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Key Factors Setting the Stage for Annaly's (NLY) Q3 Earnings

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Annaly Capital Management Inc. NLY is scheduled to report third-quarter 2021 results on Oct 27, after market close. While the company’s results are expected to reflect year-over-year declines in net interest income (NII) and earnings.

In the last reported quarter, the mortgage real estate investment trust (mREIT) posted earnings available for distribution (EAD) of 30 cents that surpassed the Zacks Consensus Estimate of 27 cents. While continued record-low financing costs and higher average yield on interest-earning assets supported Annaly, the company registered a sequential decline in book value per share.

Over the last four quarters, the company’s earnings beat the Zacks Consensus Estimate on three occasions and matched the mark in the other quarter. The average surprise was 11.4%. 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 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 the third-quarter earnings announcement.

While the steepening of the yield curve has provided some relief for margins, the near-zero interest rate environment is anticipated to have been an offsetting factor. A likely increase in liability costs as costs normalize along with continued pressure on asset yields is expected to have hindered Annaly’s margins.

Yields across all asset classes are expected to have declined in the third quarter. Given Annaly’s significant Agency mortgage-backed securities (MBS) balance, declining asset yields are likely to have dented its third-quarter performance. This, in turn, is expected to have induced net interest margin contractions.

In the third quarter, although mortgage rates increased marginally on a sequential basis, the same remained at low levels. This has continued to drive refinancing activities in the quarter. Amid this, a significant portion of Annaly’s MBS holdings is anticipated to have continued witnessing elevated levels of prepayments. This is anticipated to have led to higher net premium amortization in the September-end quarter, leading to a decline in interest income and average asset yield. Lower prevailing yields on new asset purchases are also expected to have hindered overall asset yield growth.

Spread widening in the quarter is anticipated to have eroded book value. Also, given the uncertainty about the Fed’s tapering moves, the company is expected to have migrated part of its investment portfolio from Agency MBSs to credit-focused assets.

The consensus estimate for third-quarter NII of $410.2 million indicates an 8.3% decline from the year-ago reported figure.

The consensus estimate for net interest margin is pegged at 1.93%, indicating a decline from 2.15% reported in third-quarter 2020.

Nonetheless, the Federal Reserve continued to purchase Treasury securities and agency MBS in the third quarter. This is expected to have lifted valuations of Agency MBSs held by Annaly.

Hence, Annaly’s investment strategy, driven by a prudent selection of assets and an effective capital allocation to Agency MBSs and credit-focused asset classes, is likely to have enhanced its returns in the third quarter.

Lastly, the company’s activities in the September-end quarter were inadequate to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate for third-quarter earnings has been unchanged at 26 cents in a month. This indicates a year-over-year decline of 18.8%.

Earnings Whispers

Annaly does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Annaly has an Earnings ESP of 0.00%.

Zacks Rank: Annaly currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks That Warrant a Look

Here are a few stocks worth considering from the REIT space as our model shows that these have the right combination of elements to pull off a positive surprise this earnings season:

Digital Realty Trust, Inc. DLR, scheduled to report quarterly numbers on Oct 26, currently has an Earnings ESP of +1.24% and a Zacks Rank of 3.

Blackstone Mortgage Trust, Inc. BXMT, slated to release third-quarter earnings on Oct 27, has an Earnings ESP of +1.07% and a Zacks Rank of 2 at present.

Public Storage PSA, slated to announce third-quarter results on Nov 1, currently has an Earnings ESP of +0.69% and a Zacks Rank of 2.

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Public Storage (PSA) : Free Stock Analysis Report

Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report

Blackstone Mortgage Trust, Inc. (BXMT) : Free Stock Analysis Report

Annaly Capital Management Inc (NLY) : Free Stock Analysis Report

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