Is Annaly Capital's Bet Paying Off?

Annaly Capital Management (NLY) posted third quarter results that were largely in line with the Street's expectations. GAAP earnings were $0.33/share, which included $3.8 million in gains on sales of MBS and $2.0 million in gains on related swap terminations. After backing out those one-time gains, Annaly's adjusted GAAP EPS is roughly $0.31/share, two cents ahead of analyst estimates.

Although Annaly does not disclose taxable income, its operating earnings excluding FIDAC represent a reasonable proxy for REIT taxable income - about $0.28/share, leaving Annaly with a small amount of undistributed taxable income to roll into the fourth quarter. Look for a fourth quarter dividend of $0.30/share, assuming Annaly can fully deploy its early Q4 capital raise by year-end.

Annaly's book value rose to $12.11/share (excluding the liquidation preference effect of the preferred and the pro-forma effect of the accretive Q4 offering). At a closing price of $17.05/share, Annaly is trading at 1.4x book value, in-line with peer Capstead Mortgage. However, NLY has taken on significantly more interest-rate risk than Capstead by having 71% of its portfolio in fixed-rate securities. Annaly has hedged about half of that risk with swaps, clearly betting on a falling interest rate environment. We'll know as soon as Wednesday whether Annaly has made the correct bet.

Disclosure: none