EX-99.1 2 a2019q1nlyex991.htm EXHIBIT 99.1 Exhibit

nlya02.jpg

ANNALY CAPITAL MANAGEMENT, INC. REPORTS 1st QUARTER 2019 RESULTS

NEW YORK—May 1, 2019 —Annaly Capital Management, Inc. (NYSE: NLY) ("Annaly" or the "Company") today announced its financial results for the quarter ended March 31, 2019.
Financial Highlights
•
GAAP net income (loss) of ($0.63) per average common share
•
Core earnings (excluding PAA) of $0.29 per average common share
•
GAAP return on average equity of (22.72%) and core return on average equity (excluding PAA) of 11.59%
•
Book value per common share of $9.67 up 3% from December 31, 2018
•
Economic leverage of 7.0x unchanged from prior quarter
•
Economic return for the quarter (non-annualized) of 6.18%
•
Declared quarterly common stock dividend of $0.30 per common share in the first quarter; pre-announced an expected quarterly common stock dividend of $0.25 per common share for the remainder of 2019 beginning with the second quarter, subject to the discretion and approval of our board of directors

Business Highlights
Investment and Capital Growth
•
Portfolio growth of 12% largely driven by purchases of Agency MBS; originated or purchased over $1 billion of credit assets
•
Further expansion of Annaly Commercial Real Estate Group's national coverage model with opening of Midwest office

Financing and Liquidity
•
Economic leverage nearly 20% lower than Agency mREIT peers; 51% less levered across our credit investment groups than the average of the five largest peers in each sector
•
Unencumbered assets of $9 billion at quarter end
•
Annaly Commercial Real Estate Group: Closed $857.3 million managed commercial real estate collateralized loan obligation with a two year reinvestment period during the first quarter of 2019
•
Annaly Residential Credit Group: Completed $394.0 million securitization during the first quarter of 2019, representing the fourth deal closed through Annaly’s wholly-owned subsidiary, Onslow Bay Financial LLC, and closed fifth securitization of $388.2 million subsequent to quarter end, bringing aggregate issuance to $1.9 billion since the beginning of 2018
•
Annaly Middle Market Lending Group: Secured additional financing capacity with the establishment of a $200.0 million credit facility during the quarter
•
Securitization efforts in the first quarter of 2019 within the residential credit and commercial real estate businesses have contributed to over 75 basis points of incremental levered returns on investments while adding liquidity
•
Subsequent to quarter end, announced the redemption of Annaly’s $55.0 million 8.125% Series H preferred stock

Corporate Governance
•
Reduced management fee by 30 basis points, a decrease of nearly 30%, to 0.75% on incremental equity above total Stockholders’ Equity (as defined in the Management Agreement) calculated as of February 28, 2019, highlighting the benefits of size and scale of the platform
•
Expanded Board of Directors with election of two new Independent Directors during the quarter; following the 2019 Annual Meeting of Stockholders, we expect the Board will be comprised of 82% independent directors and 45% women
•
Published extensive disclosure on the Company’s commitment to leading Corporate Responsibility practices

"During the first quarter of 2019 we opportunistically grew our portfolio, largely driven by purchases of Agency MBS and supplemented by enhanced origination capabilities that resulted in the sourcing of over $1 billion of credit assets," commented Kevin Keyes, Chairman, Chief Executive Officer and President. "Additionally, we increased our capital optimization and liquidity through new financing structures

1


and additional capacity. Over the last five years we delivered unmatched stability with our dividend and through our efficient operating structure and diversified investment platform, while providing transparency about realistic returns achievable in the market. In the current environment, one characterized by a flattening yield curve and compressed spreads, we remain committed to delivering high quality earnings and a stable yield without assuming excessive risk or sacrificing liquidity. Accordingly, we have pre-announced an expected quarterly dividend of $0.25 for the second quarter and for the remainder of 2019. Although we could maintain elevated earnings and dividend payouts by increasing leverage, we are focused on optimal liquidity thresholds and managing the portfolio within conservative risk parameters."
Mr. Keyes continued, "Also in the first quarter, we continued to enhance our leading corporate governance practices with the addition of two new independent directors, Kathy Hopinkah Hannan and Thomas Hamilton. Following the 2019 Annual Meeting, we expect the Board will be comprised of 82% independent directors and 45% women. Finally, we proactively reduced the management fee by nearly 30% to 0.75% on incremental equity raised - further demonstrating the benefits of scale and operational efficiency we have achieved as Annaly continues to grow and diversify."


