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Key Factors to Impact Annaly Capital's (NLY) Q4 Earnings

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Annaly Capital Management Inc. NLY is scheduled to report fourth-quarter 2019 and full-year results on Feb 12, after the market closes. The company’s earnings results are likely to reflect a year-over-year decline.

In the last reported quarter, this mortgage real estate investment trust (REIT) posted core earnings, excluding premium amortization adjustment of 21 cents per share, missing the Zacks Consensus Estimate of 25 cents. Further, net interest income totaling $152.4 million witnessed a steep decline from the year-ago tally of $315.6 million.

Over the last four quarters, the company’s earnings beat the Zacks Consensus Estimate on one occasion, missed the same in the other two while met the mark in another quarter. The average negative surprise is 4.07%. The graph below depicts this surprise history:

Annaly Capital Management Inc Price and EPS Surprise

Let’s see how things are shaping up prior to this announcement.

Positive economic growth, strong demand for housing and mortgage rates being relatively stable are expected to have supported mortgage originations during the fourth quarter. This, in turn, is likely to have benefited Annaly’s portfolio of Agency mortgage-backed securities (MBSs).

Moreover, the company’s investment strategy is driven by a prudent selection of assets and effective allocation of capital. In fact, during third-quarter 2019, it rotated capital from higher-coupons to lower-coupons agency investments. Analysts believe that these efforts might have aided Annaly to achieve better returns for the period. 

Additionally, the company is expected to have continued with its securitization measures within the residential credit businesses during the December quarter. In fact, its commercial real estate investment portfolio strategically complements its agency investments and is likely to have generated decent cash flows in the quarter under review.

The rapidly-changing interest-rate environment was the key theme that dominated the financial markets in 2019. In October, the Federal Open Market Committee (FOMC) slashed the federal-fund rate by 0.25%. This might have resulted in higher mortgage prepayments and refinancing.

The speedy prepayment scenario suggests higher premium amortization expense and elevated levels of conditional prepayment rate (CPR) for Annaly’s Agency MBS portfolio pertaining to the fourth quarter.

However, volatility in the repo markets in 2019 escalated funding costs and dampened the performances of many industry participants. In fact, in mid-September, the rate on overnight general collateral repo spiked to 10%, reflecting about four times above the usual levels due to shortage of cash available for lending. This instability prompted the Fed to conduct a series of operations for overnight repurchase agreements, thus injecting significant liquidity into the funding markets. Thus, it is assumed that the turmoil in the funding market might have affected Annaly’s net interest margin and spreads for the quarter to be reported.

Furthermore, the credit markets witnessed volatility in the fourth quarter, which in turn, induced tighter spreads and is likely to have adversely impacted the company’s Residential Credit Group investment portfolio that consists of non-Agency residential mortgage assets within securitized products and residential mortgage loan markets.

Lastly, Annaly’s activities during the December quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for the fourth-quarter FFO remained unchanged at 24 cents in a month’s time, indicating a 17.2% decline from the year-ago reported figure.

Earnings Whispers

Our proven model does not conclusively predict an earnings beat for Annaly this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), which is not the case here as you will see below.

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

Earning ESP: Annaly’s Earnings ESP is 0.00%.

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

Stocks That Warrant a Look

Here are a few stocks worth considering from the REIT sector as our model shows that these have the right combination of elements to deliver a positive surprise this reporting cycle:

Healthpeak Properties, Inc. PEAK, slated to release fourth-quarter earnings on Feb 11, has an Earnings ESP of +1.15% and a Zacks Rank #3 at present.

Equinix, Inc. EQIX, set to report quarterly numbers on Feb 12, has an Earnings ESP of +0.53% and a Zacks Rank of 3, currently.

Host Hotels & Resorts, Inc. (HST - Free Report) , scheduled to release October-December period results on Feb 19, has an Earnings ESP of +1.52% and is currently Zacks #3 Ranked.

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