ANNALY CAPITAL MANAGEMENT INC Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Macro Landscape: U.S. economy performed well in Q4 with strong growth, labor market strengthened, inflation elevated but showing signs of improvement. Yield curve bear steepened, 10-year treasury yields rose nearly 80 basis points, mortgage rates increased to nearly 7%, available for sale housing supply slowly increased, but national home prices continued to increase modestly.
• Portfolio Performance: Fourth quarter economic return 1.3%, full year 2024 economic return 11.9%. Earnings available for distribution rose $0.06 to $0.72. Raised over $400 million of accretive common equity in Q4, bringing total capital raised in 2024 to $1.6 billion.
• Agency Strategy: Portfolio at $71 billion, migrated up in coupon, with hedging strategy proactively managing duration extension by increasing hedges at the long end of the yield curve.
• Residential Credit Strategy: Portfolio grew $500 million, with securitization volume and lock volumes increasing, whole loan production up, and credit discipline prioritized as evidenced by OBX shelf reporting lowest delinquencies among top-10 non-QM issuers.
• MSR Strategy: Portfolio up 25% YOY, committed to purchase nearly $425 million, valuation increased 3%, fundamental performance outperformed expectations with lower-than-modeled prepayment speeds and delinquencies, and competition for deposits higher than anticipated.

Segment Performance

• Agency: Portfolio ended the year at roughly $71 billion in market value with $7.4 billion of dedicated equity, representing 59% of the firm's capital. Migrated up in coupon during the quarter, with a weighted average coupon of 5%.
• Residential Credit: Portfolio ended the year at $7 billion in economic market value, with $2.7 billion of dedicated equity, representing 22% of the firm's capital. Grew approximately $500 million quarter-over-quarter, with securitization volume totaling $11 billion in 2024, including $2.3 billion in Q4, and lock volumes at $5.4 billion in Q4 (24% increase over Q3). Whole loan production increased, with a locked pipeline of $2.3 billion at year end.
• MSR: Portfolio ended the fourth quarter at $3.3 billion in market value including unsettled commitments, a roughly 25% increase year-over-year. Represented 19% of the firm's capital with $2.5 billion of dedicated equity. Committed to purchase nearly $425 million in market value during the quarter, with valuation increasing 3% to a 5.78 multiple.

Guidance

• Full year 2024 economic return was 11.9%.
• Agency MBS is expected to continue to exhibit attractive spreads on both absolute and relative bases to competing asset classes.
• Residential Credit business expects the non-QM origination market to grow in 2025, with Onslow Bay well positioned to expand market share.
• MSR portfolio expects further growth supported by the firm's deep capital base, low leverage, and partnerships with originators and servicers.

Risks

• Risks outlined in the most recent annual and quarterly SEC filings, including factors such as interest rate movements, yield curve volatility, and market conditions affecting housing finance and fixed income markets.

Question and Answer

Q: Bose George from KBW asked about whether the $0.72 EAD equates to around a 15% net ROE and if it's in line with the current normalized economic return of the portfolio.

A: David Finkelstein responded that generally, over the course of the quarter, spreads didn't change much, Agency was at the higher end of the 15%-17% range, and expenses were lower due to the equity raise, with earnings for Q1 expected to be contextual with Q4.

Q: Rick Shane from JP Morgan inquired about MSR supply and demand, specifically if the supply opportunity offsets demand increase.

A: Ken Adler stated that while bulk volumes slowed, there's still ample MSR on originator balance sheets and Annaly is a reliable capital partner, with the business set up to be a capital partner for the origination community.

Q: Jason Stewart from Janney Montgomery Scott asked about GSE reform and opportunities in credit.

A: David Finkelstein mentioned hurdles for GSE reform, the importance of GSEs in housing finance, and that a reduced GSE footprint could open opportunities for private capital, with Michael Fania's business well-positioned to provide liquidity.

Q: Doug Harter from UBS asked about outlook for returns and volatility.

A: David Finkelstein discussed that volatility erodes Agency returns, but resi and MSR portfolios buffer some of that, and rate and spread volatility outlooks were discussed, with spreads being range bound and treasury supply considered.

Q: Matthew Erdner from JonesTrading asked about non-Agency growth and HELOCs.

A: Michael Fania talked about maintaining market share with certainty of execution and stable capital, and mentioned a HELOC transaction expected in Q1 with drawn balances close to funding.

Q: Eric Hagen from BTIG asked about mortgage spreads and leverage with treasury issuance.

A: David Finkelstein discussed spread levels, treasury supply impact on hedging, and valuation tied to economic return, EAD, leverage, and balance sheet health.

Q: Harsh Hemnani from Green Street asked about whole loan spreads vs. private label securitization and relative value of business strategies.

A: Michael Fania noted whole loan spreads tighten with securitization spreads, and David Finkelstein discussed capital allocation to Agency, with marginal dollars going to Agency MBS.

Q: Trevor Cranston from Citizens JMP asked about MSR portfolio bulk packages.

A: Ken Adler explained that most bulk packages are lower note rate, mortgage lenders hold less MSR overall, and higher note rate packages are smaller in size, with the average note rate of the overall universe still low.