Annaly Capital Management Inc.

Good morning and welcome to the first quarter 2024 Annalie Capital Management Earnings Conference Call. Today, all participants will be in a listen-only mode. Should you need any assistance during today's call, please signal for a conference specialist by pressing the star key followed by 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, you may press star then two. Please note that today's event is being recorded. I would now like to turn the conference over to Shawn Kensal, Director, Investor Relations. Please go ahead, sir.

Good morning, and welcome to the first quarter 2024 earnings call for Anna Lee 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 you're of. 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 referenced in today's call can be found in our first quarter 2024 investor presentation and first quarter 2024 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. Sweeney-Boston, Head of Agency, and Ken Adler, Head of Mortgage Service and Rights. And with that, I'll turn the call over to David.

Thank you, Sean. Good morning, and thank you all for joining us on our first quarter earnings call. Today, I'll briefly review the macro and market environment along with our first quarter performance. Then I'll provide an update on each of our three businesses and conclude with our outlook. Serena will then discuss our financials, after which we'll open the call up to Q&A. Now, beginning with the macro landscape, the first quarter of 2024 was characterized by surprisingly resilient economic data, a healthy labor market, and an uptick in inflation. Consequently, interest rates sold off modestly on the quarter as the market priced out roughly half of the rate cuts that were expected at the beginning of the year. Now, despite rising rates, risk assets performed well over the quarter as volatility declined and money flowed into both equity and fixed income markets. Banks also reemerged as modest buyers of treasuries and agency MBS in the first quarter, a welcome development given their absence over the past couple of years. Now, in addition, the Federal Reserve made it clear that it considers policy rates and balance sheet management to be separate tools as they have begun discussing slowing the pace of the Fed's Treasury securities runoff. We're encouraged by this development as this approach allows for a more gradual decline in bank reserves, thereby stabilizing liquidity, potentially reducing Treasury supply to the private sector, and strengthening banks' deposit growth. all positive for fixed income and agency MBS. Now, against this supportive backdrop, all three of our housing finance strategies performed well in the quarter, with production coupon agency MBS spreads roughly five basis points tighter, credit spreads 25 to 100 basis points tighter, and the MSR market experiencing modest multiple expansion. As a result, we delivered a 4.8% economic return for the quarter, the BAD at $0.64, and leveraged a quarter end of 5.6 turns. Now, as the second quarter has unfolded, continued strong economic data coupled with stalled progress on disinflation has driven a further repricing of forward rate expectations as well as an increase in volatility. This current risk-off tone has led to marginal spread widening across agency and credit and justifies our leverage profile, which is at its lowest level of the cycle. Now, notwithstanding lower leverage, prevailing return environment gives us confidence in the durability of the portfolio earnings profile, and we believe that our current dividend is appropriately set for 2024, given our expectations for earnings this year. Shifting to the businesses and beginning with agency, the portfolio ended the quarter modestly lower to accommodate growth in the residential credit and MSR businesses. We continue to gravitate up in coupon with our weighted average coupon increasing 20 basis points to 4.76%, reducing our holdings of 4% coupons and lower by over $5 billion in favor of predominantly 5.5% and higher. We continue to favor production coupons as they provide the widest nominal spreads and, as evidenced by their performance this past quarter, the best returns in a range-bound rate environment. They also stand to benefit from potential spread tightening should option costs decline due to a steeper yield curve or lower implied volatility. Our agency CMBS portfolio was largely unchanged over the quarter. Spreads in the sector tightened 10 to 15 basis points on continued broad-based demand, outperforming agency MBS in providing incremental excess returns while improving our overall convexity profile. As it relates to interest rate management, the notional value of our hedge portfolio declined slightly as we moved hedges out the curve, leading to a modest decline in our hedge ratio. As our existing front-end swap position has been rolling off, we've replaced that risk with hedges in the intermediate and long-end part of the yield curve, closely aligning our hedges with the interest rate risk of our assets. In addition, our increased allocation of swaps relative to treasuries that we discussed