A must-know guide to Annaly Capital's 1Q14 earnings

Part 3
A must-know guide to Annaly Capital's 1Q14 earnings (Part 3 of 5)

Annaly reports its 1st increase in book value in 6 quarters

Highlights of the quarter

Annaly reported core earnings of $0.23 a share, which was lower than the Street estimate of $0.27 per share. Book value per share increased 1.4%, to $12.30 per share. Fixed-rate agency mortgage-backed securities accounted for 93% of the portfolio—an increase from 91% in the prior quarter. Annaly was less leveraged than its peer group, with a debt-to-equity ratio of 5.2:1. At the end of Q213, the leverage ratio was 6.2:1, so Annaly de-levered pretty aggressively. Annaly grew its agency MBS exposure by nearly 7%, or $5 billion. The average interest rate spread was 0.9%—a big drop from the 1.43% the company reported in the previous quarter but more or less flat from a year ago. The decrease is due to changing amortizations based on new prepayment assumptions. American Capital Agency experienced the same thing.

NLY book valueEnlarge Graph

Annaly spent a lot of the quarter repositioning its portfolio. It made a slight adjustment to increase adjustable-rate mortgages versus fixed-rate mortgages. Annaly also increased its commercial investment portfolio, which now accounts for 14% of shareholder’s equity.

The commercial real estate yield is in the low teens, which was a big reason why the average annualized yield on Annaly’s portfolio increased from 2.88% to 3.21% year-over-year. Of course, with commercial real estate, the company is now taking credit risk.

Chief executive officer Wellington Denahan said, “We remain optimistic about the investment landscape in light of the market’s reaction to the Federal Reserve’s ongoing reduction of bond purchases. We continue to be flexible with our capital deployment and feel comfortable in our ability to sustain attractive risk-adjusted returns in the quarters ahead.”

Dividends

The company paid a quarterly dividend for the fourth quarter of 30 cents a share—flat with last quarter and down 15 cents from a year ago. Given that REITs like Annaly (NLY), American Capital Agency (AGNC), MFA Financial (MFA), Capstead (CMO), and Hatteras (HTS) must pay out 90% of their income as dividends, they tend to have volatile dividend streams.

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