2


Financial Performance
The following table summarizes certain key performance indicators as of and for the quarters ended March 31, 2019, December 31, 2018 and March 31, 2018:
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Book value per common share
$
9.67

 
$
9.39

 
$
10.53

Economic leverage at period-end (1)
7.0:1

 
7.0:1

 
6.5:1

GAAP net income (loss) per average common share (2)
$
(0.63
)
 
$
(1.74
)
 
1.12

Annualized GAAP return (loss) on average equity
(22.72
%)
 
(62.05
%)
 
36.86
%
Net interest margin (3)
1.25
%
 
1.34
%
 
1.94
%
Average yield on interest earning assets (4)
3.15
%
 
3.21
%
 
3.45
%
Average cost of interest bearing liabilities (5)
2.15
%
 
2.22
%
 
1.90
%
Net interest spread
1.00
%
 
0.99
%
 
1.55
%
Core earnings metrics *
 
 
 
 
 
Core earnings (excluding PAA) per average common share (2)(6)
$
0.29

 
$
0.29

 
$
0.30

Core earnings per average common share (2)(6)
$
0.23

 
$
0.26

 
$
0.41

PAA cost (benefit) per average common share
$
0.06

 
$
0.03

 
$
(0.11
)
Annualized core return on average equity (excluding PAA)
11.59
%
 
11.48
%
 
10.70
%
Net interest margin (excluding PAA) (3)
1.51
%
 
1.49
%
 
1.52
%
Average yield on interest earning assets (excluding PAA) (4)
3.45
%
 
3.38
%
 
2.99
%
Net interest spread (excluding PAA)
1.30
%
 
1.16
%
 
1.09
%
*
Represents non-GAAP financial measures. Please refer to the "Non-GAAP Financial Measures" section for additional information.
(1) 
Computed as the sum of recourse debt, to-be-announced ("TBA") derivative and CMBX notional outstanding and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Securitized debt, certain credit facilities (included within other secured financing) and mortgages payable are non-recourse to the Company and are excluded from this measure.
(2) 
Net of dividends on preferred stock.
(3) 
Net interest margin represents the sum of the Company's interest income plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average TBA contract and CMBX balances. Net interest margin (excluding PAA) excludes the premium amortization adjustment ("PAA") representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to the Company’s Agency mortgage-backed securities.
(4) 
Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).
(5) 
Average cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average amortized cost during the period. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.
(6) 
Beginning with the quarter ended September 30, 2018, the Company updated its calculation of core earnings and related metrics to reflect changes to its portfolio composition and operations, including the acquisition of MTGE Investment Corp. in September 2018. Refer to the section titled "Non-GAAP Financial Measures" for a complete discussion of core earnings and core earnings (excluding PAA) per average common share, and other non-GAAP financial measures. Prior period results have not been adjusted to conform to the revised calculation as the impact in each of those periods is not material.


Other Information
This news release and our public documents to which we refer contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "anticipate," "continue," or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; our ability to grow our commercial real estate business; our ability to grow our residential credit business; our ability to grow our middle market lending business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, commercial real estate assets and corporate debt; risks related to investments in mortgage servicing rights; our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; and our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law.
Annaly is a leading diversified capital manager that invests in and finances residential and commercial assets. Annaly’s principal business objective is to generate net income for distribution to its stockholders and to preserve capital through prudent selection of investments and

3


continuous management of its portfolio. Annaly has elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. Annaly is externally managed by Annaly Management Company LLC. Additional information on the Company can be found at www.annaly.com.
Annaly routinely posts important information for investors on the Company’s website, www.annaly.com. Annaly intends to use this webpage as a means of disclosing material, non-public information, for complying with the Company’s disclosure obligations under Regulation FD and to post and update investor presentations and similar materials on a regular basis. Annaly encourages investors, analysts, the media and others interested in Annaly to monitor the Company’s website, in addition to following Annaly’s press releases, SEC filings, public conference calls, presentations, webcasts and other information it posts from time to time on its website. To sign-up for email-notifications, please visit the "Email Alerts" section of our website, www.annaly.com, under the "Investors" section and enter the required information to enable notifications. The information contained on, or that may be accessed through, the Company’s webpage is not incorporated by reference into, and is not a part of, this document.
The Company prepares a supplemental investor presentation and a financial summary for the benefit of its shareholders. Both the First Quarter 2019 Investor Presentation and the First Quarter 2019 Financial Summary can be found at the Company’s website (www.annaly.com) in the Investors section under Investor Presentations.

Conference Call
The Company will hold the first quarter 2019 earnings conference call on May 2, 2019 at 9:00 a.m. Eastern Time. Participants are encouraged to pre-register for the conference call to receive a unique PIN to gain immediate access to the call and bypass the live operator.  Pre-registration may be completed by accessing the Pre-Registration link found on the homepage or "Investors" section of the Company's website at www.annaly.com, or by using the following link: http://dpregister.com/10130887.
Pre-registration may be completed at any time, including up to and after the call start time. 
For participants who would like to join the call but have not pre-registered, access is available by dialing 844-763-8274 within the U.S., or 412-717-9224 internationally, and requesting the "Annaly Earnings Call."
There will also be an audio webcast of the call on www.annaly.com. A replay of the call will be available for one week following the conference call. The replay number is 877-344-7529 for domestic calls and 412-317-0088 for international calls and the conference passcode is 10130887. If you would like to be added to the e-mail distribution list, please visit www.annaly.com, click on Investors, then select Email Alerts and complete the email notification form.