last quarter benefited our overall return given the widening in swap spreads during the quarter. The short-term outlook for Agency MBS has become somewhat more challenging as recent inflation reports have delayed the start of the cutting cycle and led to a pickup in volatility. However, we remain constructive on the sector given the potential of sustained bank demand and the expected upcoming reduction in Fed-Treasury runoff, factors that should be supportive of Agency MBS and were absent in the prior widening episodes. Meanwhile, hedge carry remains attractive with historically wide nominal spreads. Turning to residential credit, the portfolio ended the quarter at $6.2 billion in market value and $2.4 billion of equity. It comprised 21% of the firm's capital at quarter end. Resi credit spreads tightened meaningfully to start the year, given the support of fundamental backdrop, with AAA non-QM spreads 35 basis points tighter, and below IG CRTM2, 70 basis points tighter. The credit curve continued to flatten, as the issuance and supply of subordinate assets remained limited. Now, the growth in our portfolio was driven by our organic Onslow Bay strategy through increased whole loan purchases and retention of OBX securities. Given tightening spreads, we opportunistically reduced our CRT portfolio and other segments of our third-party securities holdings into strong demand. The Onslow Bay Correspondent Channel had another record quarter as we registered $3.7 billion of expanded credit locks in Q1, up 40% quarter over quarter. We settled $2.4 billion of loans, the vast majority of which were sourced directly via our Correspondent Channel. And our pipeline remains robust with $2 billion of locks at quarter end and continued momentum into the spring selling season. Most importantly, our credit discipline remains strong as our current pipeline is characterized by a 68 LTV and a 753 FICO with only 3% of our locks greater than 80 LTV. We were able to take advantage of the support of capital markets by pricing seven securitizations, totaling $3.3 billion in Q1, generating $328 million in assets for annually's balance sheet and low to mid double-digit returns. And subsequent to quarter end, we priced an additional non-QM transaction with retained assets exhibiting similar expected returns. And looking forward, the further expansion of the Onslaught Bay channel is positioned annually as a market leader in the residential credit market, allowing us to manufacture our own credit risk while retaining control over all aspects of the process. Shifting to our MSR business, our portfolio ended the first quarter at $2.7 billion in market value, representing $2.3 billion of the firm's capital. MSR transaction volumes continue to be elevated in the first quarter, given challenging originator profitability, while demand and pricing remain firm. Despite elevated supply, we were disciplined, finding better opportunity in relative value post-quarter end, and in early April, we committed to purchase just over $100 million in market value of a bulk package, which we expect to close in the second quarter. We're confident we've constructed one of the highest quality conventional MSR portfolios in the market, characterized by our industry-low 3.07% note rate and exceptional credit quality. Fundamental performance of our MSR portfolio has continued to outpace our initial expectations, with our holdings realizing a three-month CPR of 3%, rising float income given increased escrow balances, and minimal borrower delinquencies. And all of these factors have contributed to our MSR portfolio exhibiting highly stable cash flows and double-digit returns. Now, given ANALY's diversified strategy and ample liquidity position, we currently do not utilize a significant amount of recourse leverage on the MSR portfolio, as it is advantageous to supplement leverage with lower-cost agency repo. However, with $1.25 billion of committed warehouse facilities, we're positioned for additional MSR growth should pricing be favorable. Now, looking ahead, we're optimistic about the outlook for our three businesses, and we continue to see attractive risk-adjusted returns across each of our investment strategies. However, bouts of volatility remain a key risk, as we have been reminded in recent weeks, and we remain vigilant. And we continue to be well-prepared, given our conservative leverage position in capital structure. our ample liquidity, and a diversified capital allocation strategy that can outperform across different interest rate and macro landscapes. And while we continue to make progress in allocating incremental capital towards our residential credit and MSR strategies, we like our current capital allocation and are disciplined in pricing and selective in the sourcing of assets. And overall, we're proud of the unique platform we've built with three established and fully scaled businesses on our balance sheet, And we believe this model can continue to deliver superior returns relative to sector, just as we have over the past couple of years. And now with that, I'll hand it over to Serena to discuss our financials.