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Annaly (NLY) Beats Q4 Earnings Estimates, Slips on Lower NII

Annaly Capital Management, Inc. NLY reported fourth-quarter 2018 core earnings, excluding premium amortization adjustment (PAA), of 29 cents per share, surpassing the Zacks Consensus Estimate of 28 cents. However, the figure compares unfavorably with the year-ago tally of 31 cents.

Shares of the company declined 1.2% in single-day trading, following the release of fourth-quarter 2018 results. It is most likely that investors didn't find much optimism with the sequential decline in its quarterly net interest income (NII).

In fact, NII totaling $272.9 million, witnessed a sequential decline of around 13.5% in the fourth quarter.

For full-year 2018, core earnings, excluding PAA of $1.20 surpassed the Zacks Consensus Estimate of $1.18. However, the figure compares unfavorably with the year-ago tally of $1.22. Further, NII for the year declined 3.6% year over year to $1.4 billion.          

Quarter in Detail

In the reported quarter, average yield on interest-earning assets (excluding PAA) was 3.38%, up from 3.22% recorded in the previous quarter.

Net interest spread (excluding PAA) of 1.16% for the fourth quarter edged down from 1.14% reported in the prior quarter. Net interest margin (excluding PAA) in the quarter came in at 1.49% compared with 1.50% witnessed in the previous quarter.

The company’s investment at fair value of Agency mortgage-backed securities was around $90.7 million as of Dec 31, 2018, up from roughly $89.3 million as of Sep 30, 2018.

Further, Annaly’s book value per share came in at $9.39 as of Dec 31, 2018, compared with $10.03 as of Sep 30, 2018. At the end of the fourth quarter, the company’s capital ratio was 12.1%, down from 12.6% reported at the end of the last quarter.

Leverage was 6:3:1 as of Dec 31, 2018, compared with 5:9:1 as of Sep 30, 2018. The company offered an annualized core return on average equity of 11.48% in the Dec-end quarter, up from 10.85% in the prior quarter.

Our Take

In 2018, Annaly continued portfolio diversification by originating and purchasing more than $4.2 billion in investments, indicating a year-over-year increase of 65%. With majority of its portfolio in the form of high-quality (AA+ or better) MBS and short-term investments, Annaly is well poised to ride on growth curves. Further, at the end of 2018, the company had $7.7 billion in unencumbered assets. This indicated Annaly’s strong liquidity position. In addition, balance-sheet strength will support opportunistic portfolio expansion for the company.

However, persistent rise in interest expense is impacting Annaly’s NII growth. Furthermore, interest-rate volatility has impacted the company’s book value.

Annaly Capital Management Inc Price, Consensus and EPS Surprise

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

Performance of Other REITs

AGNC Investment Corp. AGNC reported fourth-quarter 2018 net spread and dollar-roll income (excluding estimated catch-up premium amortization benefit) of 53 cents per share, missing the Zacks Consensus Estimate of 61 cents. Moreover, it came in lower than the prior-year figure of 62 cents per share.

Alexandria Real Estate Equities, Inc. ARE recorded fourth-quarter 2018 adjusted FFO of $1.68 per share, missing the Zacks Consensus Estimate by a whisker.

Boston Properties Inc.’s BXP fourth-quarter 2018 FFO per share of $1.59 also missed the Zacks Consensus Estimate of $1.68. The figure, however, came in 7% higher than the prior-year tally.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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