4


Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)
 
March 31, 2019
 
December 31, 2018 (1)
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
(unaudited)
 
 
 
(unaudited)
 
(unaudited)
 
(unaudited)
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,522,605

 
$
1,735,749

 
$
1,082,747

 
$
1,135,329

 
$
984,275

Securities
104,993,271

 
92,623,788

 
91,338,611

 
88,478,689

 
90,539,192

Loans, net
3,879,324

 
4,585,975

 
4,224,203

 
3,692,172

 
3,208,617

Mortgage servicing rights
500,745

 
557,813

 
588,833

 
599,014

 
596,378

Assets transferred or pledged to securitization vehicles
4,365,300

 
3,833,200

 
4,287,821

 
3,066,270

 
3,256,621

Real estate, net
734,239

 
739,473

 
753,014

 
477,887

 
480,063

Derivative assets
148,178

 
200,503

 
404,841

 
212,138

 
230,302

Reverse repurchase agreements
523,449

 
650,040

 
1,234,704

 
259,762

 
200,459

Receivable for unsettled trades
1,574,251

 
68,779

 
1,266,840

 
21,728

 
45,126

Interest receivable
390,930

 
357,365

 
347,278

 
323,769

 
326,989

Goodwill and intangible assets, net
98,551

 
100,854

 
103,043

 
91,009

 
92,763

Other assets
441,706

 
333,988

 
329,868

 
475,230

 
421,448

Total assets
$
119,172,549

 
$
105,787,527

 
$
105,961,803

 
$
98,832,997

 
$
100,382,233

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Repurchase agreements
$
88,554,170

 
$
81,115,874

 
$
79,073,026

 
$
75,760,655

 
$
78,015,431

Other secured financing
4,144,623

 
4,183,311

 
4,108,547

 
3,760,487

 
3,830,075

Debt issued by securitization vehicles
3,693,766

 
3,347,062

 
3,799,542

 
2,728,692

 
2,904,873

Mortgages payable
510,386

 
511,056

 
511,588

 
309,878

 
309,794

Derivative liabilities
775,980

 
889,750

 
379,794

 
494,037

 
580,941

Payable for unsettled trades
4,763,376

 
583,036

 
2,505,428

 
1,108,834

 
91,327

Interest payable
424,391

 
570,928

 
399,605

 
478,439

 
284,696

Dividends payable
434,431

 
394,129

 
102,811

 
349,300

 
347,897

Other liabilities
89,982

 
74,580

 
125,606

 
68,819

 
74,264

Total liabilities
103,391,105

 
91,669,726

 
91,005,947

 
85,059,141

 
86,439,298

Stockholders’ equity
 
 
 
 
 
 
 
 
 
Preferred stock, par value $0.01 per share (2)
1,778,168

 
1,778,168

 
1,778,168

 
1,723,168

 
1,723,168

Common stock, par value $0.01 per share (3)
14,481

 
13,138

 
13,031

 
11,643

 
11,597

Additional paid-in capital
20,112,875

 
18,794,331

 
18,793,706

 
17,268,596

 
17,218,191

Accumulated other comprehensive income (loss)
(319,376
)
 
(1,979,865
)
 
(3,822,956
)
 
(3,434,447
)
 
(3,000,080
)
Accumulated deficit
(5,809,931
)
 
(4,493,660
)
 
(1,811,955
)
 
(1,800,370
)
 
(2,015,612
)
Total stockholders’ equity
15,776,217

 
14,112,112

 
14,949,994

 
13,768,590

 
13,937,264

Noncontrolling interests
5,227

 
5,689

 
5,862

 
5,266

 
5,671

Total equity
15,781,444

 
14,117,801

 
14,955,856

 
13,773,856

 
13,942,935

Total liabilities and equity
$
119,172,549

 
$
105,787,527

 
$
105,961,803

 
$
98,832,997

 
$
100,382,233

(1) 
Derived from the audited consolidated financial statements at December 31, 2018.
(2) 
7.625% Series C Cumulative Redeemable Preferred Stock - Includes 7,000,000 shares authorized, issued and outstanding at March 31, 2019, December 31, 2018 and September 30, 2018. Includes 12,000,000 shares authorized and 7,000,000 shares issued and outstanding at June 30, 2018 and March 31, 2018.
7.50% Series D Cumulative Redeemable Preferred Stock - Includes 18,400,000 shares authorized, issued and outstanding.
7.625% Series E Cumulative Redeemable Preferred Stock - Includes 0 shares authorized, issued and outstanding at March 31, 2019, December 31, 2018 and September 30, 2018. Includes 11,500,000 shares authorized and 0 shares issued and outstanding at June 30, 2018 and March 31, 2018.
6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock - Includes 28,800,000 shares authorized, issued and outstanding.
6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock - Includes 19,550,000 shares authorized and 17,000,000 shares issued and outstanding.8.125% Series H Cumulative Redeemable Preferred Stock - Includes 2,200,000 shares authorized, issued and outstanding at March 31, 2019, December 31, 2018 and September 30, 2018. Includes 0 shares authorized, issued and outstanding at June 30, 2018 and March 31, 2018.
(3) 
Includes 1,924,050,000 shares authorized and 1,448,103,248 shares issued and outstanding at March 31, 2019. Includes 1,924,050,000 shares authorized and 1,313,763,450 shares issued and outstanding at December 31, 2018. Includes 1,924,050,000 shares authorized and 1,303,079,555 shares issued and outstanding at September 30, 2018. Includes 1,909,750,000 shares authorized and 1,164,333,831 shares issued and outstanding at June 30, 2018. Includes 1,909,750,000 shares authorized and 1,159,657,350 shares issued and outstanding at March 31, 2018. 

