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Annaly book value per share declines with the rest of the sector

Annaly Capital is the biggest U.S. mortgage REIT by market capitalization

Annaly Capital (NLY) is a self-managed REIT that invests in a variety of real estate–related securities, including pass-through certificates, collateralized mortgage obligations, callable agency debt, and other mortgage-backed securities (MBS). Recently, Annaly has focused on the agency product, and 90% of its portfolio has been dedicated to Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-backed securities. However, its charter gives it the freedom to allocate up to 25% of its portfolio in non-agency product. It also invests in various agency-backed structured products such as floater and inverse floaters, which provide tailored interest rate exposure.

NLYEnlarge Graph

Highlights of the quarter

Annaly reported earnings of $1.71 per share, or $0.47 per share ex–special items. This compared favorably to the Street estimate of $0.32 per share. Book value per share declined 14.2% to $13.03 per share. Fixed-rate agency mortgage-backed securities accounted for 92% of the portfolio. Annaly was relatively less leveraged than its peer group, with a debt-to-equity ratio of 6.2:1. At the end of Q1, the leverage ratio was 6.6:1, so Annaly de-levered pretty aggressively. Annaly cut its agency MBS exposure by nearly 15%, or $15.8 billion, to $92.5 billion. Total assets declined by 18% to just over $102 billion.

Read-across to other mortgage REITs

As a REIT invested in primarily fixed-rate agency paper, Annaly’s drop in book value per share isn’t a surprise. That said, it experienced a larger drop than American Capital Agency (AGNC), which is probably the best comp for Annaly. This is also surprising because Annaly was less leveraged than American Capital. Perhaps the difference was that American Capital had more exposure to the TBA sector, which might have weathered the storm better than the MBS that Annaly held. That said, Annaly outperformed long-duration ARM REIT Hatteras (HTS), which suffered a 20% decline in book value as a big seller was hammering 7/1 adjustable-rate mortgage (ARM) paper towards the end of the quarter. Overall, the REITs with exposure to fixed-rate MBS and long-duration ARMs fared the worst, while the REITs that focused on non-agency paper like Two Harbors (TWO) or MFA Financial (MFA) fared better. REITs with servicing exposure did the best, like Nationstar (NSM).