,211,358

)

Total stockholders’ equity

 

 

10,564,470

 

 

 

11,776,279

 

 

 

11,792,122

 

 

 

11,270,443

 

 

 

10,866,119

 

Noncontrolling interests

 

 

112,587

 

 

 

111,066

 

 

 

116,911

 

 

 

98,983

 

 

 

85,436

 

Total equity

 

 

10,677,057

 

 

 

11,887,345

 

 

 

11,909,033

 

 

 

11,369,426

 

 

 

10,951,555

 

Total liabilities and equity

 

$

89,648,423

 

 

$

89,330,477

 

 

$

86,832,017

 

 

$

81,850,712

 

 

$

85,406,764

 

 

(1)

Derived from the audited consolidated financial statements at December 31, 2022.

(2)

6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock - Includes 28,800,000 shares authorized, issued and outstanding. 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock - Includes 17,000,000 shares authorized, issued and outstanding. 6.75% Series I Preferred Stock - Includes 17,700,000 shares authorized, issued and outstanding.

(3)

Includes 1,468,250,000 shares authorized. Includes 494,814,038 shares issued and outstanding at September 30, 2023, 493,893,288 shares issued and outstanding at June 30, 2023, 493,880,938 shares issued and outstanding at March 31, 2023, 468,309,810 shares issued and outstanding at December 31, 2022, 467,911,144 shares issued and outstanding at September 30, 2022.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except per share data)

(Unaudited)

 

 

For the quarters ended

 

 

September 30, 2023

 

June 30, 2023

 

March 31, 2023

 

December 31, 2022

 

September 30, 2022

Net interest income

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

1,001,485

 

 

$

921,494

 

 

$

818,250

 

 

$

798,934

 

 

$

678,488

 

Interest expense

 

 

1,046,819

 

 

 

953,457

 

 

 

798,787

 

 

 

663,847

 

 

 

400,491

 

Net interest income

 

 

(45,334

)

 

 

(31,963

)

 

 

19,463

 

 

 

135,087

 

 

 

277,997

 

Net servicing income

 

 

 

 

 

 

 

 

 

 

Servicing and related income

 

 

97,620

 

 

 

83,790

 

 

 

84,273

 

 

 

82,040

 

 

 

74,486

 

Servicing and related expense

 

 

9,623

 

 

 

8,930

 

 

 

7,880

 

 

 

7,659

 

 

 

7,780

 

Net servicing income

 

 

87,997

 

 

 

74,860

 

 

 

76,393

 

 

 

74,381

 

 

 

66,706

 

Other income (loss)

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on investments and other

 

 

(2,713,126

)

 

 

(1,308,948

)

 

 

1,712

 

 

 

(1,124,924

)

 

 

(2,702,512

)

Net gains (losses) on derivatives

 

 

2,127,430

 

 

 

1,475,325

 

 

 

(900,752

)

 

 

84,263

 

 

 

2,117,240

 

Loan loss (provision) reversal

 

 

—

 

 

 

—

 

 

 

219

 

 

 

(7,258

)

 

 

1,613

 

Business divestiture-related gains (losses)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(13,013

)

 

 

(2,936

)

Other, net

 

 

26,250

 

 

 

9,105

 

 

 

15,498

 

 

 

7,569

 

 

 

1,526

 

Total other income (loss)

 

 

(559,446

)

 

 

175,482

 

 

 

(883,323

)

 

 

(1,053,363

)

 

 

(585,069

)

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

Compensation expense

 

 

30,064

 

 

 

30,635

 

 

 

29,391

 

 

 

29,714

 

 

 

27,744

 

Other general and administrative expenses

 

 

9,845

 

 

 

12,280

 

 

 

11,437

 

 

 

13,291

 

 

 

10,178

 

Total general and administrative expenses

 

 

39,909

 

 

 

42,915

 

 

 

40,828

 

 

 

43,005

 

 

 

37,922

 

Income (loss) before income taxes

 

 

(556,692

)

 

 

175,464

 

 

 

(828,295

)

 

 

(886,900

)

 

 

(278,288

)

Income taxes

 

 

12,392

 

 

 

14,277

 

 

 

11,033

 

 

 

(86

)

 

 

(4,311

)

Net income (loss)

 

 

(569,084

)

 

 

161,187

 

 

 

(839,328

)

 

 

(886,814

)

 

 

(273,977

)

Net income (loss) attributable to noncontrolling interests

 

 

(6,879

)

 

