Annaly Capital Management Inc.

Good morning, and welcome to the second quarter 2023 earnings call to the Nally Capital. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sean Kensal, Investor Relations. Please go ahead.

Good morning, and welcome to the second quarter 2023 earnings call for Annalee Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the risk factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of gap to non-gap measures is included in our earnings release. Content referenced in today's call can be found in our second quarter 2023 investor presentation and second quarter 2023 financial supplement, both found under the presentation section of our website. Please note this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Chief Investment Officer, Serena Wolf, Chief Financial Officer, Mike Fania, Deputy Chief Investment Officer and Head of Residential Credit, V.S. Sreenivasan, Head of Agency, and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David.

Thank you, Sean. Good morning, everyone, and thank you for joining us for our second quarter earnings call. Today, I'll begin with our performance during the quarter, review the macro landscape and housing market, followed by an overview of our portfolio activity and positioning. Serena will then go over our financial results for the quarter, and we're also joined by our other business leaders who can provide additional context during Q&A. Starting with our performance, we are pleased with a 3% economic return generated for the quarter, despite elevated rate and spread volatility. And to note, we've achieved a 6% return year-to-date and kept book value largely unchanged, notwithstanding heightened uncertainty caused by the changing path of Fed rate hikes the regional banking turbulence, and debt ceiling negotiations. Our ability to manage through this volatility is attributable to our diversified capital allocation, prudent hedge portfolio, and responsible leverage position. And even with the reduction in leverage from 6.4 times to 5.8 times, we again out-earned our dividend this past quarter. Now, shifting to the macro environment, Despite the banking stress at the onset of the quarter, the U.S. economy has remained on solid footing with healthy gains in the labor market and economic growth consistent with recent quarters. Inflation was elevated through most of the quarter. However, data began to signal a more pronounced slowdown in June. Lower used car prices, an improvement in shelter inflation, and a seemingly more price-sensitive consumer have begun to put downward pressure on prices. and this should slow inflation more than recent year-end FOMC forecasts of 3.9% in core PCE. Beyond inflation, data during the quarter suggests the likelihood of a soft landing has increased and that the Fed will hold interest rates higher for longer, particularly if the labor market continues to demonstrate resilience. It is likely that the Fed has reached peak interest rate levels for the cycle after yesterday's hike, but upside surprises and inflation readings may lead to an additional hike this year. With respect to the housing market, home prices continue to outperform expectations, as we have now experienced five consecutive months of national home price increases, according to Zillow. Recent momentum has turned positive even in the previously hard-hit areas, as the top 50 metro areas all experienced positive month-over-month HBA in June, with the year-to-date national home prices now up 4.7%. Market participants were projecting meaningful home price declines given elevated mortgage rates and low affordability, with the expectation of those factors translating to reduced housing demand. Although transactional activity has declined, The market has been supported by historically low available for sale inventory as existing borrowers with low mortgage rates are unwilling to trade up or move given the potential increased payment. Total active inventory was down 10% from last year and currently sits at a very notable 45% below June 2019 levels. Now, before turning to the portfolio, I want to make one point on the banking sector. During last quarter's call, we stated that the main implication of the regional bank stress was that it created an overhang of assets that need to be absorbed by private market participants. This supply came to the forefront during the second quarter as the FDIC began selling assets from the SVB and signature bank receiverships. The sales weighed on the market for parts of the quarter, but money manager demand and transparency on the disposition process have helped the market digest a substantial portion of the $114 billion in assets already. Now shifting to our portfolio and starting with agency, when you look at the overall performance of the portfolio, the quarter once again looks more benign on the surface than that which actually occurred. As previously discussed, the confluence of market events and the resulting uncertainty led us to believe mortgage spreads would widen. Accordingly, we proactively reduced our agency exposure early in the quarter, with our portfolio declining by roughly $5 billion and notional. This tactical shift proved beneficial as spreads reached their quarterly peak in late May, and it afforded us flexibility to opportunistically deploy capital across our businesses amidst the volatility. In June, as the debt ceiling resolved and the banking sector recovered, risk-on sentiment reemerged and MBS experienced