Both Annaly Capital (NLY) and MFA Mortgage (MFA) reported solid first quarter results today, with Annaly's earnings looking particularly strong.
Annaly's core EPS of $0.51/share was in-line with estimates, and spreads improved by an impressive 58 bps on a sequential basis to 1.46%. Leverage remained at 8.1:1, however, which seems slightly aggressive. However, with no exposure to non-agency assets and no apparent painful margin calls, the 8.1:1 ratio appears reasonably comfortable.
Annaly's strong results are rooted in the Company's significant investment in fixed-rate assets several months ago. Repo financing had a weighted average cost of just 4.18% during the quarter and 3.85% at period-end. With funding becoming cheaper on the heels of yet another Fed rate cut, Annaly can look forward to several more quarters of wide spreads and flush earnings.
Annaly's book value at 3/31/08 was $13.38, so the stock is trading at 1.3x the after-hours closing price of $17.25. This valuation is on the lower end of Annaly's historical trading price, suggesting that the stock could have more room to run.
MFA also had a strong quarter, though GAAP earnings were tarnished by a $25 million loss on the sale of assets and a $91 million loss on swap terminations. Core earnings, however, came in at $0.20/share after backing out the capital losses from the asset sales and swap terminations. That $0.20/share is a good approximation of MFA's taxable income and lends support to the $0.18/share dividend. MFA declined to disclose REIT taxable income in its 10-Q.
Despite trading at just 1.1x book value, MFA still remains exposed to margin calls and markdowns on its portfolio of non-agency securities. Unlike Annaly, MFA does have some exposure to non-agency assets and consequently had to lower its leverage to 7:1 during Q1 2008. The de-levering will limit MFA's earnings power going forward. MFA's spread improved by just 25 bps to 0.90% sequentially, also hampering meaningful growth in taxable income.
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