Annaly Capital Update: A Return To Form

Aug. 7.14 | About: Annaly Capital (NLY)


Annaly reported Q2 2014 earnings results.

Book value per share increased 7.5% to $13.23 while core earnings increase 30% to $0.30 per share.

At current prices, Annaly yields 10% and trades at a 15% discount to its book value.

Annaly’s performance improved remarkably from prior periods and is now much more inline with the broader mREIT sector.

As a result, my opinion on the stock has shifted toward neutral from my earlier bearish stance.

Annaly Capital (NYSE:NLY) sure turned things around quickly. Compared to its rather lackluster performance last quarter, Q2 2014 was one of the best in the company's history. Annaly saw its book value per share increase considerably Q/Q to $13.23, up 7.5%, or $0.93, from $12.30 in Q1. This gain is after the $0.30 per share dividend declared on June 30. Combined, Annaly posted an impressive $1.23 per share total economic return in Q2, which equates to 10% for the quarter, or 40% annualized.

In terms of its operating results, Annaly did see a major improvement, with "core earnings," a non-GAAP measure, coming in at $0.30 per share, up 30% compared to $0.23 last quarter. This bodes well for the short-term sustainability of the dividend. The company also noted that it was benefiting from a stabilization in the MBS market caused by the Fed policy, boosting returns as a result. However, Annaly did see minor losses in its derivatives (mostly swaps), as a result of reduced implied volatility. Annaly has since terminated a large portion of its interest rate swaps. However, these losses were more than offset by gains in the actual value of its MBS portfolio.

Looking forward to the second half of 2014, Annaly should continue to post book value gains as interest rate spreads narrow. However, the dividend may come under pressure without a leverage increase. Over the past twelve months, Annaly's core earnings have been trending lower. Indeed, the return on equity has typically been under 10%. That being said, with the stock trading at a nearly 15% discount to book value and 10% yield, the risk adjusted return seems more than adequate.

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