Annaly Capital Management Inc.

Good morning, everyone, and welcome to the Q4 2024 Annually Capital Management Earnings Conference Call. All participants will be in a listen-only mode. If you need assistance, please see 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 and then one on your touchtone telephones. To withdraw your questions, you may press star and two. Please also note today's event is being recorded, and at this time, I'd like to turn the floor over to Sean Pencil, Director of Investor Relations. Sir, please go ahead.

Good morning, and welcome to the fourth quarter 2024 earnings call for Annalie 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 fourth quarter 2024 investor presentation and fourth 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 Co-Chief Investment Officer, Serena Wolf, Chief Financial Officer, Mike Fania, Co-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, and thank you all for joining us on our fourth quarter earnings call. Today, I'll briefly review the macro and market environment, along with our performance during the fourth quarter and the full year, And then I'll provide an update on each of our three businesses and end with our outlook for 2025. And Serena will then discuss her financials, after which we'll open the call up to Q&A. Now, starting with the macro landscape, the U.S. economy continued to perform well in the fourth quarter, recording strong growth on the back of healthy consumption. The labor market strengthened in November and December, reducing concerns of a more meaningful slowdown. Given the health of the economy and the consumers' continued willingness to spend, inflation remained elevated in Q4, though the most recent December data did show signs of improvement. During the quarter, interest rates moved contrary to market expectations from September when the onset of the Federal Reserve cuts was seen as supportive of rates markets. The yield curve subsequently bear steepened in Q4, with 10-year Treasury yields rising nearly 80 basis points as the stronger economic growth and inflation data, combined with increased attention to the long-term budget outlook, led to a meaningful rise in term premiums. An additional factor contributing to higher yields was the shift in tone from the Fed during the quarter, as officials argued that after 100 basis points of cuts, the Fed funds rate is now less restrictive than during the summer, and further downward adjustments will depend on incoming data and progress towards lower inflation. In line with Treasury yields, primary mortgage rates increased to nearly 7%, which reversed some of the pickup in housing demand when mortgage rates touched as low as 6% in late Q3. Available-for-sale housing supply continues to slowly increase, with current levels of inventory now only 25% lower than pre-pandemic averages. But despite these factors, home prices on a national level continue to increase modestly. Against this backdrop, our portfolio generated an economic return of 1.3% for the fourth quarter, with all three businesses contributing positive returns. In Annalie's full year, 2024 economic return of 11.9% underscores the strength and diversity of our housing finance portfolio in light of volatile fixed income markets. Economic leverage decreased to 5.5 turns on the quarter, driven by increased capital deployment within our lower-levered credit and MSR businesses, including positioning the portfolio for $385 million in market value of MSR that is anticipated to settle in Q1. Despite our lower economic leverage, earnings available for distribution rose $0.06 to $0.72 on the quarter, led by lower financing costs given the commencement of the Fed cutting cycle, as well as a steepening of the yield curve. And lastly, we raised over $400 million of accretive common equity through our ATM in Q4, bringing the total capital raised in 2024 to $1.6 billion. Now, turning to our investment strategies and beginning with agency, the 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. We continued to migrate up in coupon in the quarter by primarily rotating into sixes and six-and-a-halves, modestly increasing our weighted average coupon to 5%. Our allocation of TBAs remained minimal given elevated implied role financing rates that prevailed in Q4 and a preference for better convexity with specified pools. Now, agency MBS began the quarter on weaker footing with spreads widening in late October as markets experienced higher rates and increased volatility leading up to the election and It spreads reverse course post-election and tightened as agency MBS participated in a positive risk sentiment displayed across fixed income and equities. MBS spreads on average ended the quarter a couple of basis points wider, but performance varied significantly across the coupon stack. Five and a halves and higher outperformed, while intermediate coupons, the primary outperformers in the third quarter, widened by half a point. Accordingly, our portfolio benefited in Q4 from our ongoing up in coupon allocation as approximately 50% of our holdings are 5.5% and higher. Now, as it relates to our hedging strategy, the portfolio's duration extension was proactively managed by increasing hedges at the long end of the yield curve, predominantly through Treasury futures. The hedge position remains skewed toward the long end, where we anticipate a greater risk of yields moving higher, while the front end appears to be more anchored at current levels. As interest rate volatility has remained elevated, we plan to maintain a conservative hedge profile while preserving a mix of swap and treasury hedges across various