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Annaly (NLY) to Report Q2 Earnings: What's in the Offing?

Annaly Capital Management Inc. NLY is scheduled to report second-quarter 2020 results on Jul 29, after market close. The company’s results are expected to reflect a year-over-year decline in earnings per share, while net interest income is likely to have witnessed growth.

In the last reported quarter, this mortgage real estate investment trust (mREIT) posted core earnings, excluding premium amortization adjustment (PAA), of 21 cents per share, meeting the Zacks Consensus Estimate. However, NII sequentially declined to $51.6 million.

Over the last four quarters, the company’s earnings beat the Zacks Consensus Estimate on one occasion, missed in the other two and met the mark in another quarter. The average negative surprise was 2.88%. The graph below depicts this surprise history:

Annaly Capital Management Inc Price and EPS Surprise

 

Annaly Capital Management Inc Price and EPS Surprise

Annaly Capital Management Inc price-eps-surprise | Annaly Capital Management Inc Quote

Let’s see how things have shaped up prior to this announcement.

Rebounding from the steep sell-off in March, which resulted in mREITs witnessing a drastic decline in share prices and book values, the mortgage market stabilized during the second quarter. This was supported by the Federal Reserve’s continuous purchase of Agency mortgage-backed securities, a decline in benchmark interest rates to near zero and an improvement in the housing data.

As for Annaly, the company primarily uses short-term repurchase agreements or repos to finance its operations. Borrowing costs on such repos are closely related to the Fed’s target rate, which is hovering close to zero. Hence, the company is expected to have witnessed lower borrowing costs during the June-end quarter.

This is expected to have supported NII growth in the second quarter. Notably, the consensus estimate for second-quarter NII of $205 million indicates a 15.6% year-over-year increase.

Moreover, with the decrease in floating rates (like LIBOR) and short-term rates during the second quarter, Annaly’s interest rate swap hedges are projected to have lost value. Nonetheless, taking advantage of the falling rates, the company clipped its securitized product asset holdings and reduced the size of its hedge portfolio in the first quarter.

Such prudent measures undertaken in the first quarter to tackle the extreme market volatility are expected to have supported its second-quarter performance. Specifically, during the first quarter, Annaly improved the quality of its investment portfolio and rotated out of generic pools into lower coupon to-be-announced (TBAs) investments.

Also, we expect significant spread tightening across many residential mortgage assets to have supported a recovery in the mREIT’s book value for the June-end quarter.

The 30-year mortgage rates declined from 3.33% at the week ended Apr 2, 2020, to 3.07% at the week ended Jul 2, 2020. The decline in mortgage rates is expected to have driven higher mortgage prepayments. This is likely to have impacted cash flows that the company collects from mortgage service rights (MSRs) and have resulted in a significant decline in MSR valuations during the second quarter.

It also suggests an increase in premium amortization expenses and high levels of conditional prepayment rate (CPR) for the June-end quarter for Annaly’s agency portfolio, which consists primarily of fixed-rate MBS. It will also impact asset yield since net purchase premium balance will be amortized over a shorter period.

Additionally, the company’s activities during the June-end quarter were inadequate to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate for second-quarter earnings has been unchanged at 23 cents in a month, indicating an 8% year-over-year decline.

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.

Earnings ESP: Annaly’s Earnings ESP is -2.22%.

Zacks Rank: The company currently carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a beat this quarter:

Starwood Property Trust STWD, set to report quarterly numbers on Aug 5, currently has an Earnings ESP of +6.67% and a Zacks Rank of 3.

NexPoint Real Estate Finance NREF, slated to release second-quarter earnings on Aug 6, has an Earnings ESP of +1.24% and it sports a Zacks Rank of 1 at present.

SBA Communications Corporation SBAC, set to report quarterly numbers on Aug 3, currently has an Earnings ESP of +4.48% and a Zacks Rank of 3.

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