 

(5,846

)

 

 

4,928

 

 

 

1,548

 

 

 

1,287

 

Net income (loss) attributable to Annaly

 

 

(562,205

)

 

 

167,033

 

 

 

(844,256

)

 

 

(888,362

)

 

 

(275,264

)

Dividends on preferred stock

 

 

36,854

 

 

 

35,766

 

 

 

31,875

 

 

 

29,974

 

 

 

26,883

 

Net income (loss) available (related) to common stockholders

 

$

(599,059

)

 

$

131,267

 

 

$

(876,131

)

 

$

(918,336

)

 

$

(302,147

)

Net income (loss) per share available (related) to common stockholders

 

 

 

 

 

 

 

 

Basic

 

$

(1.21

)

 

$

0.27

 

 

$

(1.79

)

 

$

(1.96

)

 

$

(0.70

)

Diluted

 

$

(1.21

)

 

$

0.27

 

 

$

(1.79

)

 

$

(1.96

)

 

$

(0.70

)

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

494,330,361

 

 

 

494,165,256

 

 

 

489,688,364

 

 

 

468,250,672

 

 

 

429,858,876

 

Diluted

 

 

494,330,361

 

 

 

494,358,982

 

 

 

489,688,364

 

 

 

468,250,672

 

 

 

429,858,876

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(569,084

)

 

$

161,187

 

 

$

(839,328

)

 

$

(886,814

)

 

$

(273,977

)

Unrealized gains (losses) on available-for-sale securities

 

 

(825,286

)

 

 

(294,045

)

 

 

675,374

 

 

 

445,896

 

 

 

(2,578,509

)

Reclassification adjustment for net (gains) losses included in net income (loss)

 

 

513,041

 

 

 

462,128

 

 

 

482,908

 

 

 

1,276,644

 

 

 

1,457,999

 

Other comprehensive income (loss)

 

 

(312,245

)

 

 

168,083

 

 

 

1,158,282

 

 

 

1,722,540

 

 

 

(1,120,510

)

Comprehensive income (loss)

 

 

(881,329

)

 

 

329,270

 

 

 

318,954

 

 

 

835,726

 

 

 

(1,394,487

)

Comprehensive income (loss) attributable to noncontrolling interests

 

 

(6,879

)

 

 

(5,846

)

 

 

4,928

 

 

 

1,548

 

 

 

1,287

 

Comprehensive income (loss) attributable to Annaly

 

 

(874,450

)

 

 

335,116

 

 

 

314,026

 

 

 

834,178

 

 

 

(1,395,774

)

Dividends on preferred stock

 

 

36,854

 

 

 

35,766

 

 

 

31,875

 

 

 

29,974

 

 

 

26,883

 

Comprehensive income (loss) attributable to common stockholders

 

$

(911,304

)

 

$

299,350

 

 

$

282,151

 

 

$

804,204

 

 

$

(1,422,657

)

 

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except per share data)

 

 

For the nine months ended

 

 

September 30, 2023

 

September 30, 2022

 

 

(unaudited)

 

(unaudited)

Net interest income

 

 

 

 

Interest income

 

$

2,741,229

 

 

$

1,979,953

 

Interest expense

 

 

2,799,063

 

 

 

645,888

 

Net interest income

 

 

(57,834

)

 

 

1,334,065

 

Net servicing income

 

 

 

 

Servicing and related income

 

 

265,683

 

 

 

164,886

 

Servicing and related expense

 

 

26,433

 

 

 

17,486

 

Net servicing income

 

 

239,250

 

 

 

147,400

 

Other income (loss)

 

 

 

 

Net gains (losses) on investments and other

 

 

(4,020,362

)

 

 

(3,477,532

)

Net gains (losses) on derivatives

 

 

2,702,003

 

 

 

4,774,911

 

Loan loss (provision) reversal

 

 

219

 

 

 

27,918

 

Business divestiture-related gains (losses)

 

 

—

 

 

 

(27,245

)

Other, net

 

 

50,853

 

 

 

(902

)

Total other income (loss)

 

 

(1,267,287

)

 

 

1,297,150

 

General and administrative expenses

 

 

 

 

Compensation expense

 

 

90,090

 

 

 

82,989

 

Other general and administrative expenses

 

 

33,562

 

 

 

36,735

 

Total general and administrative expenses

 

 

123,652

 

 

 

119,724

 

Income (loss) before income taxes

 

 

(1,209,523

)

 

 

2,658,891

 

