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Annaly CEO Wellington Denahan is optimistic about the end of QE

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Highlights of the quarter

Annaly reported core earnings of $0.36 a share. This was higher than the Wall Street estimate of $0.31 per share. Book value per share increased 2.7%, to $12.87 per share. Fixed-rate agency mortgage-backed securities accounted for 95% of the portfolio—pretty much flat with Q2.

Annaly was less leveraged than its peer group, with a debt-to-equity ratio of 5.4:1. At the end of Q213, the leverage ratio was 6.2:1, so Annaly delevered pretty aggressively. Annaly grew its agency MBS (mortgage-backed securities) exposure by close to $400 million.

NLY book value

The average interest rate spread was 1.35%—an increase from the 1.26% that the company reported in the previous quarter and up 28 basis points from a year ago. Interest rate spreads are heavily influenced by prepayment assumptions, so they can be volatile.

Book value decreased. However, assets rose by a small amount. It looks like an increase in payables on the liability side accounted for the decrease

Commercial real estate yield is in the high single digits, 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.

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Chief executive officer Wellington Denahan said, “We welcome the end of quantitative easing and look forward to the opportunities it presents as the mortgage market begins to adjust to fewer direct policy impacts on fundamentals. We expect the market to endure higher levels of volatility but remain comfortable in our continued ability to deliver attractive relative returns.”

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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