Annaly Capital Management, Inc. (NYSE:NLY) Files An 8-K Results of Operations and Financial Condition

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Annaly Capital Management, Inc. (NYSE:NLY) Files An 8-K Results of Operations and Financial Condition
Item 2.02. Results of Operations and Financial Condition

In this Current Report on Form8-K, references to “we,” “us,” “our” or the “Company” refer to Annaly Capital Management, Inc. and its consolidated subsidiaries. As part of a previously announced public offering of its common stock, the Company disclosed the following estimated preliminary financial results for the quarter ended June30, 2017.

Preliminary Estimates of Net Income Per Average Common Share, Core Earnings (excluding PAA) Per Average Common Share and Core Earnings Per Average Common Share for the quarter ended June30, 2017 and Book Value Per Common Share and Economic Leverage at June30, 2017

Although our financial results for the second quarter 2017 are not yet finalized, we estimate the following:

Net income (loss) per average common share. Our net income (loss) per average common share for the quarter ended June30, 2017 was $(0.01), compared to $0.41 and ($0.32) per average common share for the quarters ended March31, 2017 and June30, 2016, respectively.
Core earnings (excluding PAA) per average common share. Our core earnings (excluding the premium amortization adjustment, or PAA) were $0.30 per average common share for the quarter ended June30, 2017, compared to $0.31 and $0.29 per average common share for the quarters ended March31, 2017 and June30, 2016, respectively.
Core earnings per average common share. Our core earnings were $0.23 per average common share for the quarter ended June30, 2017, compared to $0.29 and $0.19 per average common share for the quarters ended March31, 2017 and June30, 2016, respectively.
Book value per common share. Our book value per common share at June30, 2017 was $11.19, compared to $11.23 per common share at March31, 2017.
Economic leverage. Our economic leverage ratio, which is computed as the sum of recourse debt, to-be-announced (or TBA) derivative notional outstanding and net forward purchases of investments divided by total equity, at June30, 2017 was 6.4:1, compared to 6.1:1 at March31, 2017. Recourse debt consists of repurchase agreements and other secured financing.

Per share amounts at June30, 2017 are based on 1,019,027,880 common shares issued and outstanding as of such date.

We define core earnings, a non-GAAP measure, as net income (loss) excluding gains or losses on disposals of investments and termination of interest rate swaps, unrealized gains or losses on interest rate swaps and investments measured at fair value through earnings, net gains and losses on trading assets, impairment losses, net income (loss) attributable to noncontrolling interest, corporate acquisition related expenses and certain other non-recurring gains or losses, and inclusive of dollar roll income and realized amortization of mortgage servicing rights, or MSRs. We also present core earnings as defined in the sentence above, but excluding the PAA, which is the component of premium amortization representing the cumulative impact on prior periods, but not on the current period, of the quarter-over-quarter change in estimated long-term constant prepayment rates.

To supplement our preliminary estimate of net income per average common share, which is prepared and presented in accordance with U.S. generally accepted accounting principles (GAAP), we provide core earnings (excluding PAA) per average common share and core earnings per average common share (each of which are non-GAAP financial measures). The Company believes these non-GAAP measures provide management and investors with additional details regarding the Company’s underlying operating results and investment portfolio trends by (i)making adjustments to account for the disparate reporting of changes in fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive income (loss), and (ii)by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to provide additional transparency into the operating performance of the Company’s portfolio. Additionally, these non-GAAP measures may be useful in assessing our performance versus that of industry peers.

While intended to offer a fuller understanding of our results and operations, non-GAAP financial measures also have limitations. For example, we may define our non-GAAP measures differently than those of industry peers. Additionally, in the case of core earnings (excluding PAA), the amount of premium amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which we will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both our GAAP and non-GAAP financial results. Our non-GAAP measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP. For additional information pertaining to our use of non-GAAP measures, please refer to our Annual Report on Form 10-K for the fiscal year ended December31, 2016 and our Quarterly Report on Form 10-Q for the quarter ended March31, 2017.

