Annaly Capital Management Inc.

Good morning and welcome to the third quarter 2023 conference call for Annalie Capital Management. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And 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 Mr. Sean Kinsel, Director and Investor Relations. Please go ahead, sir.

Good morning, and welcome to the third quarter 2023 earnings call for Annaleigh 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 GAAP to non-GAAP measures is included in our earnings release. Content reference in today's call can be found in our third quarter 2023 investor presentation and third quarter 2023 supplemental information, both found under the presentation section of our website. Please also 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. Srinivasan, 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 thanks for joining us today. I'll begin with a discussion of the macro and interest rate landscape, and then I'll review the current operating environment, including our portfolio activity and positioning. Now, as all are aware, the third quarter was characterized by a sharp rise in interest rates as the 10-year Treasury yield rose nearly 75 basis points. The move was in part driven by strong economic data, the Fed's messaging of higher for longer, rising commodity prices, and the sell-off in global yields. The main driver for higher yields, however, has been a shift in perception around U.S. government debt that began with the August Treasury refunding announcement as after increasing issuance following the debt ceiling deal in early June, Treasury began to term out debt above market expectations in August, all while signaling further increases in coming quarters. This higher supply has been met with limited demand as the Fed continues to run down its balance sheet. Banks remain sidelined given the sizable unrealized losses on their bond portfolios. The foreign central bank buying has been lukewarm at best. Consequently, money managers, pensions, and ultimately households are the main source of demand for treasuries, and by extension, agency MBS. However, thus far, households are saving less than historical averages, and savings are largely being allocated to short-term fixed income instruments, best seen through the record $6 trillion in money market mutual fund holdings, contributing to the sharp sell-off and curve steepening in rates markets in recent weeks. Now, as it relates to the broader U.S. economy, growth has been supported by strong consumption and sound investment activity, while the labor market remains very healthy. Inflation has continued to moderate. Looking forward, it appears that a number of headwinds are building for the economy, including households shrinking excess savings, geopolitical risks, and the tightening in financial conditions as of late. However, hard economic data has shown little evidence of a meaningful slowdown thus far. Now, all told, higher term premium and the continued elevated volatility contributed to significant underperformance in agency MBS during the quarter, which was exacerbated by a pullback in demand from the money manager community, who remain the primary buyers of MBS. As a result, spreads widened roughly 15 to 20 basis points on the quarter, with higher coupons outperforming lower coupons as investors sought to optimize carry and duration profiles. These factors weighed on our performance, resulting in a negative 8.8% economic return for the quarter, and our leverage ended Q3 at 6.4 turns. With respect to portfolio activity, the notional value of our agency holdings was relatively unchanged given the flexibility from our reduction in leverage heading into the third quarter. We continued to migrate up in coupon, and we favored specified pools over TBAs in order to improve the convexity profile while benefiting from lower financing costs. We also grew our agency CMBS portfolio by roughly $500 million. From a relative value perspective, agency CMBS provide attractive and stable cash flows without the negative convexity of MBS, not to mention a more favorable technical backdrop. As it relates to hedging, as the hiking cycle comes to an end, we anticipated the shift from protecting the front end to protecting the long end. And therefore, over 75% of our hedge duration remain in the 7 to 20 year part of the curve, matching our asset duration profile. We were active in adding longer end treasury futures early in the quarter. And also to note, as front end swaps matured, we replaced a portion of those hedges further out the curve. We anticipate we'll reach a point in the near future where it will be advantageous to add interest rate exposure, but for the time being, we remain conservatively positioned. Now, MBS valuations look very attractive relative to other high-quality fixed-income alternatives, as well as on a standalone basis, which we expect will improve investor sentiment and help to normalize spreads over the medium term. However, our intention is to remain disciplined in terms of managing leverage as MBS find their equilibrium in the current environment. Returning to residential credit, spreads across the sector were resilient during the quarter, driven by limited issuance, supportive housing fundamentals, and a still generally healthy borrower. Benchmark CRT below investment grade spreads tightened 50 to 70 basis points on the quarter, and AAA non-QM spreads were flat to 10 basis points tighter, with non-QM securitization cost of funds relatively stable. Our RESI portfolio ended the quarter at $5.3 billion in market value, up approximately $315 million, predominantly attributable to an increase in our whole loan portfolio, as we settled $1.5 billion of expanded credit loans in the third quarter, of which 80% was sourced directly from our correspondent channel. The continued expansion of the Anzal Bay correspondent channel allowed us to more than double our Q2 whole loan production while maintaining our conservative lending standards. Q3 settlements are characterized by 752 average FICO, 69% LTV, and limited layered risk. Our securitization platform issued two non-QM transactions totaling $812 million during the quarter, which generated $98 million of retained assets. In post-quarter end, we closed another non-QM deal, continuing our programmatic issuance while locking in term financing and generating a mid-teens ROE. Now, OBX remains the largest non-bank securitizer of new origination collateral, with 2023 year-to-date issuance of nearly $4 billion. And with over $3.5 billion of dedicated facilities across Annali in our joint venture, we can efficiently finance our whole loan position via securitization or warehouse financing, which Serena will expand on. Now, lastly, within mortgage servicing rights, our portfolio grew by $90 million in the third quarter and $480 million year-to-date, ending September at $2.3 billion in market value and $153 billion in principal balance. And Onslow Bay is now a top 10 non-bank servicer, servicing roughly 2% of the agency market. While bulk trading levels declined on the quarter, the MSR market remains active and we expect supply to be elevated over the next few quarters given broad activity in the sector and continued pressure on non-bank originator profitability. As we've discussed in the past, Annalie is uniquely positioned to acquire MSR from originators given our certainty of capital as well as our non-competitive business strategy. Now, our holdings continue to benefit from our low no-rate, high credit quality asset profile, which drove the expansion of our valuation multiple on the year. Our MSR cash flows remain highly stable, as evidenced by below 4 CPR prepayment speeds and minimal delinquencies, both consistent with the prior quarter. Our capital allocation MSRs of quarter end was 19%, which brings us close to our long-term target allocation, though we maintain capacity to increase our holdings further given minimal leverage currently and our additional warehouse capacity. We've also expanded our MSR acquisition capabilities, and we can now participate in GSE flow programs to supplement our bulk execution strategy when attractively priced. Now, before handing it off to Serena, I wanted to provide one final note as it relates to where we sit today. Yields, and notably real yields, are at their most attractive levels in more than 15 years, and agency MBS spreads are historically wide. Our residential credit and MSR strategies are fully scaled and established leaders in their respective sectors and provide strong complementary returns to our core agency business as has been exhibited over the recent past. Now, given the interest rate and spread backdrop in similar periods throughout this company's history, Annalie has generated very strong returns. And we have the size, scale, and liquidity to successfully navigate this environment and capitalize on opportunities as they arise. And now with that, I'll hand it over to Serena to discuss the financials.