Highlights in 2Q16
Annaly Capital (NLY) reported core earnings of $0.29 per share in 2Q16. This value is a non-GAAP (generally accepted accounting principles) measure that excludes gains or losses on investment, swap termination gains or losses, and other non-recurring gains or losses. Wall Street analysts expected $0.29 per share—the earnings were in line with expectations.
Annaly’s GAAP loss for the quarter was $0.32 per share. This loss was mainly due to realized and mark-to-market losses on interest rate swaps. The company declared a dividend of $0.30 per share.
During the quarter, Annaly completed its merger with Hatteras Capital (HTS). To learn more, read Biggest Mortgage REIT Deal Ever: Annaly Capital Is Buying Hatteras.
Normalized core earnings
Annaly introduced a new non-GAAP earnings measure in the fourth quarter called “normalized core earnings.” Normalized core earnings are similar to core EPS (earnings per share)—except they also strip out an item called “premium amortization adjustment.” The premium amortization adjustment includes gains or losses associated with changing prepayment assumptions. During the quarter, Annaly announced that its normalized core earnings were $0.29 per share.
The normalized net interest margin was 1.5%. Annaly’s average yield on earning assets was 2.5% in the second quarter—up 39 basis points from the first quarter. The average cost of interest-bearing liabilities was 1.7%—a drop of 5 basis points from last quarter. The core net interest spread was 1.3%—unchanged from the first quarter.
Interest rate spreads are heavily influenced by prepayment assumptions, so they can be volatile. The weighted average prepayment rate for the quarter rose to 13%.
Return on equity
The core return on equity was 9.7%. Generally speaking, rates were volatile over the last year. Mortgage REITs, especially agency REITs like Annaly Capital and American Capital Agency (AGNC), are exposed to rate volatility. This exposure is a function of the negative convexity of MBS (mortgage-backed securities).
Adjustable-rate MBS REITs like MFA Financial (MFA) have much less convexity risk. They’re a good place to hide in volatile rate environments. Investors who want to bet directly on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT).
Real estate companies that bear credit risk are another good bet. Colony Capital (CLNY) is a good example. Investors interested in trading the mortgage REIT sector as a whole should look at the iShares Mortgage Real Estate Capped ETF (REM).