Annaly Q1 Earnings Preview: Slight Decline Expected, but Optimism Remains

Analysts anticipate a modest decline in Annaly Capital Management’s (NLY) Q1 2024 earnings for distribution, slated for release after the closing bell on Wednesday. Despite the expected downturn, optimism remains as narrowing mortgage spreads may benefit the mortgage REIT.

Annaly’s earnings per share (EPS) for distribution are estimated at $0.65, lower than the previous quarter’s $0.68 and the year-earlier period’s $0.81. Nevertheless, the company has a track record of surpassing Wall Street expectations, with 10 out of the past 12 quarterly earnings exceeding forecasts.

Rising mortgage rates and persistent inflation have prompted revisions to Annaly’s Q1 2024 earnings estimates. While climbing mortgage rates may indicate reduced prepayment speeds and increased servicing fees, they can also elevate funding costs.

Analysts are wary of the potential implications of a still-inverted Treasury yield curve and leverage risks. However, Annaly’s minimal exposure to Treasury rate fluctuations due to hedging through swaps offers some comfort.

Improved Outlook as Mortgage Spreads Decline

Some analysts believe that if mortgage spreads continue to narrow, Annaly’s book value may rise by 20%-30%. This is because most of the company’s mortgage-backed securities (MBS) assets were acquired before interest rates spiked, resulting in low refinancing risk.

Cautious Outlook Due to Inverted Yield Curve and Leverage Risks

Other analysts are more cautious due to the inverted Treasury yield curve. They argue that a further narrowing in the 2s10s yield gap, which has been a profit driver for the company, is unlikely.

Concerns about leverage risks have also been raised, as Annaly’s debt-to-equity ratio has increased in recent years.

Hedging Provides Mitigation

It is important to note that Annaly hedges most of its Treasury rate risk through swaps. This means that even a significant increase or decrease in Treasury rates is unlikely to have a substantial impact on its net asset value (NAV), with the change estimated to be less than 10%.

Overall, despite the anticipated earnings decline, optimism remains for Annaly Capital Management due to the potential benefits of narrowing mortgage spreads, which could lead to significant book value gains.

Annaly Q1 Earnings Preview: Slight Decline Expected, but Optimism Remains