Income taxes

 

 

37,702

 

 

 

45,657

 

Net income (loss)

 

 

(1,247,225

)

 

 

2,613,234

 

Net income (loss) attributable to noncontrolling interests

 

 

(7,797

)

 

 

(453

)

Net income (loss) attributable to Annaly

 

 

(1,239,428

)

 

 

2,613,687

 

Dividends on preferred stock

 

 

104,495

 

 

 

80,649

 

Net income (loss) available (related) to common stockholders

 

$

(1,343,923

)

 

$

2,533,038

 

Net income (loss) per share available (related) to common stockholders

 

 

Basic

 

$

(2.73

)

 

$

6.46

 

Diluted

 

$

(2.73

)

 

$

6.45

 

Weighted average number of common shares outstanding

 

 

Basic

 

 

492,744,997

 

 

 

392,172,655

 

Diluted

 

 

492,744,997

 

 

 

392,445,034

 

Other comprehensive income (loss)

 

 

Net income (loss)

 

$

(1,247,225

)

 

$

2,613,234

 

Unrealized gains (losses) on available-for-sale securities

 

 

(443,957

)

 

 

(8,650,438

)

Reclassification adjustment for net (gains) losses included in net income (loss)

 

 

1,458,077

 

 

 

2,260,592

 

Other comprehensive income (loss)

 

 

1,014,120

 

 

 

(6,389,846

)

Comprehensive income (loss)

 

 

(233,105

)

 

 

(3,776,612

)

Comprehensive income (loss) attributable to noncontrolling interests

 

 

(7,797

)

 

 

(453

)

Comprehensive income (loss) attributable to Annaly

 

 

(225,308

)

 

 

(3,776,159

)

Dividends on preferred stock

 

 

104,495

 

 

 

80,649

 

Comprehensive income (loss) attributable to common stockholders

 

$

(329,803

)

 

$

(3,856,808

)

 

 

 

 

 

Key Financial Data

The following table presents key metrics of the Company’s portfolio, liabilities and hedging positions, and performance as of and for the quarters ended:

 

 

September 30, 2023

 

June 30, 2023

 

September 30, 2022

Portfolio related metrics

 

 

 

 

 

 

Fixed-rate Residential Securities as a percentage of total Residential Securities

 

 

98%

 

 

98%

 

 

98%

Adjustable-rate and floating-rate Residential Securities as a percentage of total Residential Securities

 

 

2%

 

 

2%

 

 

2%

Weighted average experienced CPR for the period

 

 

7.3%

 

 

7.0%

 

 

9.8%

Weighted average projected long-term CPR at period-end

 

 

7.1%

 

 

8.6%

 

 

7.6%

Liabilities and hedging metrics

 

 

 

 

 

 

Weighted average days to maturity on repurchase agreements outstanding at period-end

 

 

52

 

 

44

 

 

57

Hedge ratio (1)

 

 

115%

 

 

105%

 

 

111%

Weighted average pay rate on interest rate swaps at period-end (2)

 

 

2.61%

 

 

2.50%

 

 

1.53%

Weighted average receive rate on interest rate swaps at period-end (2)

 

 

5.27%

 

 

5.05%

 

 

2.96%

Weighted average net rate on interest rate swaps at period-end (2)

 

 

(2.66%)

 

 

(2.55%)

 

 

(1.43%)

GAAP leverage at period-end (3)

 

7.1:1

 

6.1:1

 

5.8:1

GAAP capital ratio at period-end (4)

 

 

11.9%

 

 

13.3%

 

 

12.8%

Performance related metrics

 

 

 

 

 

 

Book value per common share

 

$

18.25

 

$

20.73

 

$

19.94

GAAP net income (loss) per average common share(5)

 

$

(1.21)

 

$

0.27

 

$

(0.70)

Annualized GAAP return (loss) on average equity(6)

 

 

(20.18%)

 

 

5.42%

 

 

(9.94%)

Net interest margin (7)

 

 

(0.20%)

 

 

(0.15%)

 

 

1.42%

Average yield on interest earning assets (8)

 

 

4.49%

 

 

4.27%

 

 

3.47%

Average GAAP cost of interest bearing liabilities (9)

 

 

5.27%

 

 

5.00%

 

 

2.38%

Net interest spread

 

 

(0.78%)

 

 

(0.73%)

 

 

1.09%

Dividend declared per common share

 

$

0.65

 

$

0.65

 

$

0.88

Annualized dividend yield (10)

