Annaly Capital Management, Inc. Reports 2nd Quarter 2008 Core EPS of $0.60, an Increase of 114% from Prior Year and 18% from Prior Quarter

Wed. July 30, 2008; Posted: 04:01 PM

NEW YORK, Jul 30, 2008 (BUSINESS WIRE) -- NLY | Quote | Chart | News | PowerRating -- Annaly Capital Management, Inc. (NYSE: NLY | Quote | Chart | News | PowerRating) today reported Core Earnings for the quarter ended June 30, 2008 of $305.2 million or $0.60 per average share available to common shareholders as compared to Core Earnings of $79.1 million or $0.28 per average share available to common shareholders for the quarter ended June 30, 2007, and Core Earnings of $233.6 million or $0.51 per average share available to common shareholders for the quarter ended March 31, 2008. "Core Earnings" represents a non-GAAP measure and is defined as net income (loss) excluding impairment losses and gains or losses on sales of securities and termination of interest rate swaps. On a GAAP basis, net income for the quarter ended June 30, 2008 was $308.0 million or $0.60 basic net income per average share available to common shareholders, as compared to net income of $85.7 million or $0.30 basic net income per average share available to common shareholders for the quarter ended June 30, 2007, and net income of $243.0 million or $0.54 basic net income per average share available to common shareholders for the quarter ended March 31, 2008.

During the quarter ended June 30, 2008, the Company sold $2.1 billion of Mortgage-Backed Securities, resulting in a realized gain of $2.8 million. During the quarter ended June 30, 2007, the Company sold $1.4 billion of Mortgage-Backed Securities, resulting in a realized gain of $7.3 million. During the quarter ended March 31, 2008, the Company sold $4.1 billion of Mortgage-Backed Securities, resulting in a realized gain of $9.4 million.

Common dividends declared for the quarter ended June 30, 2008 were $0.55 per share, as compared to $0.24 per share for the quarter ended June 30, 2007 and $0.48 per share for the quarter ended March 31, 2008. The annualized dividend yield on the Company's common stock for the quarter ended June 30, 2008, based on the June 30, 2008 closing price of $15.51, was 14.18%. On a Core Earnings basis, the Company provided an annualized return on average equity of 17.88% for the quarter ended June 30, 2008, as compared to 9.68% for the quarter ended June 30, 2007 and 16.01% for the quarter ended March 31, 2008. On a GAAP basis, the Company provided an annualized return on average equity of 18.04% for the quarter ended June 30, 2008, as compared to 10.49% for the quarter ended June 30, 2007, and 16.66% for the quarter ended March 31, 2008.

During the quarter ended June 30, 2008, the Company completed a public offering of 69,000,000 shares of common stock. The estimated net proceeds of the offering, including the exercise of the underwriters' over-allotment option, were approximately $1.1 billion, net of offering expenses.

Michael A.J. Farrell, Chairman, Chief Executive Officer and President of Annaly, commented on the quarter's results. "The historic events of the first quarter of 2008 have given way to quieter but still-volatile conditions in the second quarter. Policymakers continue to have their hands full--managing not only a slowing economy but also the uncertainty over inflation expectations and the risks of severe financial market instability. Most recently, Congress passed legislation to support the GSEs and the activities in which they engage pursuant to their charters. The result has been a challenging quarter across the spectrum of asset classes. Nevertheless, market conditions for Annaly are fundamentally positive, with our cost of financing remaining low, prepayment speeds remaining slow and mortgage spreads remaining wide. I am pleased with our team's ability to navigate our portfolio in this environment and to demonstrate the long-term value of our investment strategy. I believe the capital raise during the quarter positions us well to capitalize on market opportunities going forward for the benefit of shareholders."