5


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except per share data)
(Unaudited)
 
For the quarters ended
 
March 31, 2019
 
December 31, 2018
 
September 30,
2018
 
June 30, 2018
 
March 31, 2018
Net interest income
 
 
 
 
 
 
 
 
 
Interest income
$
866,186

 
$
859,674

 
$
816,596

 
$
776,806

 
$
879,487

Interest expense
647,695

 
586,774

 
500,973

 
442,692

 
367,421

Net interest income
218,491

 
272,900

 
315,623

 
334,114

 
512,066

Realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
Net interest component of interest rate swaps
134,035

 
65,889

 
51,349

 
31,475

 
(48,160
)
Realized gains (losses) on termination or maturity of interest rate swaps
(588,256
)
 
—

 
575

 
—

 
834

Unrealized gains (losses) on interest rate swaps
(390,556
)
 
(1,313,882
)
 
417,203

 
343,475

 
977,285

Subtotal
(844,777
)
 
(1,247,993
)
 
469,127

 
374,950

 
929,959

Net gains (losses) on disposal of investments
(93,916
)
 
(747,505
)
 
(324,294
)
 
(66,117
)
 
13,468

Net gains (losses) on other derivatives
(115,159
)
 
(484,872
)
 
94,827

 
34,189

 
(47,145
)
Net unrealized gains (losses) on instruments measured at fair value through earnings
47,629

 
(18,169
)
 
(39,944
)
 
(48,376
)
 
(51,593
)
Loan loss provision
(5,703
)
 
(3,496
)
 
—

 
—

 
—

Subtotal
(167,149
)
 
(1,254,042
)
 
(269,411
)
 
(80,304
)
 
(85,270
)
Total realized and unrealized gains (losses)
(1,011,926
)
 
(2,502,035
)
 
199,716

 
294,646

 
844,689

Other income (loss)
30,502

 
52,377

 
(10,643
)
 
34,170

 
34,023

General and administrative expenses
 
 
 
 
 
 
 
 
 
Compensation and management fee
44,833

 
43,750

 
45,983

 
45,579

 
44,529

Other general and administrative expenses
38,904

 
33,323

 
80,526

 
18,202

 
17,981

Total general and administrative expenses
83,737

 
77,073

 
126,509

 
63,781

 
62,510

Income (loss) before income taxes
(846,670
)
 
(2,253,831
)
 
378,187

 
599,149

 
1,328,268

Income taxes
2,581

 
1,041

 
(7,242
)
 
3,262

 
564

Net income (loss)
(849,251
)
 
(2,254,872
)
 
385,429

 
595,887

 
1,327,704

Net income (loss) attributable to noncontrolling interests
(101
)
 
17

 
(149
)
 
(32
)
 
(96
)
Net income (loss) attributable to Annaly
(849,150
)
 
(2,254,889
)
 
385,578

 
595,919

 
1,327,800

Dividends on preferred stock
32,494

 
32,494

 
31,675

 
31,377

 
33,766

Net income (loss) available (related) to common stockholders
$
(881,644
)
 
$
(2,287,383
)
 
$
353,903

 
$
564,542

 
$
1,294,034

Net income (loss) per share available (related) to common stockholders
 
 
 
 
 
 
 
 
Basic
$
(0.63
)
 
$
(1.74
)
 
$
0.29

 
$
0.49

 
$
1.12

Diluted
$
(0.63
)
 
$
(1.74
)
 
$
0.29

 
$
0.49

 
$
1.12

Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
Basic
1,398,614,205

 
1,314,377,748

 
1,202,353,851

 
1,160,436,777

 
1,159,617,848

Diluted
1,398,614,205

 
1,314,377,748

 
1,202,353,851

 
1,160,979,451

 
1,160,103,185

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Net income (loss)
$
(849,251
)
 
$
(2,254,872
)
 
$
385,429

 
$
595,887

 
$
1,327,704

Unrealized gains (losses) on available-for-sale securities
1,599,398

 
1,100,052

 
(719,609
)
 
(505,130
)
 
(1,879,479
)
Reclassification adjustment for net (gains) losses included in net income (loss)
61,091

 
743,039

 
331,100

 
70,763

 
5,419

Other comprehensive income (loss)
1,660,489

 
1,843,091

 
(388,509
)
 
(434,367
)
 
(1,874,060
)
Comprehensive income (loss)
811,238

 
(411,781
)
 
(3,080
)
 
