Good morning and welcome to the Q2 2022 Annaly Capital Management earnings conference call. Today all participants will be in a listen-only mode. Should you need assistance during today’s call, please signal for 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. If you would like to withdraw your question, please press star then two. At this time, I would like to turn the conference over to Sean Kensil, Investor Relations. Please go ahead, sir.

Good morning and welcome to the second quarter 2022 earnings call for Annaly Capital Management. Any forward-looking statements made during today’s call are subject to certain risks and uncertainties, including with respect to COVID-19 impacts, 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. As a reminder, Annaly routinely posts important information for investors on the company’s website, www.annaly.com. Content referenced in today’s call can be found in our second quarter 2022 investor presentation and second quarter 2022 financial supplement, both found under the Presentations section of our website. Annaly intends to use our webpage as a means of disclosing material non-public information for complying with the company’s disclosure obligations under Regulation FD, and to post and update investor presentations and similar materials on a regular basis. Please note this event is being recorded. Participants on this morning’s call include David Finkelstein, President and Chief Executive Officer; Serena Wolfe, Chief Financial Officer; Ilker Ertas ,Chief Investment Officer, and Mike Fania, Head of Residential Credit. With that, I’ll turn the call over to David.

Thank you Sean. Good morning everyone and thanks for joining us for our second quarter earnings call. Today I’ll review the macroeconomic and housing market backdrop, our performance during the quarter, and then provide an update on our broader strategic direction as we begin the second half of the year. Ilker will then discuss our portfolio activity in more detail, followed by Serena who will go over our financial results for the quarter. Starting with the macro landscape, as all are aware, the first half of 2022 has been an exceptionally challenging investment environment. Very high inflation, geopolitical uncertainty, and the fastest pace of monetary policy tightening in recent history led to broad-based deterioration across asset classes. Despite forecasts for inflation to peak this spring, headline CPI climbed through the quarter, reaching 9.1% year-over-year in June. Meanwhile, tight labor markets supported healthy consumption, making it increasingly clear economic activity was too strong for inflation to slow meaningfully. In respond, the Federal Reserve hiked 125 basis points in the second quarter and another 75 basis points just yesterday. The hawkish Fed and markets pricing an additional 100 basis points of rate hikes for 2022 in June relative to March led to the largest quarterly tightening of financial conditions since the onset of the financial crisis. Economic activity now appears to be slowing, which can best be seen by the decline in activity in interest rate sensitive sectors, such as housing. Given the importance of the housing market to our business, I want to spend a moment on the outlook for single family housing. Home prices have continued to risk sharply, appreciating over 10% the first five months of the year, according to the Case-Shiller Index. Housing activity, however, has slowed recently as the highest mortgage rates since 2008 and 40% cumulative…

Thank you David. As you had discussed, volatility in the fixed income market persisted throughout the second quarter with a continued sell-off in rates and underperformance in risk assets. Agency MBS widened 20 to 30 basis points as supply remained elevated, while on the demand side the Fed began reducing its balance sheet and banks were sellers on the quarter, leaving money managers as the primary buyer of MBS. The largest buyers of MBS have shifted from being price agnostic and yield-based - the Fed and the banks respectively, to investors who are more focused on nominal and option-adjusted spreads. Mortgage underperformance has been closely tied to the rising interest rate volatility, which outside the short-lived spike in March 2020 is at the highest levels since 2009. In the agency universe, a reversion of the trend in the first quarter lowered coupons underperformed as they were weighed down by fears of potential sales from the Fed and investors gravitated towards wider spreads and increased carryover in higher coupons. Specified pools outperformed TBAs, attributable to improved convexity protection from the extreme levels of realized interest rate volatility, a worsening of the TBA deliverable due to higher average loan sizes, and TBA growth softening over the course of the quarter as new production replenished the float coupons. During the quarter, we kept the size of our agency portfolio relatively stable while we continued to rotate up in coupon, reducing our holdings of 2s through 3s by nearly $16 billion in favor of 3.5s, 4 and 5s. The technical decision of rotating up in coupon reduced our spread duration and improved the earnings in the portfolio. In lower coupons, we maintain a significant portion in specified pools, notably lower loan balance, credit impaired and faster services stories, which have historically prepaid rapidly in…