broad-based outperformance, ultimately driving spreads modestly tighter for the quarter. With respect to portfolio positioning, we continue to rotate into higher coupons, which provide the most attractive nominal spreads. We also reduced our holdings of seasoned intermediate coupons and 15-year MBS. And as a result, the average coupon on our portfolio shifted modestly higher to 4.3%, but we remained disciplined in managing our convexity profile through collateral selection. We also took advantage of softer payups to replace over 8 billion TVAs with specified pools during the quarter. And in addition to their favorable prepayment profile, specs provide incremental carry relative to TVAs in the current environment. On the hedging side, the notional value of our hedges declined in line with our assets, though we remained fully hedged. We maintained a slight flattening bias throughout the quarter as twos, tens, and treasuries exceeded negative 100 basis points, but have shifted to a balanced curve position given the extreme inversion in the yield curve. The diversity of our assets allows us to be opportunistic in our rates exposure as the market stays highly sensitive to income data. Moving to residential credit, spreads tightened and the credit curve flattened on the quarter, driven by a supportive backdrop of limited net issuance, resiliency in the housing market, and a strong consumer. Benchmark CRT below investment grade spreads tightened 95 basis points on the quarter, while production coupon non-QM loan spreads were 75 basis points tighter, reflecting a declining cost of funds in the securitization market. Our residential credit portfolio ended the quarter at $4.9 billion in market value, down approximately $300 million quarter-over-quarter, given our increased pace of securitization activity. Whole loan purchases remained healthy, increasing 16% relative to Q1, with approximately $750 million in loans settled. We securitized $1.5 billion in loans in the second quarter through our OBX platform, generating $162 million of retained assets. And post-quarter end, we priced our latest non-QM deal, taking advantage of the recent market rally to achieve AAA levels 20 basis points tighter than at the end of June. This brings our aggregate year-to-date securitization volume to eight transactions, totaling over $3 billion. And notably, Annalie has been the largest non-bank securitizer since the beginning of 2022 and second largest overall, including bank issuers. Our securitization activity has been supported by our correspondent channel, which continues to gain momentum despite a challenging landscape for mortgage origination. Our Q2 loan lock volume of $1.5 billion was our largest since inception, and the channel accounted for 85% of our total loan settlements. And we maintained a disciplined credit focus, as demonstrated by the current pipeline exhibiting a weighted average FICO of 748 and an LTV of 68%, as well as limited layer risk. Now, finally, within MSR, we grew our portfolio by $350 million, or 19% during the quarter, through the purchase of four bulk packages. Our holdings now stand at just over $2 billion in market value and $150 billion in unpaid principal balance. The portfolio exhibited another quarter of slow prepayment speeds, paying below 4 CPR, and delinquencies were unchanged and remained minimal. All told, our strategy of acquiring low note rate, high credit quality MSR continue to deliver predictable cash flows with attractive risk-adjusted returns. MSR trading volumes are strong in the second quarter as market participants efficiently absorb high levels of bulk supply, a dynamic that we expect to persist for the foreseeable future. And despite elevated supply, pricing has held firm and low WAC MSR valuations improved, driven by the rise in rates, muted prepayment speeds, and modest spread tightening. Now, shifting to our outlook, we expect the second half of 2023 should provide a more accommodative environment for agency MBS. While supply and demand challenges will persist, with money managers likely to be the primary buyers of mortgages, Net supply from banks is likely to decline as FDIC sales are completed, and the Fed nearing the end of its hiking cycle should lead to lower volatility and a potentially steeper curve, making MBS more attractive to investors on an option-adjusted spread basis. But I would note that we do expect spreads will stay wider relative to historical averages given technical considerations, though there is still room for tightening from here. And that said, the benefit of agency spreads settling at wider levels is that we expect to earn a healthy yield without employing excessive leverage. As it relates to residential credit and MSR, we're optimistic about the opportunity set within these businesses and will look to grow these strategies responsibly. In resi, we anticipate further expansion of our correspondent channel as we now have approximately 160 counterparties onboarded, and we expect to benefit from our scale as we further penetrate the market. And post-quarter end lock volume has been strong with the current expanded credit pipeline of $900 million. At MSR, we're well positioned for opportunistic growth as an established top 20 servicer, and we continue to add partnerships, including new subservicing, as well as bulk and flow relationships, and have ample capacity to further leverage our platform. And now with that, I'll hand it over to Serena to discuss the financials.