Annaly Capital Management Inc.

Good day and welcome to the Q2 2025 Annually Capital Management Earnings Conference Call. 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 Canfield, Director, Investor Relations. Please go ahead.

Good morning, and welcome to the second quarter 2025 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 factor 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 second quarter 2025 investor presentation and second quarter 2025 financial supplement, 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, everyone, and thank you all for joining us for our second quarter earnings call. Today, as usual, I'll briefly review the macro and market environment, as well as our performance for the quarter. Then I'll provide an update on each of our three businesses, ending with our outlook. Serena will then discuss our financials before opening up the call to Q&A. Now, starting with the macro landscape, the U.S. economy has persevered through considerable trade-related uncertainty and resulting market volatility in recent months. Growth is likely to run around 1% annualized for the first half of the year. well below the pace of recent years, but is arguably outperforming post-liberation day expectations. Employers hired nearly 450,000 workers in the second quarter, which has lowered the unemployment rate marginally to 4.1%. And overall hiring has slowed compared to recent years, but the labor market is relatively balanced and layoffs have been somewhat muted. Inflation, meanwhile, likely ran at the slowest level in the past three quarters as the continued decline in service sector inflation offset firming in goods prices, some of which likely tariff-related. The economy and the labor market's resilience has affirmed the Fed's current wait-and-see stance, with the majority of policymakers indicating a preference for more data to assess the impact of tariffs on inflation. We do expect the Fed to ultimately deliver on the two interest rate cuts projected for 2025 at the last FOMC meeting. Given the consensus view among policymakers, the current interest rate levels remain somewhat restrictive. As it relates to markets, a positive reversal in sentiment as the second quarter progressed helped risk assets recover from their sharp underperformance in early April. and financial conditions have reached some of the most accommodative levels since the onset of the hiking cycle in 2022. Now, despite improvement in markets, longer-term Treasury yields remain elevated as the market will need to continue to fund large deficits, particularly with the passage of the recent tax and spending bill. Swap spreads have also been unable to reverse the majority of their April tightening, which left agency MBS spreads 5 to 10 basis points wider on the quarter. Now, against this backdrop, we delivered an economic return of 0.7 percent for the second quarter, while generating earnings available for distribution of 73 cents, once again out-earning our dividend. And Q2 marked the seventh consecutive quarter of generating a positive economic return for our shareholders, demonstrating the diversification benefit of our three fully scaled housing finance strategies. Year to date, we've delivered a 3.7% economic return with a total shareholder return of over 10% through quarter end. And further to note, we raised just over $750 million of accretive capital in the second quarter through our ATM program, which was predominantly deployed in the agency sector. and leverage increased modestly to 5.8 terms in light of the increased allocation to agency. Now, turning to our investment strategies and beginning with agency, our portfolio ended the quarter at nearly $80 billion in market value, up 6% quarter-over-quarter. After the early April volatility, market conditions for agency MBS improved. Rates were range-bound. The yield curve remained relatively steep. Implied volatility declined. and comparable fixed income assets tightened given the favorable risk sentiment in markets. Agency MBS did lag in the recovery as demand from overseas and the bank community has remained muted, but we do think that these participants could become more active should the Fed resume cutting or as expected regulatory reform materializes. With respect to our activity, early in the quarter, we managed our duration through the tariff-driven volatility with little adjustment to our agency portfolio. And as markets normalized, we steadily added agency MBS in attracting spreads in line with our capital raising, growing our agency portfolio by roughly $4.5 billion in notional terms. Purchases were fairly evenly split across 4.5s, 5.5s, and 6s, and we marginally preferred pools over TBAs, as repo financing was slightly more attractive than dollar roll carry. We continue to operate within a narrow interest rate risk band, given the volatility we've experienced thus far this year. And in Q2, all asset purchases were hedged, and duration extension was prudently managed due to the rise in long-end rates. Within our hedge portfolio, we remain in favor of holding swaps against shorter-term risk due to the positive carry profile. while maintaining a more balanced mix of