For the quarter ended June 30, 2008, the annualized yield on average earning assets was 5.50% and the annualized cost of funds on the average repurchase balance was 3.51%, which results in an interest rate spread of 1.99%. This is a 139 basis point increase over the 0.60% annualized interest rate spread for the quarter ended June 30, 2007 and a 53 basis point increase over the 1.46% annualized interest rate spread for the quarter ended March 31, 2008. For the quarter ended June 30, 2007, the annualized yield on average earning assets was 5.73% and the annualized cost of funds on the average repurchase balance was 5.13%. For the quarter ended March 31, 2008, the annualized yield on average earning assets was 5.64% and the annualized cost of funds on the average repurchase balance was 4.18%. At June 30, 2008, the weighted average yield on assets was 5.27% and the cost of funds, including the effect of interest rate swaps, was 3.40%, which results in an interest rate spread of 1.87%. Leverage at June 30, 2008 was 7.1:1, in comparison to 11.2:1 at June 30, 2007 and 8.1:1 at March 31, 2008.

Fixed-rate securities comprised 69% of the Company's portfolio at June 30, 2008. The balance of the portfolio was comprised of 23% adjustable-rate mortgages and 8% LIBOR floating-rate collateralized mortgage obligations. At June 30, 2008, the Company had entered into interest rate swaps on a notional amount of $17.7 billion, or 30% of the portfolio. The Company's swaps are designated as cash flow hedges against the benchmark interest rate risk associated with the Company's borrowings. The purpose of the swaps is to mitigate the risk of rising interest rates that affect the Company's cost of funds. Since the Company will be receiving a floating rate on the notional amount of the swaps, the effect of the swaps is to lock in a spread relative to the cost of financing. As of June 30, 2008, all of the Company's Investment Securities were FNMA, GNMA and FHLMC mortgage-backed securities and Agency debentures, which carry an actual or implied "AAA" rating.

"The persistence of wide spreads in the mortgage market has enabled Annaly to generate compelling returns even as we continue to manage our portfolio conservatively at the low end of our historical leverage levels," said Wellington Denahan-Norris, Annaly's Vice Chairman, Chief Investment Officer and Chief Operating Officer. "We believe that our prudent risk management and the consistent deployment of our barbell strategy will position the company to perform through this environment and for the long-term. After taking into account the effect of interest rate swaps, at June 30, 2008 our portfolio of Investment Securities was comprised of 39% fixed-rate, 23% adjustable-rate and 38% floating-rate assets."

The following table summarizes portfolio information for the Company:

June 30, June 30, March 31, 2008 2007 2008 --------------------------- Leverage at period-end 7.1:1 11.2:1 8.1:1 Fixed-rate investment securities as % of portfolio 69% 76% 69% Adjustable-rate investment securities as % of portfolio 23% 19% 21% Floating-rate investment securities as % of portfolio 8% 5% 10% Notional amount of interest rate swaps as % of portfolio 30% 33% 30% Annualized yield on average earning assets during the quarter 5.50% 5.73% 5.64% Annualized cost of funds on average repurchase balance during the quarter 3.51% 5.13% 4.18% Annualized interest rate spread during the quarter 1.99% 0.60% 1.46% Weighted average yield on assets at period-end 5.27% 5.71% 5.36% Weighted average cost of funds at period- end 3.40% 5.10% 3.85% Interest rate spread at period-end 1.87% 0.61% 1.51%

The Constant Prepayment Rate was 16% during the second quarter of 2008, as compared to 15% during the second quarter of 2007, and 15% during the first quarter of 2008. The weighted average cost basis of the Investment Securities was 100.9 at June 30, 2008. The net amortization of premiums and accretion of discounts on Investment Securities for the quarters ended June 30, 2008, June 30, 2007 and March 31, 2008 was $26.6 million, $16.7 million, and $27.5 million, respectively. The total net premium remaining unamortized at June 30, 2008, June 30, 2007 and March 31, 2008 was $500.7 million, $211.4 million, and $383.3 million, respectively.

General and administrative expenses as a percentage of average assets were 0.18%, 0.12% and 0.17% for the quarter ended June 30, 2008, June 30, 2007, and March 31, 2008, respectively. At June 30, 2008, June 30, 2007, and March 31, 2008, the Company had a common stock book value per share of $13.03, $10.52 and $12.95, respectively.