161,520

 
(546,356
)
Comprehensive income (loss) attributable to noncontrolling interests
(101
)
 
17

 
(149
)
 
(32
)
 
(96
)
Comprehensive income (loss) attributable to Annaly
811,339

 
(411,798
)
 
(2,931
)
 
161,552

 
(546,260
)
Dividends on preferred stock
32,494

 
32,494

 
31,675

 
31,377

 
33,766

Comprehensive income (loss) attributable to common stockholders
$
778,845

 
$
(444,292
)
 
$
(34,606
)
 
$
130,175

 
$
(580,026
)

 



6


Key Financial Data
The following table presents key metrics of the Company’s portfolio, liabilities and hedging positions, and performance as of and for the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018:
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Portfolio related metrics
 
 
 
 
 
Fixed-rate Residential Securities as a percentage of total Residential Securities
94
%
 
93
%
 
91
%
Adjustable-rate and floating-rate Residential Securities as a percentage of total Residential Securities
6
%
 
7
%
 
9
%
Weighted average experienced CPR for the period
7.3
%
 
7.9
%
 
8.9
%
Weighted average projected long-term CPR at period-end
11.6
%
 
10.1
%
 
9.2
%
Liabilities and hedging metrics
 
 
 
 
 
Weighted average days to maturity on repurchase agreements outstanding at period-end
72

 
77

 
72

Hedge ratio (1)
85
%
 
94
%
 
94
%
Weighted average pay rate on interest rate swaps at period-end (2)
2.20
%
 
2.17
%
 
2.00
%
Weighted average receive rate on interest rate swaps at period-end (2)
2.66
%
 
2.68
%
 
2.13
%
Weighted average net rate on interest rate swaps at period-end (2)
(0.46
%)
 
(0.51
%)
 
(0.13
%)
Leverage at period-end (3)
6.1:1

 
6.3:1

 
6.1:1

Economic leverage at period-end (4)
7.0:1

 
7.0:1

 
6.5:1

Capital ratio at period-end
12.0
%
 
12.1
%
 
13.1
%
Performance related metrics
 
 
 
 
 
Book value per common share
$
9.67

 
$
9.39

 
$
10.53

GAAP net income (loss) per average common share (5)
$
(0.63
)
 
$
(1.74
)
 
$
1.12

Annualized GAAP return (loss) on average equity
(22.72
%)
 
(62.05
%)
 
36.86
%
Net interest margin
1.25
%
 
1.34
%
 
1.94
%
Average yield on interest earning assets (6)
3.15
%
 
3.21
%
 
3.45
%
Average cost of interest bearing liabilities (7)
2.15
%
 
2.22
%
 
1.90
%
Net interest spread
1.00
%
 
0.99
%
 
1.55
%
Dividend declared per common share
$
0.30

 
$
0.30

 
$
0.30

Annualized dividend yield (8)
12.01
%
 
12.22
%
 
11.51
%
Core earnings metrics *
 
 
 
 
 
Core earnings (excluding PAA) per average common share (5)
$
0.29

 
$
0.29

 
$
0.30

Core earnings per average common share (5)
$
0.23

 
$
0.26

 
$
0.41

PAA cost (benefit) per average common share
$
0.06

 
$
0.03

 
$
(0.11
)
Annualized core return on average equity (excluding PAA)
11.59
%
 
11.48
%
 
10.70
%
Net interest margin (excluding PAA)
1.51
%
 
1.49
%
 
1.52
%
Average yield on interest earning assets (excluding PAA) (6)
3.45
%
 
3.38
%
 
2.99
%
Net interest spread (excluding PAA)
1.30
%
 
1.16
%
 
1.09
%
*
Represents non-GAAP financial measures. Please refer to the ‘Non-GAAP Financial Measures’ section for additional information.
(1) 
Measures total notional balances of interest rate swaps, interest rate swaptions and futures relative to repurchase agreements, other secured financing and TBA notional outstanding;  excludes MSRs and the effects of term financing, both of which serve to reduce interest rate risk. Additionally, the hedge ratio does not take into consideration differences in duration between assets and liabilities.
(2) 
Excludes forward starting swaps.
(3) 
Debt consists of repurchase agreements, other secured financing, securitized debt and mortgages payable. Certain credit facilities (included within other secured financing), securitized debt and mortgages payable are non-recourse to the Company.
(4) 
Computed as the sum of recourse debt, TBA derivative and CMBX notional outstanding and net forward purchases of investments divided by total equity.
(5) 
Net of dividends on preferred stock.
(6) 
Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).
(7) 
Average cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average amortized cost during the period. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.
(8) 
Based on the closing price of the Company’s common stock of $9.99, $9.82 and $10.43 at March 31, 2019, December 31, 2018 and March 31, 2018, respectively.