 

 

13.82%

 

 

12.99%

 

 

20.51%

Non-GAAP metrics *

 

 

 

 

 

 

Earnings available for distribution per average common share (5)

 

$

0.66

 

$

0.72

 

$

1.06

Annualized EAD return on average equity (excluding PAA)

 

 

12.96%

 

 

13.22%

 

 

17.57%

Economic leverage at period-end (3)

 

6.4:1

 

5.8:1

 

7.1:1

Economic capital ratio at period end (4)

 

 

13.1%

 

 

14.3%

 

 

11.8%

Net interest margin (excluding PAA) (7)

 

 

1.48%

 

 

1.66%

 

 

1.98%

Average yield on interest earning assets (excluding PAA) (8)

 

 

4.46%

 

 

4.22%

 

 

3.24%

Average economic cost of interest bearing liabilities (9)

 

 

3.28%

 

 

2.77%

 

 

1.54%

Net interest spread (excluding PAA)

 

 

1.18%

 

 

1.45%

 

 

1.70%

*

Represents a non-GAAP financial measure. Please refer to the "Non-GAAP Financial Measures" section for additional information.

(1)

Measures total notional balances of interest rate swaps, interest rate swaptions (excluding receiver swaptions) and futures relative to repurchase agreements, other secured financing and cost basis of TBA derivatives outstanding and net forward purchases (sales) of investments; excludes MSR and the effects of term financing, both of which serve to reduce interest rate risk. Additionally, the hedge ratio does not take into consideration differences in duration between assets and liabilities.

(2)

Excludes forward starting swaps.

(3)

GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles and participations issued divided by total equity. Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced ("TBA") and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing. Debt issued by securitization vehicles and participations issued are non-recourse to the Company and are excluded from economic leverage.

(4)

GAAP capital ratio is computed as total equity divided by total assets. Economic capital ratio is computed as total equity divided by total economic assets. Total economic assets include the implied market value of TBA derivatives and are net of debt issued by securitization vehicles.

(5)

Net of dividends on preferred stock.

(6)

Annualized GAAP return (loss) on average equity annualizes realized and unrealized gains and (losses) which may not be indicative of full year performance, unannualized GAAP return (loss) on average equity is (5.04%), 1.35% and (2.49%) for the quarters ended September 30, 2023, June 30, 2023 and September 30, 2022, respectively.

(7)

Net interest margin represents interest income less interest expense divided by average interest earning assets. Net interest margin does not include net interest component of interest rate swaps. Net interest margin (excluding PAA) represents the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average TBA contract and CMBX balances.

(8)

Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).

(9)

Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

(10)

Based on the closing price of the Company’s common stock of $18.81, $20.01 and $17.16 at September 30, 2023, June 30, 2023 and September 30, 2022, respectively.

The following table contains additional information on our investment portfolio as of the dates presented:

 

 

For the quarters ended

 

 

September 30, 2023

 

June 30, 2023

 

September 30, 2022

Agency mortgage-backed securities

 

$

66,591,536

 

$

67,764,264

 

$

63,037,241

Residential credit risk transfer securities

 

 

982,951

 

 

1,064,401

 

 

1,056,906

Non-agency mortgage-backed securities

 

 

2,063,861

 

 

2,008,106

 

 

2,156,706

Commercial mortgage-backed securities

 

 

222,382

 

 

365,690

 

 

588,500

Total securities

 

$

69,860,730

 

$

71,202,461

 

$

66,839,353

Residential mortgage loans

 

$

1,793,140

 

$

1,154,320

 

$

1,551,637

Residential mortgage loan warehouse facility

 

 

—

 

 

—

 

 

70

Total loans, net

 

$

1,793,140

 

$

1,154,320

 

$

1,551,707

Mortgage servicing rights

 

$

2,234,813

 

$

2,018,896

 

$

1,705,254

Agency mortgage-backed securities transferred or pledged to securitization vehicles

 

$

—

 

$

—

 

$

431,388

Residential mortgage loans transferred or pledged to securitization vehicles

 

 

11,450,346

 

 

11,318,419

 

 

8,770,626

Assets transferred or pledged to securitization vehicles

 

$

11,450,346

 

$

11,318,419

 

$

9,202,014

Assets of disposal group held for sale

 

$

—

 

$

—

 

$

11,371

Total investment portfolio

 

$

85,339,029

 

$

85,694,096

 

$

79,309,699

 

Non-GAAP Financial Measures

To supplement its consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles ("GAAP"), the Company provides the following non-GAAP measures:

• earnings available for distribution ("EAD");
• earnings available for distribution attributable to common stockholders;
• earnings available for distribution per average common share;
• annualized EAD return on average equity;
• economic leverage;
• economic capital ratio;
• interest income (excluding PAA);
• economic interest expense;
• economic net interest income (excluding PAA);
• average yield on interest earning assets (excluding PAA);
• average economic cost of interest bearing liabilities;
• net interest margin (excluding PAA); and
• net interest spread (excluding PAA).