At June 30, 2008, FIDAC, Annaly's wholly-owned registered investment advisor, had under management approximately $2.7 billion in net assets and $11.8 billion in gross assets, as compared to $2.6 billion in net assets and $15.7 billion in gross assets at June 30, 2007 and $3.2 billion in net assets and $12.7 billion in gross assets at March 31, 2008. For the quarter ended June 30, 2008, FIDAC earned investment advisory and service fees, net of fees paid to distributors, of $6.0 million, as compared to $4.5 million for the quarter ended June 30, 2007 and $6.0 million for the quarter ended March 31, 2008.

Annaly manages assets on behalf of institutional and individual investors worldwide through Annaly and through the funds managed by its wholly-owned registered investment advisor, FIDAC. The Company's principal business objective is to generate net income for distribution to investors from the spread between the interest income on its mortgage-backed securities and the cost of borrowing to finance their acquisition and from dividends Annaly receives from FIDAC, which earns investment advisory fee income. The Company, a Maryland corporation that has elected to be taxed as a real estate investment trust ("REIT"), currently has 538,549,916 shares of common stock outstanding.

The Company will hold the second quarter 2008 earnings conference call on Thursday July 31, 2008 at 10:00 a.m. EST. The number to call is 866-770-7146 for domestic calls and 617-213-8068 for international calls and the pass code is 42402257. The replay number is 888-286-8010 for domestic calls and 617-801-6888 for international calls and the pass code is 98762217. The replay is available for 48 hours after the earnings call. There will be a web cast of the call on www.annaly.com. If you would like to be added to the e-mail distribution list, please visit www.annaly.com, click on E-Mail alerts, enter your e-mail address where indicated and click the Subscribe button.

