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A must-read guide to Annaly Capital's 2nd quarter 2014 earnings

Part 3
A must-read guide to Annaly Capital's 2nd quarter 2014 earnings (Part 3 of 5)

Annaly Capital reports its 2nd increase in book value per share

Highlights of the quarter

Annaly reported core earnings of $0.30 a share. This was lower than the Wall Street estimate of $0.26 per share. Book value per share increased 7.6%, to $13.23 per share. Fixed-rate agency mortgage-backed securities accounted for 95% 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 5.3:1. At the end of Q213, the leverage ratio was 6.2:1, so Annaly delevered pretty aggressively. Annaly grew its agency MBS exposure by nearly 6%, or $4.6 billion.

The average interest rate spread was 1.26%—a big increase from the 0.9% the company reported in the previous quarter and up 25 basis points from a year ago. Interest rate spreads are heavily influenced by prepayment assumptions, so they can be volatile.

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 11% 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 2.54% to 3.2% year-over-year. Of course, with commercial real estate, the company is now taking credit risk.

Chief executive officer Wellington Denahan said, “We welcome the continued reduction of monetary policy influences on the markets and all the opportunities it brings. We continue to 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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