These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP. While intended to offer a fuller understanding of the Company’s results and operations, non-GAAP financial measures also have limitations. For example, the Company may calculate its non-GAAP metrics, such as earnings available for distribution, or the PAA, differently than its peers making comparative analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which the Company will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results.

These non-GAAP measures provide additional detail to enhance investor understanding of the Company’s period-over-period operating performance and business trends, as well as for assessing the Company’s performance versus that of industry peers. Additional information pertaining to the Company’s use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below.

Earnings available for distribution, earnings available for distribution attributable to common stockholders, earnings available for distribution per average common share and annualized EAD return on average equity

The Company's principal business objective is to generate net income for distribution to its stockholders and to preserve capital through prudent selection of investments and continuous management of its portfolio. The Company generates net income by earning a net interest spread on its investment portfolio, which is a function of interest income from its investment portfolio less financing, hedging and operating costs. Earnings available for distribution, which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) net servicing income less realized amortization of MSR, (d) other income (loss) (excluding amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment ("PAA") representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to the Company’s Agency mortgage-backed securities is used by the Company's management and, the Company believes, used by analysts and investors to measure its progress in achieving its principal business objective.

The Company seeks to fulfill this objective through a variety of factors including portfolio construction, the degree of market risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of the Company's capital allocation policy and risk governance framework.

The Company believes these non-GAAP measures provide management and investors with additional details regarding the Company’s underlying operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive income (loss) and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to provide additional transparency into the operating performance of the Company’s portfolio. In addition, EAD serves as a useful indicator for investors in evaluating the Company's performance and ability to pay dividends. Annualized EAD return on average equity, which is calculated by dividing earnings available for distribution over average stockholders’ equity, provides investors with additional detail on the earnings available for distribution generated by the Company’s invested equity capital.

The following table presents a reconciliation of GAAP financial results to non-GAAP earnings available for distribution for the periods presented:

 

 

For the quarters ended

 

 

September 30, 2023

 

June 30, 2023

 

September 30, 2022

 

 

(dollars in thousands, except per share data)

GAAP net income (loss)

 

$

(569,084

)

 

$

161,187

 

 

$

(273,977

)

Adjustments to exclude reported realized and unrealized (gains) losses

 

 

 

 

 

 

Net (gains) losses on investments and other(1)

 

 

2,710,208

 

 

 

1,316,837

 

 

 

2,702,512

 

Net (gains) losses on derivatives (2)

 

 

(1,732,753

)

 

 

(1,050,032

)

 

 

(1,976,130

)

Loan loss provision (reversal)

 

 

—

 

 

 

—

 

 

 

(1,613

)

Business divestiture-related (gains) losses

 

 

—

 

 

 

—

 

 

 

2,936

 

Other adjustments

Amortization of intangibles

 

 

2,384

 

 

 

758

 

 

 

758

 

Non-EAD (income) loss allocated to equity method investments (3)

 

 

(140

)

 

 

541

 

 

 

(2,003

)

Transaction expenses and non-recurring items (4)

 

 

1,882

 

 

 

2,650

 

 

 

1,712

 

Income tax effect of non-EAD income (loss) items

 

 

9,444

 

 

 

12,364

 

 

 

(9,444

)

TBA dollar roll income and CMBX coupon income (5)

 

 

(1,016

)

 

 

1,734

 

 

 

105,543

 

MSR amortization (6)

 

 

(49,073

)

 

 

(41,297

)

 

 

(22,897

)

EAD attributable to noncontrolling interests

 

 

(3,811

)

 

 

(3,344

)

 

 

(1,287

)

Premium amortization adjustment cost (benefit)

 

 

(6,062

)

 

 

(11,923

)

 

 

(45,414

)

Earnings available for distribution *

 

 

361,979

 

 

 

389,475

 

 

 

480,696

 

Dividends on preferred stock

 

 

36,854

 

 

 

35,766

 

