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No. of Recommendations: 13
These are some quick notes on the press release (well, not quick in one instance).

Book value: Dropped for the 5th consecutive reported quarter. This time by 4.5% to $12.13. The company therefore ended the quarter trading at 82% of book (end of year closing price) and is now at a more modest discount to book (less than 10% discount).

Leverage: 5.0 to one, a drop in leverage from the prior quarter, and for the fourth reported quarter in a row. But this is balanced by --

Return on average assets: 3.50%
Return on avg. borrowing: 2.07%
..........srpead........: 1.43%

Borrowing ticked up a bit from 1.81% the quarter before, and has risen for 4 reported quarters. But yield on average assets has also been rising over that time, and this quarter saw a substantial jump in the spread from 1.01% to 1.43%. It would be nice to see this over 2%, but I like the direction.

This has enabled an improvement in the return on equity. Core return on equity 11.05%*, up from the 8.62%* of the prior quarter. Since the company has noted in the past that they target an ROE in the mid teens, this tells me they are still quite conservative in their approach. I won't listen to the call until later, but expect they will be asked about being encouraged by the 'taper' and will shrug it off noting the Fed is still the primary operator in the MBS space (hugely) and they want them fully out, not just starting to close a still wide open door.

Core earnings cover the dividend, but that has been falling.

Helical Investor

* OK, here is what made this 'not quick'. Hard to comment on ROE and even core earnings with historical context. There has often been a report of earnings without XYZ reported in the press release (one-times, swaps, etc.), and an ROE with the same exclusions. I have tended to call this 'core', but it has been different from what NLY now calls core. For the last two quarters they have reported core earnings and ROE that also seems to exclude 'gains or losses on disposals of investments'. This exclusion wasn't there before. [And appears to coincide with CFO change over].


During the quarter ended December 31, 2013, the Company disposed of $11.9 billion of Investment Securities, resulting in a realized gain of $49.6 million. During the quarter ended September 30, 2013, the Company disposed of $13.0 billion of Investment Securities, resulting in a realized gain of $43.6 million. During the quarter ended December 31, 2012, the Company disposed of $13.2 billion of Investment Securities, resulting in a realized gain of $121.4 million.

Note that they had a 'trading' gain in the quarter of $43.6M. [Nice job given the rise in asset yield, this is easier to accomplish with drops in yield, and may be reflected in taking on more duration -- awaits 10K] Especially note that in the prior year (Q4-2012) this gain was a much higher $121.4M. I recall wondering how 'sustainable that was' as these gains seemed to coincide with NLY reducing duration (as yields dropped).

The difference on the ROE was significant. NLY reported a core ROE for this last (Q4-2013) of 11.05%, and one for last year (Q4-2012) of just 8.12%. But .. if you go to last years press release, the ROE that was previously considered core, and apparently incorporated this $121.4M trading gain, was 11.27%. Higher than the 8.12% provided now. [And maybe this change was why they reported later this year than last] So, while the reported core of 11.05% ROE is nice to see, this historical comparitor is probably closer to 12.6% if one adds the trading gains on disposals to the core earnings. Closer to the 'mid teens' they have in the past commented on targeting (when Mike was still around) when they reported ROE with those disposal earnings included.

Is this better? Probably, but trading gains and losses are part of their business.
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