Treasury and swap exposure in the intermediate and long end. Swap spreads tightened significantly during the quarter, and forward markets are signaling further tightening in the months ahead. If that changes, however, we can nimbly adjust our hedges between swaps and Treasury risks. But for now, maintaining a roughly 60-40 hedge allocation between swaps and Treasuries is more favorable in our view. Overall, we remain optimistic on the agency sector as fundamentals are sound and there are several potential catalysts out the horizon to improve agency MBS technicals. Additionally, we're encouraged by the administration's recent statements regarding GSC reform, noting that any privatization efforts will preserve the implicit guarantee and aim to tighten MBS spreads, removing a significant market concern. Shifting to residential credit, Our portfolio was relatively unchanged at $6.6 billion in market value and $2.4 billion of capital. The resi credit sector broadly tracked corporate credit over the quarter, widening in sympathy with other risk assets in early April, only to finish the quarter with spreads roughly unchanged. Now, despite the turbulence in the first half of the quarter, the non-agency market demonstrated its durability with over $43 billion of gross issuance on the quarter. Our Onslow Bank platform had its highest quarterly securitization activity to date, closing $3.6 billion across seven transactions, and we priced an additional two securitizations in July, bringing cumulative 2025 activity to $7.6 billion across 15 transactions, generating $913 million of high-yielding proprietary assets for Analy and our joint venture. Onslow Bay's expanded credit correspondent channel also remained the industry leader, generating $5.3 billion of locks and funding $3.7 billion of loans over the quarter. And this is despite tightening our credit standards once again, given some of the headwinds we are seeing in housing. Our current lock pipeline has a 764 weighted average FICO, a 68% LTV, and is over 95% first lien. Regarding the housing market, Available-for-sale inventory continues to increase as affordability remains challenged given elevated mortgage rates, high home prices, and increased property taxes and insurance premiums. While housing affordability has been an issue for the past three years, we've entered a buyer's market as sellers now materially outweigh prospective homeowners. Higher supply has led to four consecutive months of negative HPA, according to Zillow, and we expect the majority of the housing market to turn modestly negative year over year in the near term. Now, balancing the deceleration of the housing market is a stable labor market, low consumer delinquencies, expansionary fiscal policy, and elevated asset pricing, including equity markets. We remain well positioned in this environment, as we control all aspects of our loan manufacturing strategy, and the resulting assets have minimal leverage. Notably, over 70% of our residential credit exposure is represented by retained OBX securities and residential whole loans collateralized with high-quality borrowers. Moving to our MSR business, the portfolio ended the second quarter unchanged at $3.3 billion in market value, comprising $2.6 billion of the firm's capital. While bulk trading activity was healthy in the second quarter, we were measured with respect to new purchases as MSR valuations remained firm, acquiring approximately $30 million in market value. Our MSR valuation improved very modestly quarter over quarter, driven by the steepening in the yield curve, lower implied volatility, and strong observed bulk execution. Solid fundamental performance, the portfolio persisted this past quarter with a three-month CPR of 4.6%, serious delinquencies unchanged at 50 basis points, and escrow balances up 6% year over year, which helped to drive increased float income. And the portfolio continued to generate well-defined durable cash flows given the 3.24% note rate with the average borrower at 350 basis points out of the money. As we move forward, we remain focused on furthering the build-out of our flow servicing relationships and capabilities and expanding our subservicing and recapture partnerships, which should allow us to capitalize on MSR opportunities across both the bulk and flow channels as relative value dictates. Now, to conclude with our outlook, we maintain conviction that our portfolio will continue to generate strong risk-adjusted returns in the current environment. We've been encouraged by declining macro volatility as of late, and we see further benefits to our portfolio in the mortgage sector should expected Fed cuts materialize. In the near term, we expect to be overweight agency given historically attractive spread levels, but over the long term, we'll strategically grow our residential credit and MSR portfolios as we look to expand on slow-based presence across the housing finance sector. And as always, we remain flexible in the current investing climate with our historically low leverage and ample liquidity. We're well positioned as we enter the second half of the year. With that, I'll turn it over to Serena to discuss the financials.