Update: Annaly Capital - My Bottom Call And The Impact Of Q2 Earnings

| About: Annaly Capital (NLY)


Annaly Capital released Q2 earnings and reported core taxable REIT core earnings income of $300.4 million, or $0.30 per share.

This is slightly better than the Street expected, and so far, is in line with my prediction for the performance for the company I made to start the year after calling a bottom.

Book value rose for the second straight quarter to $13.23, which would provide a 15% upside from current levels.

Net interest rate spread ballooned to 1.26%, up from 0.9% in Q1, falling in line with my prediction for improvements in the spread.

I maintain a buy rating on shares, and anticipate a dividend raise before in fiscal 2014.

Annaly Capital (NYSE:NLY) just reported its second-quarter earnings figures. Core income and estimated ordinary taxable REIT income was approximately $300.4 million, or $0.30 per share. On a comprehensive basis, GAAP net loss for the second quarter was approximately $335 million, or $0.30 per share, which is still far below the GAAP net income of $1.6 billion, or $1.71, reported in last year's comparable quarter. Still, things are moving in the right direction. The company paid dividends of $0.30 per common share for the quarter, resulting in a perfect coverage of the dividend. The annualized yield on average interest-earning assets was 3.20%, and the annualized cost of funds on average interest-bearing liabilities, including the net interest payments on interest rate swaps, was 1.94%, which resulted in an average interest rate spread of 1.26%. This is incredibly strong relative to past quarters. This represented a 36-basis point increase from the 0.90% average interest rate spread for the quarter ended March 31, 2014, and a 25-basis point increase from the 1.01% average interest rate spread for the quarter ended June 30, 2013.

In my January article, I argued that Annaly Capital stock had bottomed and there were multiple reasons to buy. That has been one of the most direct and best calls I have made to-date, and the present quarterly results support my thesis. Unlike its smaller competitor, Javelin Mortgage Investment (NYSE:JMI), which entered 2014 on a strong note, Annaly Capital was bumping along five-year lows to start the year. I predicted that the rebalancing of Annaly's portfolio would generate strength, and that the dividend cuts were over. That has since proved to be correct. Further, unlike Javelin, which has seen slight book value erosion, Annaly's book value rose for the second consecutive quarter, now at $13.23, a 15% premium to the current share price of $11.51.

Thus far, the calls I made in the January article have been correct. The present earnings report was certainly better than most had expected. I predicted that Annaly had reached an inflection point around $9.75 and practically begged investors to get in at that time. Since that time, shares are up 20%. I predicted the dividend would likely be maintained at $0.30, and it has been, and I believe this has served as a catalyst moving forward. So why the turnaround? Well, interest rate concerns were overblown, and now they are back to the levels from early 2013. What I believe is that Annaly clearly benefited from its portfolio rebalancing efforts. Javelin Mortgage didn't begin rebalancing until late 2013, thus that company may need another quarter or two before book value rebounds. Since Annaly is performing well, I now would look to see earnings improve in Q3 and Q4, and predict that the dividend will be raised to $0.35. I maintain my "buy" rating on the stock, and believe it offers a reliable source of income while interest rates remain stagnant.

Disclosure: The author is long JMI, NLY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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Tagged: , REIT - Diversified, Earnings
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