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The following table presents a summary reconciliation of our preliminary estimates of our GAAP financial results to our preliminary estimates of non-GAAP core earnings and core earnings (excluding PAA) for the quarter ended June30, 2016. Amounts for the quarters ended March31, 2017 and June30, 2016 are based on actual results, as previously reported:

For the Quarters Ended
June30, 2017 March31, 2017 June30, 2016

(dollars in thousands,

except per share data)

GAAP net income (loss)

$ 14,522 $ 440,408 $ (278,497 )

Less:

Unrealized (gains) losses on interest rate swaps

177,567 (149,184 ) 373,220

Other adjustments: (gains) and losses (1)

3,859 (29,134 ) 22,351

Plus:

TBA dollar roll income and MSR amortization

63,953 55,938 79,519

Core earnings

259,901 318,028 196,593

PAA cost (benefit)

72,700 17,870 85,583

Core earnings (excluding PAA)

$ 332,601 $ 335,898 $ 282,176

GAAP net income (loss) per average common share (2)

$ (0.01 ) $ 0.41 $ (0.32 )

Core earnings per average common share (2)

$ 0.23 $ 0.29 $ 0.19

Core earnings (excluding PAA) per average common share (2)

$ 0.30 $ 0.31 $ 0.29
(1) Comprised of realized gains (losses) on termination of interest rate swaps, net gains (losses) on disposal of investments, net gains (losses) on trading assets, net unrealized gains (losses) on investments measured at fair value through earnings, corporate acquisition related expenses and net income (loss) attributable to noncontrolling interest.
(2) Net of dividends on preferred stock.

Our closing procedures for the three months ended June30, 2017 are not yet complete and, as a result, our preliminary estimates of the financial information above reflect our preliminary estimate with respect to such results based on information currently available to management, and may vary from our actual financial results as of and for the quarter ended June30, 2017. Further, these estimates are not a comprehensive statement of our financial results as of and for the quarter ended June30, 2017. Accordingly, you should not place undue reliance on this preliminary information. These estimates, which are the responsibility of our management, were prepared by our management in connection with the preparation of our financial statements and are based upon a number of assumptions. Additional items that may require adjustments to the preliminary operating results may be identified and could result in material changes to our estimated preliminary operating results. Estimates of operating results are inherently uncertain and we undertake no obligation to update this information. Ernst& Young LLP has not audited, reviewed, compiled or performed any procedures with respect to this preliminary financial information. Accordingly, Ernst& Young LLP does not express an opinion or provide any form of assurance with respect thereto.

Cautionary Language Regarding Forward-Looking Statements

When used in this report or other written or oral communications, statements which are not historical in nature, including those containing words such as “will,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “could,” “would,” “should,” “may” or similar expressions, are intended to identify “forward-looking statements” within the meaning of Section27A of the Securities Act and Section21E of the Exchange Act, and, as such, may involve known and unknown risks, uncertainties and assumptions. Statements regarding the following subjects, among others, may be forward-looking: our ability to accurately predict our preliminary estimates of net income per average common share and core earnings per average common share for the quarter ended June30, 2017 and book value per share and economic leverage at June30, 2017. The risks and uncertainties associated with forward-looking information in this report include, but are not limited to, factors that are beyond the Company’s control, including the factors listed in the Company’s Annual Report on Form10-K, in the Company’s Quarterly Reports on Form10-Q and in the Company’s Current Reports on Form8-K. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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About Annaly Capital Management, Inc. (NYSE:NLY)

Annaly Capital Management, Inc. (Annaly) is a mortgage real estate investment trust (REIT). The Company’s principal business objectives are to generate net income for distribution to its stockholders from its investments and capital preservation. Its portfolio also includes residential credit investments, such as credit risk transfer securities and non-agency mortgage-backed securities. Its business operations primarily consist of Annaly Commercial Real Estate Group, Inc. (ACREG), which specializes in originating or acquiring, financing and managing commercial loans and other commercial real estate debt, commercial mortgage-backed securities and other commercial real estate-related assets; Annaly Middle Market Lending LLC (MML), which engages in corporate middle market lending transactions, and RCap Securities, Inc. (RCap), which operates as a broker-dealer, and is a member of the Financial Industry Regulatory Authority (FINRA). It is managed by Annaly Management Company LLC.

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