This news release and our public documents to which we refer contain or incorporate by reference certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions (some of which are beyond our control) may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "anticipate," "continue," or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates, changes in yield curve, changes in prepayment rates, the availability of mortgage-backed securities for purchase, the availability of financing and, if available, the terms of any financing, changes in the market value of our assets, changes in business conditions and the general economy, and risks associated with the investment advisory business of FIDAC, including the removal by FIDAC's clients of assets FIDAC manages, FIDAC's regulatory requirements, and competition in the investment advisory business, changes in government regulations affecting our business, and our ability to maintain our qualification as a REIT for federal income tax purposes. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, and all subsequent Quarterly Reports on Form 10-Q. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands) June 30, March 31, 2008 2008 (Unaudited) (Unaudited) ------------------------ ASSETS Cash and cash equivalents $1,462,737 $1,549,041 Reverse repurchase agreements 49,964 800,000 Mortgage-Backed Securities, at fair value 58,017,305 56,115,025 Agency debentures, at fair value 731,995 738,837 Available for sale equity securities, at fair value 32,631 44,546 Trading securities, at fair value 23,478 1,836 Receivable for Mortgage-Backed Securities sold 824,308 174,413 Accrued interest and dividends receivable 303,228 287,261 Receivable for advisory and service fees 4,703 4,581 Intangible for customer relationships 7,604 8,840 Goodwill 22,966 22,966 Interest rate swaps, at fair value - - Other assets 3,216 4,347 ------------------------ Total assets $61,484,135 $59,751,693 ======================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements $51,839,663 $51,324,007 Payable for Investment Securities purchased 1,405,109 828,235 Trading securities sold, not yet purchased, at fair value 48,718 37,268 Accrued interest payable 154,615 172,575 Dividends payable 296,201 224,823 Accounts payable and other liabilities 36,625 20,123 Interest rate swaps, at fair value 400,998 789,859 ------------------------ Total liabilities 54,181,929 53,396,890 ------------------------ Minority interest in equity of consolidated affiliate - - ------------------------ 6.00% Series B Cumulative Convertible Preferred Stock: 4,600,000 shares authorized, 4,496,525, 4,597,550, 4,600,000, 4,600,000, and 4,600,000 shares issued and outstanding, respectively 108,957 111,405 ------------------------ Stockholders' Equity: 7.875% Series A Cumulative Redeemable Preferred Stock: 7,412,500 authorized, 7,412,500 shares issued and outstanding 177,088 177,088 Common stock: par value $.01 per share; 987,987,500 authorized 538,546,666, 468,380,797, 401,822,703, 330,509,203, and 269,385,348 issued and outstanding, respectively 5,385 4,684 Additional paid-in capital 7,592,161 6,506,494 Accumulated other comprehensive loss (478,791) (335,814) Accumulated deficit (102,594) (109,054) ------------------------ Total stockholders' equity 7,193,249 6,243,398 ------------------------ Total liabilities, minority interest, Series B Cumulative Convertible Preferred Stock and stockholders' equity $61,484,135 $59,751,693 ======================== (1) Derived from the audited consolidated financial statements at December 31, 2007. September 30, June 30, December 31, 2007 2007 2007 (1) (Unaudited) (Unaudited) ---------------------------------------- ASSETS Cash and cash equivalents $103,960 $90,028 $91,781 Reverse repurchase agreements - - - Mortgage-Backed Securities, at fair value 52,879,528 44,641,352 38,603,002 Agency debentures, at fair value 253,915 249,281 150,507 Available for sale equity securities, at fair value 64,754 - - Trading securities, at fair value 11,675 10,987 12,131 Receivable for Mortgage-Backed Securities sold 276,737 516,140 - Accrued interest and dividends receivable 271,996 235,787 197,060 Receivable for advisory and service fees 3,598 2,933 2,954 Intangible for customer relationships 9,842 10,178 10,513 Goodwill 22,966 22,966 22,966 Interest rate swaps, at fair value - - 93,404 Other assets 4,543 3,026 3,146 ---------------------------------------- Total assets $53,903,514 $45,782,678 $39,187,464 ======================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements $46,046,560 $40,140,113 $35,093,856 Payable for Investment Securities purchased 1,677,131 1,169,324 744,027 Trading securities sold, not yet purchased, at fair value 32,835 26,823 37,734 Accrued interest payable 257,608 148,462 104,456 Dividends payable 136,618 85,932 64,652 Accounts payable and other liabilities 36,688 25,237 14,520 Interest rate swaps, at fair value 398,096 142,061 838 ---------------------------------------- Total liabilities 48,585,536 41,737,952 36,060,083 ---------------------------------------- Minority interest in equity of consolidated affiliate 1,574 1,329 5,623 ---------------------------------------- 6.00% Series B Cumulative Convertible Preferred Stock: 4,600,000 shares authorized, 4,496,525, 4,597,550, 4,600,000, 4,600,000, and 4,600,000 shares issued and outstanding, respectively 111,466 111,466 111,466 ---------------------------------------- Stockholders' Equity: 7.875% Series A Cumulative Redeemable Preferred Stock: 7,412,500 authorized, 7,412,500 shares issued and outstanding 177,088 177,088 177,088 Common stock: par value $.01 per share; 987,987,500 authorized 538,546,666, 468,380,797, 401,822,703, 330,509,203, and 269,385,348 issued and outstanding, respectively 4,018 3,305 2,694 Additional paid-in capital 5,297,922 4,270,330 3,447,964 Accumulated other comprehensive loss (152,197) (385,960) (467,640) Accumulated deficit (121,893) (132,832) (149,814) ---------------------------------------- Total stockholders' equity 5,204,938 3,931,931 3,010,292 ---------------------------------------- Total liabilities, minority interest, Series B Cumulative Convertible Preferred Stock and stockholders' equity $53,903,514 $45,782,678 $39,187,464 ======================================== (1) Derived from the audited consolidated financial statements at December 31, 2007.