points on the yield curve, leveraging the advantages of a diversified and liquid hedge portfolio. And it's worth noting that agency MBS proved much more resilient during the fourth quarter than other recent periods of similar increases in rates, and this dynamic was driven by lower supply and increased demand for MBS as the reduction in financing rates improved MBS carry. And the combination of better technicals coupled with an ongoing cutting cycle should support a narrower range of MBS spreads going forward, which remain attractive. Now, moving to residential credit, the 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. The portfolio grew approximately $500 million quarter-over-quarter as we continued to prioritize our organic strategy, increasing our whole loan and retained OBX assets by $730 million, while decreasing our allocation of third-party securities given relatively tight credit spreads. Market conditions for securitization sponsors remain favorable in Q4, as we recorded our tightest AAA spread of the year in our last deal of 2024 at 115 basis points over treasuries. We closed on four securitizations, totaling $2.3 billion in Q4, bringing our cumulative issuance on the year to 21 transactions, totaling $11 billion, which created $1.1 billion of proprietary assets for Annali in 2024. Our securitization volume continues to be driven by growth in our conduit as we settled $3.9 billion through the channel, a 32% increase quarter over quarter, and strong momentum within our lock volumes also continued as we processed $5.4 billion of locks on the quarter, a 24% increase over Q3. On the year, we closed $11.7 billion of residential whole loans through the correspondent channel, with total loan acquisitions of $13 billion. Our locked pipeline remained robust at year end, as we had $2.3 billion of high credit loans in the pipeline, with a weighted average FICO of 757 and a CLTV of 68%. As our whole loan production continues to increase, credit discipline remains top priority, as evidenced by the OBX shelf continuing to report the lowest delinquencies out of the top 10 largest non-QM issuers. And Onslow Bay's positioning in the market as an industry-leading non-agency correspondent and one of the largest, most liquid residential credit securitization sponsors should allow us to continue to manufacture high-quality assets with double-digit ROEs despite tighter credit spreads. Now, turning to the MSR business, our portfolio ended the fourth quarter at $3.3 billion in market value, including unsettled commitments. which is a roughly 25% increase year over year. MSR ended the year representing 19% of the firm's capital with $2.5 billion of dedicated equity. During the quarter, we committed to purchase nearly $425 million in market value with a $28 billion principal balance and a weighted average coupon of 3.67%. We onboarded 58 billion UPB of MSR throughout the year, ending 2024 as the third largest buyer of conforming MSR in the market. While supply declined by nearly 40% in Q4, we anticipate that MSR bulk activity will stay elevated relative to historical levels as the origination market remains challenged with high mortgage rates, tepid origination volumes, and compressed gain-on-sale margins. The valuation on our MSR portfolio increased 3% to a 5.78 multiple on the quarter, resulting from the rise in mortgage rates, a steeper yield curve, and modestly tighter spreads. Fundamental performance within the MSR portfolio continues to outperform our expectations with actual realized prepayment speeds and delinquencies lower than initially modeled, while the competition for deposits and resulting flow income has been higher than anticipated. Portfolio paid 3.7 CPR in the quarter, with current serious delinquencies approximately 50 basis points. And with a weighted average note rate of 3.2%, our portfolio's cash flows should remain durable. While we continue to find lower coupon MSR more attractive in the current environment, The expansion of our flow business and our leading recapture relationships provide us the optionality to invest across both current coupon as well as low note rate MSR. Now, to conclude with our outlook, we believe each of our three strategies is well positioned heading into the new year. Agency MBS continues to exhibit attractive spreads on both an absolute and relative basis to competing asset classes. further supported by a better balanced supply and demand picture and improved carry. Our residential credit business is a clear market leader with strong momentum for continued growth after another year of record loan production and securitization volume, and we expect the non-QM origination market to grow in 2025 with Onslow Bay well-positioned to further expand our market share capabilities. Within MSR, our deep capital base, low leverage, and partnerships with originators and servicers all support further growth of the portfolio. And we expect the NLE platform to continue to outperform in the current operating environment as our diversified strategies, conservative leverage, and ample liquidity are key differentiators. And now lastly, before I turn it over to Serena, I wanted to congratulate Mike Fania on being named Co-Chief Investment Officer. Over the past two years as Deputy CIO, Mike has played a critical role in our Portfolio Management Committee, which oversees all three of our investment strategies. I look forward to continuing to work closely with Mike and our other investment leaders to manage our portfolios and further our leadership across all aspects of housing finance. And now with that, I'll hand it over to Serena to talk about the financials.