 

 

26,883

 

Earnings available for distribution attributable to common stockholders *

 

$

325,125

 

 

$

353,709

 

 

$

453,813

 

GAAP net income (loss) per average common share

 

$

(1.21

)

 

$

0.27

 

 

$

(0.70

)

Earnings available for distribution per average common share *

 

$

0.66

 

 

$

0.72

 

 

$

1.06

 

Annualized GAAP return (loss) on average equity(7)

 

 

(20.18

%)

 

 

5.42

%

 

 

(9.94

%)

Annualized EAD return on average equity *

 

 

12.96

%

 

 

13.22

%

 

 

17.57

%

*

Represents a non-GAAP financial measure.

(1)

Includes a write-down or recovery on investments which is reported in Other, net in the Company's Consolidated Statement of Comprehensive Income (Loss).

(2)

The adjustment to add back Net (gains) losses on derivatives does not include the net interest component of interest rate swaps which is reflected in earnings available for distribution. The net interest component of interest rate swaps totaled $394.7 million, $425.3 million and $141.1 million for the quarters ended September 30, 2023, June 30, 2023 and September 30, 2022, respectively.

(3)

The Company excludes non-EAD (income) loss allocated to equity method investments, which represents the unrealized (gains) losses allocated to equity interests in a portfolio of MSR, which is a component of Other, net.

(4)

Represents costs incurred in connection with securitizations of residential whole loans.

(5)

TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on derivatives. CMBX coupon income totaled $0.0 million, $0.5 million and $1.1 million for the quarters ended September 30, 2023, June 30, 2023 and September 30, 2022, respectively.

(6)

MSR amortization utilizes purchase date cash flow assumptions and actual unpaid principal balances and is calculated as the difference between projected MSR yield income and net servicing income for the period.

(7)

Annualized GAAP return (loss) on average equity annualizes realized and unrealized gains and (losses) which may not be indicative of full year performance, unannualized GAAP return (loss) on average equity is (5.04%), 1.35% and (2.49%) for the quarters ended September 30, 2023, June 30, 2023 and September 30, 2022, respectively.

From time to time, the Company enters into TBA forward contracts as an alternate means of investing in and financing Agency mortgage-backed securities. A TBA contract is an agreement to purchase or sell, for future delivery, an Agency mortgage-backed security with a specified issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but different settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the "drop". The drop is a reflection of the expected net interest income from an investment in similar Agency mortgage-backed securities, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party providing the financing is the party that would retain all principal and interest payments accrued during the financing period. Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency mortgage-backed security less an implied financing cost.

TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. The Company records TBA derivatives at fair value on its Consolidated Statements of Financial Condition and recognizes periodic changes in fair value in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives.

TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract. Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency mortgage-backed security (interest income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss).

The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities ("CMBS") of a particular rating and vintage. The CMBX index allows investors to take a long exposure (referred to as selling protection) or short exposure (referred to as buying protection) on the respective basket of CMBS securities and is structured as a "pay-as-you-go" contract whereby the protection buyer pays to the protection seller a standardized running coupon on the contracted notional amount. The Company reports income (expense) on CMBX positions in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). The coupon payments received or paid on CMBX positions are equivalent to interest income (expense) and therefore included in earnings available for distribution.

Premium Amortization Expense

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, multifamily and reverse mortgages, taking into account estimates of future principal prepayments in the calculation of the effective yield. 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 security 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. Certain of the Company’s non-GAAP metrics exclude the effect of the PAA, which quantifies the component of premium amortization representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term CPR.

The following table illustrates the impact of the PAA on premium amortization expense for the Company’s Residential Securities portfolio and residential securities transferred or pledged to securitization vehicles, for the quarters ended September 30, 2023, June 30, 2023 and September 30, 2022:

 

 

For the quarters ended

 

 

September 30, 2023

 

June 30, 2023

 

September 30, 2022

 

 

(dollars in thousands)

Premium amortization expense (accretion)

 

$

24,272

 

 

$

33,105

 

 

$

39,406

 

Less: PAA cost (benefit)

 

 

(6,062

)

 

 

(11,923

)

 

 

(45,414

)

Premium amortization expense (excluding PAA)

 

$

30,334

 

 

$

45,028

 

 

$

84,820

 

 

Economic leverage and economic capital ratios

The Company uses capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on its assets and the cost of its borrowings and hedging activities. The Company’s capital structure is designed to offer an efficient complement of funding sources to generate positive risk-adjusted returns for its stockholders while maintaining appropriate liquidity to support its business and meet the Company’s financial obligations under periods of market stress. To maintain its desired capital profile, the Company utilizes a mix of debt and equity funding. Debt funding may include the use of repurchase agreements, loans, securitizations, participations issued, lines of credit, asset backed lending facilities, corporate bond issuance, convertible bonds or other liabilities. Equity capital primarily consists of common and preferred stock.

