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Annaly (NLY) Stock Up on Q2 Earnings Beat, Lower NII Hurts

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Post the second-quarter earnings release on Aug 1, shares of Annaly Capital Management (NLY - Free Report) inched up 0.9% during regular trading session, likely reflecting investors’ reaction toward an earning beat negated by lower net interest income (NII) recorded at quarter end.

Notably, the companyreported second-quarter 2018 core earnings, excluding premium amortization adjustment (PAA) of 30 cents per share, beating the Zacks Consensus Estimate by a whisker. Further, earnings remained flat year over year.

Net interest margin (excluding PAA) in the quarter came in at 1.56% compared with 1.52% recorded in the prior quarter. However, NII totaling $334.1 million, witnessed a sequential decline of around 35%. Further, Annaly’s book value per share came in at $10.35 as of Jun 30, 2018, compared with $10.53 as of Mar 31, 2018.

Continuing its acquisition strategy, this May, Annaly announced that it has signed a definitive merger agreement with MTGE Investment Corp., per which the former will acquire MTGE for $900 million. The deal is anticipated to close in third-quarter 2018. The cash-and-stock deal values MTGE shares at $19.65.

The transaction is expected to have no significant impact on Annaly’s leverage and liquidity position.

Notably, this acquisition is a strategic fit as it offers ample business and asset diversification. Importantly, MTGE's triple net-leased healthcare real estate assets are expected to increase the number of investment classes to 37, approximately three times the investment alternatives available to Annaly in 2013. Furthermore, it complements Annaly’s agency and non-agency portfolios.

The consolidation will enhance business scale by widening Annaly’s capital base to nearly $14.5 billion, with unencumbered assets more than $7.7 billion. This is constructive for the company’s internal growth, as well as its investment platforms.

Going forward, Annaly stands to gain from an investment strategy focused on prudent selection of assets and effective allocation of capital. Its investment strategy involves traditional agency mortgage backed securities (MBSs), as well as investments in more credit-focused asset classes. In fact, Annaly increased its credit capital allocation to 28% during the June-end quarter compared with 24% at the beginning of 2018. Further, it exited the quarter with $1.1 billion of new credit investments

Nonetheless, hike in interest rates and the flattening yield curve impacted its results in the quarter under review. Notably, interest expense flared up $75 million sequentially this season. Moving ahead, we believe due to interest rate hike, the company may have to face higher borrowing cost, which will likely have adverse effects on Annaly’s growth prospects in the near future.

Additionally, Annaly operates in a highly competitive market. It has to compete with other financial institutions, institutional investors, lenders, government bodies and mortgage REITs to acquire assets in target markets, which affect the pricing of securities.

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

We, now, look forward to the earnings releases of Lamar Advertising Company (LAMR - Free Report) , Host Hotels & Resorts, Inc. (HST - Free Report) and Outfront Media Inc. (OUT - Free Report) , all of which are scheduled to report their quarterly numbers next week.

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