7


The following table contains additional information on our residential and commercial investments as of the dates presented:
 
For the quarters ended
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Agency mortgage-backed securities
$
103,093,526

 
$
90,752,995

 
$
88,579,097

Credit risk transfer securities
607,945

 
552,097

 
628,942

Non-agency mortgage-backed securities
1,116,569

 
1,161,938

 
1,066,343

Commercial mortgage-backed securities
175,231

 
156,758

 
264,810

Total securities
$
104,993,271

 
$
92,623,788

 
$
90,539,192

Residential mortgage loans
$
1,311,720

 
$
1,359,806

 
$
974,577

Commercial real estate debt and preferred equity
722,962

 
1,296,803

 
1,081,295

Corporate debt
1,758,082

 
1,887,182

 
1,152,745

Loans held for sale
86,560

 
42,184

 
—

Total loans, net
$
3,879,324

 
$
4,585,975

 
$
3,208,617

Mortgage servicing rights
$
500,745

 
$
557,813

 
$
596,378

Residential mortgage loans transferred or pledged to securitization vehicles
$
1,425,668

 
$
1,094,831

 
$
561,108

Commercial real estate debt transferred or pledged to securitization vehicles
2,939,632

 
2,738,369

 
2,695,513

Assets transferred or pledged to securitization vehicles
$
4,365,300

 
$
3,833,200

 
$
3,256,621

Real estate, net
$
734,239

 
$
739,473

 
$
480,063

Total residential and commercial investments
$
114,472,879

 
$
102,340,249

 
$
98,080,871



8


Non-GAAP Financial Measures
Beginning with the quarter ended September 30, 2018, the Company updated its calculation of core earnings and related metrics to reflect changes to its portfolio composition and operations, including the acquisition of MTGE Investment Corp. ("MTGE") in September 2018. Compared to prior periods, the revised definition of core earnings includes coupon income (expense) on CMBX positions (reported in Net gains (losses) on other derivatives) and excludes depreciation and amortization expense on real estate and related intangibles (reported in Other income (loss)), non-core income (loss) allocated to equity method investments (reported in Other income (loss)) and the income tax effect of non-core income (loss) (reported in Income taxes). Prior period results have not been adjusted to conform to the revised calculation as the impact in each of those periods is not material.
To supplement its consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles ("GAAP"), the Company provides the following non-GAAP measures:
•
core earnings and core earnings (excluding PAA);
•
core earnings attributable to common stockholders and core earnings attributable to common stockholders (excluding PAA);
•
core earnings and core earnings (excluding PAA) per average common share;
•
annualized core return on average equity (excluding PAA);
 
•
interest income (excluding PAA);
•
economic interest expense;
•
economic net interest income (excluding PAA);
•
average yield on interest earning assets (excluding PAA);
•
net interest margin (excluding PAA); and
•
net interest spread (excluding PAA).

These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP. While intended to offer a fuller understanding of the Company’s results and operations, non-GAAP financial measures also have limitations. For example, the Company may calculate its non-GAAP metrics, such as core earnings, or the PAA, differently than its peers making comparative analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which the Company will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results.
These non-GAAP measures provide additional detail to enhance investor understanding of the Company’s period-over-period operating performance and business trends, as well as for assessing the Company’s performance versus that of industry peers. Additional information pertaining to the Company’s use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below.
Core earnings and core earnings (excluding PAA), core earnings attributable to common stockholders and core earnings attributable to common stockholders (excluding PAA), core earnings and core earnings (excluding PAA) per average common share and annualized core return on average equity (excluding PAA)
The Company's principal business objective is to generate net income for distribution to its stockholders and to preserve capital through prudent selection of investments and continuous management of its portfolio. The Company generates net income by earning a net interest spread on its investment portfolio, which is a function of interest income from its investment portfolio less financing, hedging and operating costs.  Core earnings, which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSRs, (d) other income (loss) (excluding depreciation and amortization expense on real estate and related intangibles, non-core income allocated to equity method investments and other non-core components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items) and (f) income taxes (excluding the income tax effect of non-core income (loss) items), and core earnings (excluding PAA), which is defined as core earnings excluding the premium amortization adjustment representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to the Company’s Agency mortgage-backed securities, are used by the Company's management and, the Company believes, used by analysts and investors to measure its progress in achieving its principal business objective.
The Company seeks to fulfill this objective through a variety of factors including portfolio construction, the degree of market risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of the Company's capital allocation policy and risk governance framework.
The Company believes these non-GAAP measures provide management and investors with additional details regarding the Company’s underlying operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to provide additional transparency into the operating performance of the Company’s portfolio. Annualized core return on average equity (excluding PAA), which is calculated by dividing core earnings (excluding PAA) over average stockholders’ equity, provides investors with additional detail on the core earnings generated by the Company’s invested equity capital.

