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Is a Beat in the Cards for Annaly (NLY) in Q1 Earnings?

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Annaly Capital Management Inc. (NLY - Free Report) is scheduled to report first-quarter 2021 results on Apr 28, after market close. The company’s results are expected to reflect year-over-year growth in net interest income (NII) and earnings.

In the last reported quarter, this mortgage real estate investment trust (mREIT) posted core earnings (excluding premium amortization adjustment) of 30 cents per share, which met the Zacks Consensus Estimate. While the decline in cost of interest-bearing liabilities supported Annaly’s performance, the continued fall in average yield on interest-earning assets was a spoilsport. Nonetheless, the company registered a sequential improvement in book value per share (BVPS).

Over the last four quarters, the company’s earnings beat the Zacks Consensus Estimate on two occasions and matched the mark in the other two quarters. The average surprise was 10.12%. The graph below depicts this surprise history:

Let’s see how things have shaped up prior to this announcement.

Annaly’s investment strategy, driven by a prudent selection of assets and an effective capital allocation to Agency mortgage-backed securities (MBSs) and credit-focused asset classes, is likely to have enhanced its returns in the first quarter.

Markedly, during the first quarter, a significant government stimulus and an increase in vaccine coverage steered the economy toward recovery. This along with a strong housing market supported growth in the mortgage market. Also, the yield curve steepened while spreads in the agency residential MBS market are likely to have tightened. Amid this, Annaly is expected to have been better positioned to re-deploy capital to higher-yielding opportunities and register growth in its book value.

Also, the Federal Reserve continued to consistently purchase Treasury securities and agency MBS during the first quarter.This might have helped lift valuations of Agency MBS securities held by Annaly.  

Further, the to-be-announced (TBA) dollar rolls are expected to have continued to be an attractive investment option. Anticipating that TBA specialness and the prevalence of lower-coupon specified pools continued in the first quarter, Annaly’s investment portfolio is likely to have generated decent returns.

Notably, the consensus estimate for first-quarter NII of $408.4 million indicates a substantial surge from the year-ago quarter’s reported figure.

Last December, the company’s board of directors authorized the buyback of up to $1.5 billion of its outstanding shares of common stock through Dec 31, 2021. We believe, any repurchases executed during the first quarter might have provided an immediate book value accretion and additional flexibility within the company’s capital allocation framework.

Additionally, amid a low interest-rate environment, Annaly is likely to have enjoyed low financing costs and a reduction in the cost of interest-bearing liabilities, thereby driving net interest margin expansion.

Also, in July 2020, the company transformed itself into an internally-managed REIT. Management expected this internalization move to create cost savings from economies of scale and provide a scope for incremental cost control and operating flexibility beginning first-quarter 2021.

However, yields across all asset classes are expected to have declined in the first quarter. Given Annaly’s significant Agency MBS balance, declining asset yields are likely to have dented its first-quarter performance. Notably, the Zacks Consensus Estimate for first-quarter average yield on interest-earning assets is pegged at 2.29%, indicating a decline from 2.61% recorded in the prior quarter. This, in turn, might have induced net interest margin contractions.

Also, during first-quarter 2021, mortgage refinancing level remained high. A significant portion of Annaly’s MBS holdings is anticipated to have continued witnessing elevated levels of constant prepayment rate.This is likely to have adversely impacted the company’s NII and asset yield.

Lastly, the company’s activities during the March quarter were inadequate to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate for first-quarter earnings has been intact at 26 cents a month. Nonetheless, it indicates 23.8% growth from the prior-year quarter’s reported number.

Key Developments in Q1

In March, Annalyentered into a definitive agreement with Slate Asset Management L.P. to sell its commercial real-estate business in a transaction valued at $2.33 billion. This will substantially reduce the company’s exposure to the commercial real-estate sector and make a significant amount of capital available, driving a shift in its capital allocation strategy toward residential mortgage finance.

The sale comprises substantially all assets included in the company’s commercial real-estate business like equity interests, loan assets and commercial mortgage-backed securities. Moreover, certain employees involved in Annaly’s commercial real-estate business are expected to join Slate upon the completion of the sale.

Conditional to customary closing norms including applicable regulatory approvals, the commercial real-estate business disposition is expected to conclude by third-quarter 2021.

Earnings Whispers

Annaly has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Annaly has an Earnings ESP of +0.93%.

Zacks Rank: Annaly currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Stocks That Warrant a Look

Here are a few other stocks worth considering from the REIT sector as our model shows that these too have the right combination of elements to pull off a positive surprise this earnings season:

Digital Realty Trust, Inc. (DLR - Free Report) , scheduled to report quarterly numbers on Apr 29, currently has an Earnings ESP of +1.06% and a Zacks Rank of 3.

CubeSmart (CUBE - Free Report) , slated to release quarterly numbers on Apr 29, has an Earnings ESP of +3.14% and a Zacks Rank of 3 at present.

Welltower, Inc. (WELL - Free Report) , slated to release quarterly earnings on Apr 28, currently has an Earnings ESP of +0.93% and a Zacks Rank of 3.

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