The Company’s economic leverage ratio is computed as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing. Debt issued by securitization vehicles and participations issued are non-recourse to the Company and are excluded from economic leverage.

The following table presents a reconciliation of GAAP debt to economic debt for purposes of calculating the Company’s economic leverage ratio for the periods presented:

 

 

As of

 

 

September 30, 2023

 

June 30, 2023

 

September 30, 2022

Economic leverage ratio reconciliation

 

(dollars in thousands)

Repurchase agreements

 

$

64,693,821

 

 

$

61,637,600

 

 

$

54,160,731

 

Other secured financing

 

 

500,000

 

 

 

500,000

 

 

 

250,000

 

Debt issued by securitization vehicles

 

 

9,983,847

 

 

 

9,789,282

 

 

 

7,844,518

 

Participations issued

 

 

788,442

 

 

 

492,307

 

 

 

745,729

 

Total GAAP debt

 

$

75,966,110

 

 

$

72,419,189

 

 

$

63,000,978

 

Less Non-Recourse Debt:

 

 

 

 

 

 

Debt issued by securitization vehicles

 

$

(9,983,847

)

 

$

(9,789,282

)

 

$

(7,844,518

)

Participations issued

 

 

(788,442

)

 

 

(492,307

)

 

 

(745,729

)

Total recourse debt

 

$

65,193,821

 

 

$

62,137,600

 

 

$

54,410,731

 

Plus / (Less):

 

 

 

 

 

 

Cost basis of TBA and CMBX derivatives

 

$

1,965,117

 

 

$

3,625,443

 

 

$

16,209,886

 

Payable for unsettled trades

 

 

2,214,319

 

 

 

4,331,315

 

 

 

9,333,646

 

Receivable for unsettled trades

 

 

(1,047,566

)

 

 

(787,442

)

 

 

(2,153,895

)

Economic debt *

 

$

68,325,691

 

 

$

69,306,916

 

 

$

77,800,368

 

Total equity

 

$

10,677,057

 

 

$

11,887,345

 

 

$

10,951,555

 

Economic leverage ratio *

 

6.4:1

 

 

5.8:1

 

 

7.1:1

 

 

 

 

 

 

 

 

* Represents a non-GAAP financial measure.

The following table presents a reconciliation of GAAP total assets to economic total assets for purposes of calculating the Company’s economic capital ratio for the periods presented:

 

 

As of

 

 

September 30, 2023

 

June 30, 2023

 

September 30, 2022

Economic capital ratio reconciliation

 

(dollars in thousands)

Total GAAP assets

 

$

89,648,423

 

 

$

89,330,477

 

 

$

85,406,764

 

Less:

 

 

 

 

 

 

Gross unrealized gains on TBA derivatives (1)

 

 

(7,232

)

 

 

(21,460

)

 

 

(28,032

)

Debt issued by securitization vehicles

 

 

(9,983,847

)

 

 

(9,789,282

)

 

 

(7,844,518

)

Plus:

 

 

 

 

 

 

Implied market value of TBA derivatives

 

 

1,925,614

 

 

 

3,627,716

 

 

 

15,182,806

 

Total economic assets *

 

$

81,582,958

 

 

$

83,147,451

 

 

$

92,717,020

 

Total equity

 

$

10,677,057

 

 

$

11,887,345

 

 

$

10,951,555

 

Economic capital ratio *

 

 

13.1

%

 

 

14.3

%

 

 

11.8

%

 

 

 

 

 

 

 

* Represents a non-GAAP financial measure.

(1) Included in Derivative assets in the Company’s Consolidated Statements of Financial Condition.

Interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)

Interest income (excluding PAA) represents interest income excluding the effect of the PAA, and serves as the basis for deriving average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA) and net interest margin (excluding PAA), which are discussed below. The Company believes this measure provides management and investors with additional detail to enhance their understanding of the Company’s operating results and trends by excluding the component of premium amortization expense representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to the Company’s Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio.

