8-K: Annaly Capital Management Reports First Quarter 2024 Results, Demonstrating Strong Economic Return

Annaly Capital Management announced a 4.8% economic return for the first quarter of 2024, driven by contributions from all three of its investment strategies.

Summary

• Annaly Capital Management reported a GAAP net income of $0.85 per average common share for the first quarter of 2024.
• Earnings available for distribution (EAD) were $0.64 per average common share.
• The company achieved a 4.8% economic return for the quarter.
• Book value per common share stood at $19.73.
• GAAP leverage decreased to 6.7x from 6.8x in the previous quarter, while economic leverage fell to 5.6x from 5.7x.
• A quarterly common stock cash dividend of $0.65 per share was declared.
• The total portfolio was $73.5 billion, with $64.7 billion in the Agency portfolio.
• The Agency portfolio decreased slightly, with a focus on higher coupon, high-quality specified pools.
• The Residential Credit portfolio increased by 4% to $6.2 billion.
• The Mortgage Servicing Rights (MSR) portfolio ended the quarter at $2.7 billion.
• The company committed to adding a $117 million market value bulk package of low note rate MSR subsequent to quarter end.
• Annaly's average GAAP cost of interest bearing liabilities increased to 5.40%, while the average economic cost increased to 3.78%.

Sentiment

Score: 8

Explanation: The document conveys a positive sentiment due to the strong economic return, increased book value, and growth in key business segments. While there are some challenges, the overall tone is optimistic and confident in the company's future prospects.

Positives

• Annaly achieved a solid 4.8% economic return in Q1 2024.
• The company's book value per common share increased to $19.73.
• The Residential Credit business saw record growth in lock and whole loan securitization volume.
• The MSR portfolio increased in value due to the interest rate environment.
• Annaly maintains a well-hedged portfolio and a responsible leverage and liquidity profile.
• The company is well-positioned for future opportunities across its three investment strategies.
• Annaly's Agency portfolio performed well due to lower volatility and improved supply and demand.
• The company added $300 million in credit facility capacity during the quarter.
• Annaly priced eight whole loan securitizations totaling $3.8 billion since the beginning of 2024, representing record quarterly issuance for the OBX shelf.

Negatives

• The average GAAP cost of interest bearing liabilities increased by three basis points to 5.40%.
• The average economic cost of interest bearing liabilities increased by 36 basis points to 3.78% quarter-over-quarter.
• The hedge ratio decreased from 106% to 97% during the quarter.
• The Agency portfolio decreased modestly during the quarter.

Risks

• The company is prepared for elevated volatility, which has been seen subsequent to quarter end.
• Changes in interest rates, the yield curve, and prepayment rates could impact results.
• The availability of mortgage-backed securities and financing could affect performance.
• Changes in market value of assets and general economic conditions pose risks.
• Credit risks related to investments in credit risk transfer securities and residential mortgage-backed securities are present.
• Operational risks and cybersecurity incidents are potential concerns.
• The company's ability to maintain its REIT status and exemption from the Investment Company Act of 1940 are ongoing risks.

Future Outlook

Annaly remains prepared for elevated volatility and sees attractive returns across its three investment strategies, positioning the company well for future opportunities.

Management Comments

• We were pleased to generate a 4.8% economic return in the first quarter as each of our three investment strategies contributed to our book value appreciation, as well as generated stable earnings, commented David Finkelstein, Annaly's Chief Executive Officer and Chief Investment Officer.
• Our core Agency MBS portfolio performed well as spreads were supported during the first quarter by lower volatility and an improved supply and demand picture.
• Our Residential Credit business continued to expand market share across the non-Agency sector with record lock and whole loan securitization volume and our MSR portfolio increased in value given the interest rate environment.
• Annaly remains prepared for elevated volatility, which we have seen materialize subsequent to quarter end, with a well-hedged portfolio, a responsible leverage and liquidity profile and a capital allocation that can perform throughout different interest rate and macro environments.
• Importantly, we continue to see attractive returns across our three investment strategies and are well-positioned for future opportunities where most attractive.

Industry Context

Annaly's results reflect the broader trends in the mortgage finance industry, including the focus on higher coupon securities and the growth in the non-agency residential credit sector. The company's performance is also influenced by interest rate volatility and the supply and demand dynamics in the MBS market.

Comparison to Industry Standards

• Annaly's economic return of 4.8% is a positive result compared to some peers in the mortgage REIT sector, which have faced challenges due to interest rate volatility.
• The company's focus on higher coupon Agency MBS is a common strategy among mortgage REITs seeking to improve yields in the current environment.
• Annaly's growth in the Residential Credit business, particularly in securitization volume, positions it well against competitors in the non-agency space, such as AG Mortgage Investment Trust and MFA Financial.
• The company's leverage ratios are within the range of other large mortgage REITs, but the decrease in both GAAP and economic leverage is a positive sign of risk management.
• Annaly's MSR portfolio growth is in line with the trend of mortgage REITs diversifying their assets to include servicing rights, similar to companies like New Residential Investment Corp.

Stakeholder Impact

• Shareholders will benefit from the positive economic return and the declared dividend of $0.65 per share.
• Employees may experience stability due to the company's strong performance.
• Customers of the Residential Credit business will benefit from the company's continued growth and market share expansion.
• Suppliers and creditors will likely see Annaly as a stable and reliable partner.

Next Steps

• The company will hold a first quarter 2024 earnings conference call on April 25, 2024.
• Annaly will continue to monitor market conditions and adjust its investment strategies accordingly.
• The company will focus on maintaining a well-hedged portfolio and responsible leverage.

Key Dates

Keywords

Annaly Capital Management, Mortgage REIT, Agency MBS, Residential Credit, MSR, Economic Return, Leverage, Dividend, Securitization, Interest Rates