Mortgage REIT Annaly Capital Management posted net earnings of $1.2 billion for the fourth quarter, a 64% jump from the same period a year earlier, but below the expectations of some analysts.
The $83 billion REIT, which invests in agency quality MBS, said it would have earned just $380 million if it had not been hedged.
"The fixed income markets had a volatile fourth quarter," said Wellington Denahan-Norris, Annaly's vice chairman and chief investment officer, "and our interest rate swap book served to mitigate that volatility. The fundamentals for our investment strategy improved throughout the quarter as prepayment speeds remained relatively muted and spreads to financing widened."
The New York-based company took in net interest income of $682 million on its portfolio in 4Q, a 9% decline from the same period a year ago. (Fixed-rate mortgage-backed securities and agency debentures comprised 86% of the firm's portfolio at December 31.)
In a new research report, Sandler O'Neill said, "The primary driver of the [earnings] miss was a lower net interest spread of 1.85% vs. our estimate of 1.99%."
Mortgage REITs such as Annaly, Capstead Mortgage, Redwood Trust, and others are expected to play a larger role in the residential finance business as the White House and Congress move to restructure the business in the years ahead.