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (dollars in thousands, except per share data) For the quarters ended June 30, March 31, 2008 2008 ------------------------ Interest income $773,359 $791,128 Interest expense 442,251 537,606 ------------------------ Net interest income 331,108 253,522 ------------------------ Other income Investment advisory and service fees 6,406 6,598 Gain on sale of Mortgage-Backed Securities 2,830 9,417 Gain on termination of interest rate swaps - - Income from trading securities 2,180 1,854 Dividend income from available-for-sale equity securities 580 941 Loss on other-than-temporarily impaired securities - - ------------------------ Total other income 11,996 18,810 ------------------------ Expenses Distribution fees 370 633 General and administrative expenses 27,215 23,995 ------------------------ Total expenses 27,585 24,628 ------------------------ Income before income taxes and minority interest 315,519 247,704 Income taxes 7,527 4,610 ------------------------ Income before minority interest 307,992 243,094 Minority interest - 58 ------------------------ Net income 307,992 243,036 Dividend on preferred stock 5,334 5,373 ------------------------ Net income available to common shareholders $302,658 $237,663 ======================== Net income available per share to common shareholders: Basic $0.60 $0.54 ======================== Diluted $0.59 $0.53 ======================== Weighted average number of common shares outstanding: Basic 503,758,079 443,812,432 ======================== Diluted 512,678,975 452,967,457 ======================== Net income $307,992 $243,036 ------------------------ Other comprehensive income (loss): Unrealized (loss) gain on available-for- sale securities (529,008) 217,563 Unrealized gain (loss) on interest rate swaps 388,861 (391,763) Reclassification adjustment for gains included in net income (2,830) (9,417) ------------------------ Other comprehensive (loss) income (142,977) (183,617) ------------------------ Comprehensive income (loss) $165,015 $59,419 ------------------------ For the quarters ended December 31, September 30, June 30, 2007 2007 2007 ---------------------------------------- Interest income $720,925 $628,696 $556,262 Interest expense 558,435 519,118 468,748 ---------------------------------------- Net interest income 162,490 109,578 87,514 ---------------------------------------- Other income Investment advisory and service fees 5,636 5,464 5,366 Gain on sale of Mortgage- Backed Securities 1,829 3,795 7,293 Gain on termination of interest rate swaps - 2,029 - Income from trading securities 7,187 8,288 243 Dividend income from available-for-sale equity securities 91 - - Loss on other-than- temporarily impaired securities - - (698) ---------------------------------------- Total other income 14,743 19,576 12,204 ---------------------------------------- Expenses Distribution fees 782 1,100 861 General and administrative expenses 20,174 17,334 12,272 ---------------------------------------- Total expenses 20,956 18,434 13,133 ---------------------------------------- Income before income taxes and minority interest 156,277 110,720 86,585 Income taxes 3,100 2,327 839 ---------------------------------------- Income before minority interest 153,177 108,393 85,746 Minority interest 245 106 13 ---------------------------------------- Net income 152,932 108,287 85,733 Dividend on preferred stock 5,374 5,373 5,373 ---------------------------------------- Net income available to common shareholders $147,558 $102,914 $80,360 ======================================== Net income available per share to common shareholders: Basic $0.38 $0.33 $0.30 ======================================== Diluted $0.37 $0.32 $0.30 ======================================== Weighted average number of common shares outstanding: Basic 389,410,812 315,969,814 264,990,422 ======================================== Diluted 398,247,632 324,614,534 273,578,836 ======================================== Net income $152,932 $108,287 $85,733 ---------------------------------------- Other comprehensive income (loss): Unrealized (loss) gain on available-for-sale securities 491,626 320,102 (535,413) Unrealized gain (loss) on interest rate swaps (256,034) (232,598) 134,408 Reclassification adjustment for gains included in net income (1,829) (5,824) (6,595) ---------------------------------------- Other comprehensive (loss) income 233,763 81,680 (407,600) ---------------------------------------- Comprehensive income (loss) $386,695 $189,967 ($321,867) ----------------------------------------

SOURCE: Annaly Capital Management, Inc.

Annaly Capital Management, Inc. Investor Relations, 1-(888)8Annaly www.annaly.com

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