Economic interest expense includes GAAP interest expense and the net interest component of interest rate swaps. 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. Accordingly, adding the net interest component of interest rate swaps to interest expense, as computed in accordance with GAAP, reflects the total contractual interest expense and thus, provides investors with additional information about the cost of the Company's financing strategy. The Company may use market agreed coupon ("MAC") interest rate swaps in which the Company may receive or make a payment at the time of entering into such interest rate swap to compensate for the off-market nature of such interest rate swap. In accordance with GAAP, upfront payments associated with MAC interest rate swaps are not reflected in the net interest component of interest rate swaps in the Company's Consolidated Statements of Comprehensive Income (Loss).

Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations.

 

 

For the quarters ended

 

 

September 30, 2023

 

June 30, 2023

 

September 30, 2022

Interest income (excluding PAA) reconciliation

 

(dollars in thousands)

GAAP interest income

 

$

1,001,485

 

 

$

921,494

 

 

$

678,488

 

Premium amortization adjustment

 

 

(6,062

)

 

 

(11,923

)

 

 

(45,414

)

Interest income (excluding PAA) *

 

$

995,423

 

 

$

909,571

 

 

$

633,074

 

Economic interest expense reconciliation

 

 

 

 

 

 

GAAP interest expense

 

$

1,046,819

 

 

$

953,457

 

 

$

400,491

 

Add:

 

 

 

 

 

 

Net interest component of interest rate swaps

 

 

(394,677

)

 

 

(425,293

)

 

 

(141,110

)

Economic interest expense *

 

$

652,142

 

 

$

528,164

 

 

$

259,381

 

Economic net interest income (excluding PAA) reconciliation

 

 

 

 

Interest income (excluding PAA) *

 

$

995,423

 

 

$

909,571

 

 

$

633,074

 

Less:

 

 

 

 

 

 

Economic interest expense *

 

 

652,142

 

 

 

528,164

 

 

 

259,381

 

Economic net interest income (excluding PAA) *

 

$

343,281

 

 

$

381,407

 

 

$

373,693

 

 

* Represents a non-GAAP financial measure.

Average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA), net interest margin (excluding PAA) and average economic cost of interest bearing liabilities

Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA) and the average economic cost of interest bearing liabilities, which represents annualized economic interest expense divided by average interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average TBA contract and CMBX balances, provide management with additional measures of the Company’s profitability that management relies upon in monitoring the performance of the business.

Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management evaluates the Company’s performance.

 

 

For the quarters ended

 

 

September 30, 2023

 

June 30, 2023

 

September 30, 2022

Economic metrics (excluding PAA)

 

(dollars in thousands)

Average interest earning assets

 

$

89,300,922

 

 

$

86,254,955

 

 

$

78,143,337

 

Interest income (excluding PAA) *

 

$

995,423

 

 

$

909,571

 

 

$

633,074

 

Average yield on interest earning assets (excluding PAA) *

 

 

4.46

%

 

 

4.22

%

 

 

3.24

%

Average interest bearing liabilities

 

$

77,780,989

 

 

$

75,424,564

 

 

$

65,755,563

 

Economic interest expense *

 

$

652,142

 

 

$

528,164

 

 

$

259,381

 

Average economic cost of interest bearing liabilities *

 

 

3.28

%

 

 

2.77

%

 

 

1.54

%

Economic net interest income (excluding PAA) *

 

$

343,281

 

 

$

381,407

 

 

$

373,693

 

Net interest spread (excluding PAA) *

 

 

1.18

%

 

 

1.45

%

 

 

1.70

%

Interest income (excluding PAA) *

 

$

995,423

 

 

$

909,571

 

 

$

633,074

 

TBA dollar roll income and CMBX coupon income

 

 

(1,016

)

 

 

1,734

 

 

 

105,543

 

Economic interest expense *

 

 

(652,142

)

 

 

(528,164

)

 

 

(259,381

)

Subtotal

 

$

342,265

 

 

$

383,141

 

 

$

479,236

 

Average interest earnings assets

 

$

89,300,922

 

 

$

86,254,955

 

 

$

78,143,337

 

Average TBA contract and CMBX balances

 

 

2,960,081

 

 

 

6,303,202

 

 

 

18,837,475

 

Subtotal

 

$

92,261,003

 

 

$

92,558,157

 

 

$

96,980,812

 

Net interest margin (excluding PAA) *

 

 

1.48

%

 

 

1.66

%

 

 

1.98

%

* Represents a non-GAAP financial measure.

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20231024526759/en/

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