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Annaly Capital Management Inc. (NLY - Snapshot Report) – the mortgage real estate investment trust (mREIT) reported first-quarter 2014 core earnings of 23 cents per share, missing the Zacks Consensus Estimate by 4 cents. The results also fell short of the prior-quarter core earnings of 35 cents per share and the year-ago period figure of 29 cents.

Results reflect interest spread compression in the quarter. Net interest income came in at $530.9 million, down 16.2% sequentially and 5.1% year over year.

Quarter in Detail

For the reported quarter, annualized yield on average interest-earning assets was 3.21% while annualized cost of funds on average interest-bearing liabilities (including the net interest payments on interest rate swaps) was 2.31%.

This led to an average interest rate spread of 0.90% for the quarter, reflecting a 53 basis points decrease from the prior quarter and 1 basis point fall from the year-ago quarter. The decline was due to higher amortization expense on its investment securities.

However, the company’s investment securities (includes Agency mortgage-backed securities, Agency debentures) were $77.8 billion as of Mar 31, 2014, reflecting an uptick from $73.4 billion as of Dec 31, 2013 but down from $112.2 billion as of Mar 31, 2013.

Annaly’s book value per share came in at $12.30 as of Mar 31, 2014. Though this reflected a sequential rise of 1.4%, on a year-over-year basis, it fell 19.0%. As of Mar 31, 2014, the company’s capital ratio (representing the ratio of stockholders’ equity to total assets) was 15.2%, compared with 15.1% at the end of the prior quarter and 12.2% in the year-ago quarter end.

Leverage was 5.2:1 as of Mar 31, 2014, compared with 5.0:1 as of Dec 31, 2013 and 6.6:1 as of Mar 31, 2013. The company offered an annualized core return on average equity of 7.68% in the quarter under review, compared with 11.05% in the prior quarter and 7.59% in the year-ago period.

The company completed the first securitization of commercial real estate loans in the reported quarter with an aggregate principal balance of $399.5 million. The commercial investment portfolio, net of financing, represented 12% of stockholders’ equity as of Mar 31, 2014, compared with 14% as of Dec 31, 2013.

Our Take

Amid the continued Fed tapering of bond purchases and anticipation of rising interest rates in the long term, Annaly is making concerted efforts to lower its leverage level. However, the US Treasury 10-year note yield fell in the first quarter and spread compression in the quarter affected its results. Nevertheless, we believe that the diversification of Annaly into the commercial assets would help enhance the company’s top-line growth going forward.

Annaly currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include AG Mortgage Investment Trust, Inc. (MITT - Snapshot Report), Arbor Realty Trust Inc. (ABR - Snapshot Report) and Anworth Mortgage Asset Corporation (ANH - Snapshot Report). All these stocks hold a Zacks Rank #2 (Buy).
 

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