8-K: Annaly Capital Management Reports Mixed Results for Q4 2023, Cites Strong Economic Return

Annaly Capital Management announced a net loss of $0.88 per share for the fourth quarter of 2023, but highlighted a 10.1% economic return and growth in its Residential Credit and MSR portfolios.

Summary

• Annaly Capital Management reported a GAAP net loss of $0.88 per average common share for the fourth quarter of 2023, and a loss of $3.61 per share for the full year.
• Earnings available for distribution (EAD) were $0.68 per average common share for the quarter and $2.86 per share for the full year.
• The company achieved a 10.1% economic return for the fourth quarter and a 6.0% economic return for the full year 2023.
• Book value per common share was $19.44.
• GAAP leverage decreased to 6.8x from 7.1x in the previous quarter, while economic leverage decreased to 5.7x from 6.4x.
• The total portfolio was $74.3 billion, with $65.7 billion in the highly liquid Agency portfolio.
• The Agency portfolio decreased by 4%, with a focus on higher coupon securities and a reduction in TBA positions.
• The Residential Credit portfolio increased by 9% to $5.7 billion, driven by strong performance from the correspondent channel.
• The Mortgage Servicing Rights (MSR) portfolio increased by 18% to $2.7 billion.
• The average GAAP cost of interest-bearing liabilities increased to 5.37%, and the average economic cost increased to 3.42%.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the strong economic return and growth in key portfolios, but tempered by the GAAP net loss and increased interest costs. The management's optimistic outlook provides a positive signal.

Positives

• Annaly delivered a strong 10.1% economic return in the fourth quarter.
• The company's economic return for the full year was a solid 6.0% despite market volatility.
• The Residential Credit and MSR portfolios showed significant growth.
• Annaly proactively managed its leverage profile, reducing both GAAP and economic leverage.
• The company successfully shifted its Agency portfolio to higher coupon securities.
• Annaly raised $674 million of accretive common equity through its at-the-market (ATM) sales program.
• The company expanded its Board of Directors with three new independent directors.

Negatives

• Annaly reported a GAAP net loss of $0.88 per average common share for the quarter.
• The company experienced a GAAP net loss of $3.61 per average common share for the full year.
• The Agency portfolio decreased by 4% during the quarter.
• Net interest margin was negative at -0.25% for the quarter.
• The average GAAP cost of interest-bearing liabilities increased to 5.37%.

Risks

• Changes in interest rates could impact the company's performance.
• Changes in prepayment rates could affect the value of mortgage-backed securities.
• The availability of financing and its terms could pose a risk.
• Market value fluctuations of the company's assets could impact results.
• Credit risks related to investments in credit risk transfer securities and residential mortgage-backed securities could affect performance.
• Operational risks, including cybersecurity incidents, could pose a threat.

Future Outlook

Annaly is optimistic about the outlook for each of its businesses in 2024, encouraged by the improving operating environment and the potential shift to a more accommodative monetary policy by the Federal Reserve.

Management Comments

• Annaly delivered a 10.1% economic return in the fourth quarter as interest rates declined and mortgage-related assets exhibited strong performance, remarked David Finkelstein, Annalys Chief Executive Officer and Chief Investment Officer.
• We are proud to have generated a 6.0% economic return in 2023 through what was another historically volatile year in fixed income markets.
• We view this performance as a testament to Annalys diversified housing finance model and prudent portfolio and risk management.
• Importantly, we continued to make progress in expanding our capabilities and leadership across housing finance as we further scaled our Residential Credit and MSR businesses last year.
• We continue to believe the synergies between our three investment strategies will allow Annaly to generate superior risk-adjusted returns across a variety of economic environments.
• As the Federal Reserve likely shifts to a more accommodative monetary policy in 2024, we are encouraged by the improving operating environment we have experienced in recent months and are optimistic on the outlook for each of our businesses.

Industry Context

The results reflect the challenges and opportunities in the mortgage finance sector, particularly with fluctuating interest rates and market volatility. Annaly's focus on diversifying its portfolio across Agency, Residential Credit, and MSR assets aligns with industry trends to mitigate risk and enhance returns.

Comparison to Industry Standards

• Annaly's economic return of 10.1% for the quarter is a strong result compared to some peers in the mortgage REIT sector, though specific comparisons would require analysis of individual competitor results.
• The company's reduction in leverage is a positive sign, as many mortgage REITs have been under pressure to manage their debt levels.
• The growth in the Residential Credit and MSR portfolios is notable, as these areas are becoming increasingly important for mortgage REITs seeking to diversify their income streams.
• Annaly's position as the largest non-bank issuer and second largest issuer overall of Prime Jumbo and Expanded Credit MBS from the beginning of 2022 through 2023 year-end highlights its significant role in the market.
• Companies like AGNC Investment Corp. and Two Harbors Investment Corp. are comparable peers, and a detailed comparison of their results would provide further context.

Management Changes

Corporate Governance

Stakeholder Impact

• Shareholders may be concerned about the GAAP net loss but encouraged by the economic return and dividend.
• Employees may be impacted by the company's performance and strategic shifts.
• Customers and suppliers may see changes in the company's operations and investment strategies.
• Creditors will monitor the company's leverage and financial health.

Next Steps

• The company will hold a conference call on February 8, 2024, to discuss the results.
• Investors are encouraged to monitor the company's website and social media channels for further updates.

Key Dates

Keywords

Annaly Capital Management, Mortgage REIT, Residential Credit, MSR, Agency MBS, Economic Return, Leverage, Interest Rates, Prepayment Rates, Financial Results