Annaly Capital Management Inc. (NLY - Snapshot Report) – the mortgage real estate investment trust (mREIT) – reported third-quarter 2014 core earnings of 31 cents per share, in line with the Zacks Consensus Estimate. The figure came a cent ahead of the prior-quarter core earnings of 30 cents per share and 3 cents above the year-ago figure of 28 cents per share.

Annaly Capital Management, Inc - Earnings Surprise | FindTheBest

Results reflect net interest margin (NIM) expansion in the quarter. Net interest income (NII) came in at $517.6 million, down 7.2% sequentially and 6.2% year over year.

Quarter in Detail

For the reported quarter, average yield on interest-earning assets was 2.99% while average cost of interest-bearing liabilities (including the net interest payments on interest rate swaps) was 1.64%.

This led to net interest rate spread of 1.35% for the quarter, reflecting a 90 basis point (bps) increase from the prior quarter and a 28 bps uptick from the year-ago quarter. NIM for the quarter came in at 1.61% compared with 1.57% in the prior quarter and 1.34% in the year-ago period.

The company’s investment securities (including Agency mortgage-backed securities and Agency debentures) were $82.8 billion as of Sep 30, 2014, up from $82.4 billion in prior-quarter but approximately flat on a year-over-year basis. The commercial investment portfolio, net of financing, denoted 11% of stockholders’ equity as of Sep 30, 2014, flat on a sequential basis.

Annaly’s book value per share came in at $12.87 as of Sep 30, 2014, compared to $13.23 as of Jun 30, 2014 and $12.70 as of Sep 30, 2013. At the end of third-quarter 2014, the company’s capital ratio (representing the ratio of stockholders’ equity to total assets) was 15.0%, compared with 15.4% at the end of the prior quarter and 13.9% at year-ago quarter end.

Leverage was 5.4:1 as of Sep 30, 2014, compared with 5.3:1 as of Jun 30, 2014 and 5.4:1 as of Sep 30, 2013. The company offered an annualized core return on average equity of 9.30% in the quarter under review, compared with 9.24% in the prior quarter and 8.62% in the year-ago period.

Our Take

Going forward, we believe that the diversification of Annaly into commercial assets would help enhance the company’s top-line growth. Moreover, with the end of Fed’s tapering of bond purchases, Annaly is seeking opportunities and making concerted efforts to enhance its book value and manage its leverage level.

Last month, another mREIT – American Capital Agency Corp. (AGNC - Analyst Report) – reported encouraging third-quarter 2014 results with its net spread and dollar roll income of 86 cents per share (excluding "catch-up" premium amortization) significantly exceeding the Zacks Consensus Estimate of 77 cents. Results benefited from the strategic decisions implemented by the company to counter the changing interest rate and mortgage market scenario.

Annaly currently has a Zacks Rank #3 (Hold). Investors interested in the mREIT industry may consider stocks like American Capital Mortgage Investment Corp. (MTGE - Snapshot Report) and Five Oaks Investment Corp. (OAKS - Snapshot Report). Both stocks carry a Zacks Rank #2 (Buy).