Annaly Capital Management Inc.

Good morning and welcome to the third quarter 2024 earnings call for Annali Capital Management. All participants will be in 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 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 third quarter 2024 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 GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our third quarter 2024 investor presentation and third 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. 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. Thank you all for joining us for our third quarter earnings call. Today, I'll briefly review the macro and market environment along with our performance during the quarter. Then I'll provide an update on each of our three businesses and end with our outlook. Serena will then discuss our financials, after which we'll open the call up to Q&A. Now, starting with the macro landscape, financial markets benefited from both the Federal Reserve beginning the long-anticipated cutting cycle, as well as the continued robust pace of growth exhibited by the U.S. economy. With respect to the Fed, as all are aware, policy rates were lowered by 50 basis points in September, in turn ending 16 months of 5% plus short-term interest rates. And policymakers signaled that they will continue to ease over time as current rates remain restrictive, with the pace and extent of easing dependent on economic data. Now, the change in monetary policy was driven both by the labor market moving into better balance as hiring slowed over the summer, as well as the continued normalization of inflation with core PCE likely to run only slightly above 2% annualized for the third quarter. The market's pricing of additional rate cuts has led to a steeper yield curve, increasing the attractiveness of fixed income assets and agency MBS in particular. In addition, interest rate volatility declined over the quarter to the lowest level seen since the onset of the March 23 regional banking crisis, though it remains meaningfully above pre-COVID average levels. Meanwhile, economic growth has been resilient with estimates for Q3 GDP roughly in line with the 3% annualized expansion in the second quarter. Now, these developments have been supportive of our diversified housing model, as seen in the performance we delivered on the quarter. We generated an economic return of 4.9% for Q3 and 10.5% year to date, and our earnings available for distribution, again, exceeded our dividend. Economic leverage ticked down slightly to 5.7 turns, which we anticipate maintaining over the near term. And also to note, our performance in the constructive backdrop for Analyze investment strategies allowed us to raise $1.2 billion of accretive common equity since the beginning of the third quarter through our ATM program. The environment to deploy capital remains attractive, and the market value of all three of our business lines increased quarter over quarter. Notably, roughly 40% of the proceeds raised were from negotiated sales following investor reverse inquiries, underscoring the value proposition and associated institutional demand. Now, turning to our portfolios and beginning with agency MBS, in light of the capital raised, our agency portfolio grew by just over $4 billion notional, with the remaining increase in market value attributable to price appreciation. As mortgage rates declined over the quarter, prepayment concerns weighed on generic higher coupons, while lower coupons and specified pools with prepayment protection outperformed. This was less of a concern for us as the focus of our methodical migration up in coupon over the past two years has been on high-quality specified pools. For example, our sixes and higher represent roughly a quarter of our portfolio, and within these coupons, only a small fraction of our pools are backed by generic collateral. and approximately 70% have what we would characterize as high-quality prepayment protection. And the benefits of our collateral selection were best seen in the latest prepayment report. Now, as the third quarter unfolded and higher coupons lagged into the rally, particularly in September, we did rotate an additional 5% of the portfolio from intermediate coupons to higher coupon collateral on a relative value basis. Now, as it relates to our hedge portfolio, we maintain conservative interest rate exposure throughout the quarter while benefiting from a steepening bias. As rates rallied, we proactively managed our rate exposure as mortgage durations contracted, but ended the quarter with minimal duration, thus helping prepare us for the recent sell-off as the fourth quarter has unfolded. Now shifting to residential credit, the portfolio ended Q3 at $6.5 billion in economic market value with $2.3 billion of dedicated capital representing 18% of the firm's equity. The market value of the portfolio increased by $535 million quarter over quarter, driven by the continued growth of our correspondent platform with our whole loan and retained OBX securitization portfolio increasing by $640 million. Residential credit spreads were range bound during the quarter with new issue AAA non-QM securities trading in the 10 basis point range, providing a supportive backdrop for our OBX securitization platform. Now capitalizing on the firmness in credit spreads, we priced six securitizations totaling 3.3 billion in UPB since the beginning of the third quarter and have now priced 18 securitizations totaling 9.4 billion in 2024. Maintaining Onslow Bay is the largest non-bank sponsor in the residential credit market and second largest overall. Year-to-date, these transactions have led to the organic creation of over $1.3 billion in market value of retained OBX securities across Annalie and our joint venture with projected ROEs on deployed capital of 12% to 15%. Our correspondent channel produced record volumes again in Q3 across both locks and fundings at $4.4 billion and $2.9 billion, respectively. And we have now achieved 11 consecutive months of expanded credit lock volume in excess of $1 billion per month. And the momentum of the channel continued into Q4 as we have a current locked pipeline of $2.2 billion with strong credit characteristics and limited layer risk representing a 754 weighted average FICO and a 68 LTV. Our disciplined focus on underwriting sound credit risk and our proactive asset management has led to Onslow Bay's non-QM securitizations having the lowest delinquencies across the top 10 issuers in the market, and while the overall serious delinquency rate on the entire GAAP portfolio remains nominal at under 1.4%. And our resi business is very well positioned given the optionality of our ever-growing correspondent channel and our ability to manufacture high-yielding assets across all spread environments. Now moving to the MSR business, our portfolio ended the third quarter at $2.8 billion in market value, utilizing $2.5 billion in equity, representing 21% of the firm's capital. Our MSR holdings, including unsettled acquisitions, were up modestly as we committed to purchase one bulk transaction comprising $125 million in market value, which we expect to close before year end. Notwithstanding the 80 basis point decline in mortgage rates on the quarter, the valuation on our MSR portfolio decreased minimally to a 5.6 multiple, highlighting the durability of a portfolio that is 300 basis points out of the money. Fundamental performance of the portfolio continues to be strong with a three-month CPR of 3.9%, and serious delinquencies are near 45 basis points. Deposit income remains elevated given the shape of the curve, and increased competition in the subservicing market should benefit financial participants like Annaleigh. And on the strategic front related to MSR, Annaleigh's long history of formulating value-add partnerships was again on display this quarter. as we announced a subservicing partnership with Rocket Mortgage in early October. Annalee's size and the stability of our capital helped develop this relationship, and we're pleased to be Rocket's first agency MSR subservicing partner. Rocket is expected to begin servicing loans for us as early as December, And this collaboration should allow Anneli to benefit from Rocket's best-in-class recapture capabilities, and we expect it to increase our competitiveness in purchasing new MSR. And similar to our existing subservicing agreements, a Rocket agreement allows Anneli to participate in the gain on sale of a loan refinanced, helping to preserve and protect our portfolio. This new partnership in conjunction with our existing recapture agreements should allow Analeigh to leverage best in class industry partners without taking on the operational leverage and earning cyclicality of an originator. Now, lastly, as it relates to our outlook, we remain optimistic that our business model is well positioned with the Fed's cutting cycle now officially underway and the potential realization of a soft landing. We do, however, remain disciplined in our management of the portfolio concerning leverage, liquidity, and duration exposure given the Fed's meeting-to-meeting dependence in the upcoming presidential election. We remain in a very attractive environment for agency MBS given elevated investor inflows, a steeper yield curve, and an improving technical backdrop. Our Onslow Bay Home Loan Correspondent Channel has continued to bring in record volume and allows us to create proprietary assets not available to the broader market. Our ability to create industry-leading partnerships within MSR and our low-growth SWAC portfolio have created differentiated advantages. And collectively, we have all the pieces in place across our residential housing finance businesses to deliver stable returns, as demonstrated by our 25% economic return realized over the past two years. And now with that, I'll hand it over to Serena to discuss the financials.