9


The following table presents a reconciliation of GAAP financial results to non-GAAP core earnings for the periods presented:
 
For the quarters ended
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
 
(dollars in thousands, except per share data)
GAAP net income (loss)
$
(849,251
)
 
$
(2,254,872
)
 
$
1,327,704

Net income (loss) attributable to noncontrolling interests
(101
)
 
17

 
(96
)
Net income (loss) attributable to Annaly
(849,150
)
 
(2,254,889
)
 
1,327,800

Adjustments to exclude reported realized and unrealized (gains) losses
 
 
 
 
 
Realized (gains) losses on termination or maturity of interest rate swaps
588,256

 
—

 
(834
)
Unrealized (gains) losses on interest rate swaps
390,556

 
1,313,882

 
(977,285
)
Net (gains) losses on disposal of investments
93,916

 
747,505

 
(13,468
)
Net (gains) losses on other derivatives
115,159

 
484,872

 
47,145

Net unrealized (gains) losses on instruments measured at fair value through earnings
(47,629
)
 
18,169

 
51,593

Loan loss provision
5,703

 
3,496

 
—

Adjustments to exclude components of other (income) loss
Depreciation and amortization expense related to commercial real estate
10,114

 
11,000

 
—

Non-core (income) loss allocated to equity method investments (1)
9,496

 
(10,307
)
 
—

Adjustments to exclude components of general and administrative expenses and income taxes
Transaction expenses and non-recurring items (2)
9,982

 
3,816

 
1,519

Income tax effect of non-core income (loss) items
726

 
3,334

 
—

Adjustments to add back components of realized and unrealized (gains) losses
 
 
 
 
TBA dollar roll income and CMBX coupon income (3)
38,134

 
69,572

 
88,353

MSR amortization (4)
(13,979
)
 
(18,753
)
 
(21,156
)
Core earnings *
351,284

 
371,697

 
503,667

Less:
 
 
 
 
 
Premium amortization adjustment cost (benefit)
81,871

 
45,472

 
(118,395
)
Core earnings (excluding PAA) *
$
433,155

 
$
417,169

 
$
385,272

 
 
 
 
 
 
Dividends on preferred stock
32,494

 
32,494

 
33,766

Core earnings attributable to common stockholders *
$
318,790

 
$
339,203

 
$
469,901

Core earnings attributable to common stockholders (excluding PAA) *
$
400,661

 
$
384,675

 
$
351,506

GAAP net income (loss) per average common share
$
(0.63
)
 
$
(1.74
)
 
$
1.12

Core earnings per average common share *
$
0.23

 
$
0.26

 
$
0.41

Core earnings (excluding PAA) per average common share *
$
0.29

 
$
0.29

 
$
0.30

Annualized GAAP return (loss) on average equity
(22.72
%)
 
(62.05
%)
 
36.86
%
Annualized core return on average equity (excluding PAA) *
11.59
%
 
11.48
%
 
10.70
%
*
Represents a non-GAAP financial measure.
(1) 
Beginning with the quarter ended September 30, 2018, the Company excludes non-core (income) loss allocated to equity method investments, which represents the unrealized (gains) losses allocated to equity interests in a portfolio of MSR, which is a component of Other income (loss). The quarter ended December 31, 2018 also includes a realized gain on sale within an unconsolidated joint venture, which is a component of Other income (loss).
(2) 
Represents costs incurred in connection with securitizations of residential whole loans. The quarter ended March 31, 2019 also includes costs incurred in connection with the securitization of commercial loans. The quarter ended December 31, 2018 also includes costs incurred in connection with the MTGE transaction.
(3) 
TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives. CMBX coupon income totaled $1.1 million and $1.2 million for the quarters ended March 31, 2019 and December 31, 2018, respectively. There were no adjustments for CMBX coupon income prior to September 30, 2018.
(4) 
MSR amortization represents the portion of changes in fair value that is attributable to the realization of estimated cash flows on the Company’s MSR portfolio and is reported as a component of Net unrealized gains (losses) on instruments measured at fair value.

From time to time, the Company enters into TBA forward contracts as an alternate means of investing in and financing Agency mortgage-backed securities. A TBA contract is an agreement to purchase or sell, for future delivery, an Agency mortgage-backed security with a specified issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but different settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the "drop". The drop is a reflection of the expected net interest income from an investment in similar Agency mortgage-backed securities, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party providing the financing is the party that would retain all principal and interest payments accrued during the financing period. Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency mortgage-backed security less an implied financing cost.

10


TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. The Company records TBA derivatives at fair value on its Consolidated Statements of Financial Condition and recognizes periodic changes in fair value as Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).
TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract. Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency mortgage-backed security (interest income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss).
The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities ("CMBS") of a particular rating and vintage. The CMBX index allows investors to take a long exposure (referred to as selling protection) or short exposure (referred to as buying protection) on the respective basket of CMBS securities and is structured as a "pay-as-you-go" contract whereby the protection buyer pays to the protection seller a standardized running coupon on the contracted notional amount. The Company reports income (expense) on CMBX positions in Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss). The coupon payments received or paid on CMBX positions are equivalent to interest income (expense) and therefore included in core earnings.
Premium Amortization Expense
In accordance with GAAP, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities, excluding interest-only securities, multifamily and reverse mortgages, taking into account estimates of future principal prepayments in the calculation of the effective yield. The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third-party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.
The Company’s GAAP metrics include the unadjusted impact of amortization and accretion associated with this method. Certain of the Company’s non-GAAP metrics exclude the effect of the PAA, which quantifies the component of premium amortization representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term CPR.
The following table illustrates the impact of the PAA on premium amortization expense for the Company’s Residential Securities portfolio for the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018:
 
