ANNALY CAPITAL MANAGEMENT INC Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Macro Environment: Financial markets benefited from Fed rate cuts and robust U.S. economy growth. Yield curve steepened, interest rate volatility declined, but remained above pre-COVID levels. Economic growth resilient.
• Agency MBS: Capital raise led to portfolio growth. Focus on high-quality specified pools with prepayment protection. Rotated portfolio to higher coupon collateral on relative value basis. Conservative hedge portfolio management with minimal duration at quarter end.
• Residential Credit: Portfolio growth driven by correspondent platform. Record volumes in Q3, current lock pipeline with strong credit characteristics. Low delinquencies in non-QM securitizations. Securitizations totaling $9.4 billion in 2024, maintaining market share.
• MSR: Stable fundamental performance. Partnership with Rocket Mortgage to benefit from recapture capabilities, expected to enhance competitiveness in purchasing new MSR.

Segment Performance

• Agency MBS: Portfolio grew by just over $4 billion notional, with market value increase due to price appreciation. Sixes and higher coupons represent roughly 1/4 of the portfolio, and approximately 70% have high-quality prepayment protection. Rotated 5% of the portfolio from intermediate coupons to higher coupon collateral on a relative value basis. Hedge portfolio had conservative interest rate exposure with minimal duration at quarter end.
• Residential Credit: Ended Q3 at $6.5 billion in economic market value, $2.3 billion dedicated capital (18% of firm's equity). Market value increased by $535 million QoQ. Whole loan and retained OBX securitization portfolio grew by $640 million. 11 consecutive months of expanded credit lock volume > $1 billion per month, with a current lock pipeline of $2.2 billion. Non-QM securitizations have lowest delinquencies among top 10 issuers.
• MSR: Ended Q3 at $2.8 billion in market value, $2.5 billion equity (21% of firm's capital). Valuation decreased minimally despite 80 bp mortgage rate decline. Fundamental performance strong, with 3-month CPR 3.9% and serious delinquencies 45 bp. Announced subservicing partnership with Rocket Mortgage, expected to start servicing loans by December.

Guidance

• Remain optimistic about business model with Fed's cutting cycle underway. Disciplined in portfolio management concerning leverage, liquidity, and duration. Attractive environment for Agency MBS with elevated investor inflows and steeper yield curve. Onslow Bay correspondent channel strong, MSR partnerships beneficial. Expect stable returns as demonstrated by 25% economic return over past two years.

Risks

• Market volatility due to unexpected interest rate changes. Election uncertainty impacting market pricing. Competition in subservicing market affecting economics. Potential for higher prepayment risk in agency portfolio.

Q: Richard Shane asked about managing risks in the fourth quarter, especially with political uncertainty.

A: David Finkelstein responded that they came into the quarter with virtually no rate risk, sold ~$5 billion in Agency MBS in October, operating at ~half a year duration, and will be disciplined managing rate and basis risk due to election uncertainty.

Q: Bose George asked about book value update and dividend outlook.

A: David Finkelstein said book value was off ~1% pre-dividend accrual, and they feel good about the dividend, expecting to earn modestly more in Q4 with NIM expected to increase modestly.

Q: Doug Harter asked about equity allocation and capital raising.

A: David Finkelstein stated marginal dollars going to Agency MBS, will raise capital if accretive and assets priced appropriately, with ample liquidity and ability to make investments with raised capital.

Q: Jason Weaver asked about securitization data and Rocket partnership.

A: Mike Fania said non-QM portfolio has low delinquencies, Ken Adler mentioned competition in subservicing leading to lower pricing and better economics for Annaly.

Q: Eric Hagen asked about book value and leverage.

A: David Finkelstein and Serena Wolfe discussed convexity profile of agency portfolio influencing leverage, focus on high-quality specified pools reducing duration drift.

Q: Harsh Hemnani asked about relative value in MSR.

A: David Finkelstein mentioned Rocket partnership as addition to recapture partners, opportunistically bidding on higher or lower note rates.

Q: Jason Stewart asked about leverage and capital raising.

A: David Finkelstein said raising capital is better than taking leverage up currently, will consider leverage up if market calms after election.

Q: Don Fandetti asked about agency MBS spreads.

A: Sean Kensil said Agency MBS spreads likely to tighten to 110-130 basis points range post-election, with better technicals from banks and foreign buyers.

Q: Trevor Cranston asked about new participants in non-QM.

A: Mike Fania said Annaly has significant market share, continues to gain market share with stable infrastructure and relationships, expecting market share to increase.