8-K: Annaly Capital Management Reports Solid Third Quarter Results, Driven by Agency Portfolio Growth

Annaly Capital Management announced a 4.9% economic return for the third quarter of 2024, driven by growth in its Agency portfolio and record whole loan production.

Summary

• Annaly Capital Management reported a GAAP net income of $0.05 per average common share for the third quarter of 2024.
• Earnings available for distribution (EAD) was $0.66 per average common share for the quarter.
• The company achieved an economic return of 4.9% for the third quarter and 10.5% year-to-date.
• Book value per common share stood at $19.54.
• GAAP leverage decreased to 6.9x from 7.1x in the previous quarter, while economic leverage decreased to 5.7x from 5.8x.
• The company's total portfolio reached $81.8 billion, with $72.5 billion in the highly liquid Agency portfolio.
• The Agency portfolio increased by $6.4 billion quarter-over-quarter, supported by $1.2 billion in accretive common equity raised since the beginning of the quarter.
• The Residential Credit portfolio grew by 9% to $6.5 billion, with record whole loan purchases of $3 billion during the quarter.
• The Mortgage Servicing Rights (MSR) portfolio remained relatively stable at $2.8 billion.
• Annaly announced a strategic subservicing relationship with Rocket Mortgage for a portion of its MSR portfolio.
• The company has $7.4 billion of total assets available for financing, including $4.7 billion in cash and unencumbered Agency MBS.
• The average GAAP cost of interest-bearing liabilities decreased slightly to 5.42%, while the average economic cost increased to 3.93%.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with strong economic returns and growth in key portfolios, but the low GAAP net income and negative net interest spread temper the overall sentiment. The company's strategic moves and capital raising are viewed favorably.

Positives

• The company's economic return of 4.9% for the quarter and 10.5% year-to-date demonstrates strong performance.
• The growth in the Agency portfolio indicates successful deployment of capital.
• Record whole loan production in the Residential Credit business highlights the strength of the correspondent channel.
• The strategic subservicing relationship with Rocket Mortgage could improve efficiency in the MSR portfolio.
• The company has increased financing capacity for its Residential Credit and MSR businesses.
• Annaly's book value per common share increased to $19.54 from $19.25 in the prior quarter.

Negatives

• GAAP net income was only $0.05 per average common share, which is relatively low.
• The net interest margin was 0.06%, which is a decrease from 0.24% in the prior quarter.
• The average GAAP cost of interest-bearing liabilities decreased by only one basis point, while the average economic cost increased by three basis points.
• The net interest spread was negative at -0.26%.

Risks

• Changes in interest rates could impact the company's profitability.
• Changes in prepayment rates could affect the value of mortgage-backed securities.
• The availability of financing and the terms of any financing could impact the company's operations.
• Market value fluctuations of the company's assets could pose a risk.
• Operational risks, including cybersecurity incidents, could disrupt business activities.
• The company's ability to maintain its REIT status is crucial for tax purposes.

Future Outlook

The company is optimistic about the improving operating environment and believes its portfolio is well-positioned to deliver strong risk-adjusted returns.

Management Comments

• Annaly delivered a 4.9% economic return in the third quarter and 10.5% economic return for the first nine months of the year, demonstrating the power of our diversified housing finance portfolio.
• Agency MBS benefited from the onset of the Federal Reserves rate cutting cycle and we were able to deploy equity capital raised during the quarter into the sector given attractive new money returns.
• Our whole loan correspondent channel continues to generate record production with exceptional credit quality and our differentiated MSR portfolio has consistently performed ahead of expectations.
• Looking ahead, we are optimistic given the improving operating environment and believe our portfolio is well-positioned to deliver strong risk-adjusted returns.

Industry Context

The results reflect the broader trends in the mortgage REIT sector, with a focus on managing interest rate risk and deploying capital into high-quality assets. The company's strategic move into subservicing with Rocket Mortgage is a notable development in the MSR space.

Comparison to Industry Standards

• Annaly's economic return of 4.9% for the quarter is a positive result compared to some peers in the mortgage REIT sector, but it is important to compare this to other companies with similar investment strategies.
• The increase in the Agency portfolio is in line with the trend of some REITs focusing on lower-risk assets in the current environment.
• The growth in the Residential Credit portfolio and the record whole loan production are strong indicators of Annaly's ability to generate returns in this segment, which is a differentiator compared to some peers.
• The company's leverage ratios are within the range of other mortgage REITs, but it is important to monitor these closely given the current interest rate environment.
• Companies like AGNC Investment Corp. and Two Harbors Investment Corp. are comparable peers in the Agency MBS space, while companies like PennyMac Financial Services are active in the mortgage servicing rights sector. Annaly's performance should be benchmarked against these companies to assess its relative position.

Stakeholder Impact

• Shareholders will benefit from the positive economic returns and the declared dividend of $0.65 per share.
• Employees may be impacted by the company's performance and strategic initiatives.
• Customers and suppliers may be affected by the company's business activities and partnerships.
• Creditors will be interested in the company's leverage ratios and financing capacity.

Next Steps

• The company will hold a third quarter 2024 earnings conference call on October 24, 2024.
• Investors are encouraged to monitor the company's website and social media channels for further updates.

Key Dates

Keywords

Annaly Capital Management, Mortgage REIT, Agency MBS, Residential Credit, Mortgage Servicing Rights, Leverage, Economic Return, Net Interest Margin, Dividend, Whole Loans