For the quarters ended
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
 
(dollars in thousands)
Premium amortization expense (accretion)
$
247,446

 
$
220,131

 
$
95,832

Less: PAA cost (benefit)
81,871

 
45,472

 
(118,395
)
Premium amortization expense (excluding PAA)
$
165,575

 
$
174,659

 
$
214,227

 
 
 
 
 
 
 
For the quarters ended
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
 
(per average common share)
Premium amortization expense (accretion)
$
0.18

 
$
0.17

 
$
0.08

Less: PAA cost (benefit) (1)
0.06

 
0.03

 
(0.11
)
Premium amortization expense (excluding PAA)
$
0.12

 
$
0.14

 
$
0.19

(1) 
The Company separately calculates core earnings per average common share and core earnings (excluding PAA) per average common share, with the difference between these two per share amounts attributed to the PAA cost (benefit) per average common share. As such, the reported value of the PAA cost (benefit) per average common share may not reflect the result of dividing the PAA cost (benefit) by the weighted average number of common shares outstanding due to rounding.

Interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)
Interest income (excluding PAA) represents interest income excluding the effect of the PAA, and serves as the basis for deriving average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA) and net interest margin (excluding PAA), which are discussed below. The Company believes this measure provides management and investors with additional detail to enhance their understanding of the Company’s operating results and trends by excluding the component of premium amortization expense representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment

11


speeds related to the Company’s Agency mortgage-backed securities (other than interest-only securities), which can obscure underlying trends in the performance of the portfolio.
Economic interest expense includes GAAP interest expense and the net interest component of interest rate swaps. The Company uses interest rate swaps to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. Accordingly, adding the net interest component of interest rate swaps to interest expense, as computed in accordance with GAAP, reflects the total contractual interest expense and thus, provides investors with additional information about the cost of the Company's financing strategy.
Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations.
 
For the quarters ended
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Interest income (excluding PAA) reconciliation
(dollars in thousands)
GAAP interest income
$
866,186

 
$
859,674

 
$
879,487

Premium amortization adjustment
81,871

 
45,472

 
(118,395
)
Interest income (excluding PAA) *
$
948,057

 
$
905,146

 
$
761,092

Economic interest expense reconciliation
 
 
 
 
 
GAAP interest expense
$
647,695

 
$
586,774

 
$
367,421

Add:
 
 
 
 
 
Net interest component of interest rate swaps
(134,035
)
 
(65,889
)
 
48,160

Economic interest expense *
$
513,660

 
$
520,885

 
$
415,581

Economic net interest income (excluding PAA) reconciliation
 
 
 
 
Interest income (excluding PAA) *
$
948,057

 
$
905,146

 
$
761,092

Less:
 
 
 
 
 
Economic interest expense *
513,660

 
520,885

 
415,581

Economic net interest income (excluding PAA) *
$
434,397

 
$
384,261

 
$
345,511

*
Represents a non-GAAP financial measure.

Average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA) and net interest margin (excluding PAA)
Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA) and the average cost of interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average TBA contract and CMBX balances, provide management with additional measures of the Company’s profitability that management relies upon in monitoring the performance of the business.
Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management evaluates the Company’s performance.

12


 
For the quarters ended
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Economic metrics (excluding PAA)
(dollars in thousands)
Average interest earning assets
$
109,946,527

 
$
107,232,861

 
$
101,979,042

Interest income (excluding PAA) *
$
948,057

 
$
905,146

 
$
761,092

Average yield on interest earning assets (excluding PAA) *
3.45
%
 
3.38
%
 
2.99
%
Average interest bearing liabilities
$
95,529,819

 
$
91,746,160

 
$
87,376,452

Economic interest expense *
$
513,660

 
$
520,885

 
$
415,581

Average cost of interest bearing liabilities
2.15
%
 
2.22
%
 
1.90
%
Economic net interest income (excluding PAA) *
$
434,397

 
$
384,261

 
$
345,511

Net interest spread (excluding PAA) *
1.30
%
 
1.16
%
 
1.09
%
Interest income (excluding PAA) *
$
948,057

 
$
905,146

 
$
761,092

TBA dollar roll income and CMBX coupon income
38,134

 
69,572

 
88,353

Interest expense
(647,695
)
 
(586,774
)
 
(367,421
)
Net interest component of interest rate swaps
134,035

 
65,889

 
(48,160
)
Subtotal
$
472,531

 
$
453,833

 
$
433,864

Average interest earnings assets
$
109,946,527

 
$
107,232,861

 
$
101,979,042

Average TBA contract and CMBX balances
14,927,490

 
14,788,453

 
12,050,341

Subtotal
$
124,874,017

 
$
122,021,314

 
$
114,029,383

Net interest margin (excluding PAA) *
1.51
%
 
1.49
%
 
1.52
%
*
Represents a non-GAAP financial measure.

13