Thank you Ilker. Today I will provide brief financial highlights of the quarter ended June 30, 2022. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. To set the stage with some summary information, our book value per share was $5.90 for Q2 and we generated earnings available for distribution per share of $0.30, ample coverage of our dividend. Book value decreased by $0.87 per share for the quarter primarily due to a continuation of themes referenced in Q1; that is, higher rates and spread widening and the related declining valuations on our agency position. Agency and TBA valuations were down $2.18 per share on the prior quarter. GAAP net income of $0.55 per share and our multi-faceted hedging strategy continued to support book value, providing a partial offset to the agency declines mentioned above with swaps, future and MSR valuations contributing $1.25 per share to the book value during the quarter. MSR valuations moderated in comparison to Q1 but were valued $0.06 per share higher at the quarter end that in the prior quarter. After combining our book value performance with our first quarter dividend of $0.22, our quarterly economic return was negative 9.6%. As noted earlier, the portfolio generated EAD per share of $0.30. Earnings continued to be strong, resulting from high dollar roll income, increasing MSR net servicing income, reduced amortization due to lower CPRs, and a benefit from our swaps portfolio as it turned to a net receipt position during the quarter on higher short term rates. However, EAD was meaningfully aided this quarter by an increase in specialness and dollar rolls, primarily driven by a scarcity of TBA-type collateral and newer higher rate production…

Today’s first question comes from Bose George with KBW. Please proceed.

Hey everyone, good morning. Can I get your book value quarter to date? I don’t think you mentioned that in the prepared remarks.

Sure Bose, good morning. Book is up 4% as of yesterday, and this morning, post-Fed follow-through as well as GDP, it seems as though there’s very positive momentum.

Okay, great. Thanks. Then in your hedges, your treasury future position continues to increase relative to swaps. Can you just discuss the benefits of futures versus swaps, and then just from an accounting standpoint, is there anything we should think about in terms of how they flow through the P&L?

Yes, that’s a good question, Bose. With respect to an outsized position in futures relative to historical, it’s about liquidity and better fit with the agency portfolio. To your point with respect to accounting considerations, and Serena mentioned that our swap position turned to a net receive where we generated income in Q2, and we expect that to grow given higher short rates, and as a consequence, the futures position does not flow through EAD. There is an economic benefit much like there is with swaps, but it doesn’t flow through EAD, and so as a consequence, EAD may temporarily underestimate the economic earnings of the portfolio.

Okay, great, but I guess is there any way to sort of quantify that, or just--yes, because I guess there was a period where--or, I guess maybe if we could rephrase that, when you think about your total return and what drives the dividend, I guess there could be a period where EAD is being depressed by the use of futures, but your economic return still is higher than that, right?

That’s correct. The way we think about the dividend is based on the economic earnings of the portfolio.

Okay, great. Thanks.

You bet, Bose.

The next question comes from Rick Shane with JP Morgan. Please proceed.

Thanks guys for taking my question, and I apologize - we’ve been bouncing around, so some of this was covered, I apologize. When we look at book value and we look at the ROE hurdle you need to sustain the dividend, which is about 15% right now, given the opportunities that are in front of you, do you think that the market is presenting you with a 15%-plus ROE opportunity that makes sense within your risk parameters?

Sure. Look, I would say when we look at levered returns on agency and residential credit, we can get into the details within each of the sectors, but you can earn 15% in both sectors. MSR on an unlevered basis is lower than that, but given the fit in the portfolio, we’re perfectly comfortable with that. To answer your question, the dividend yield on book value at quarter end, 15%, it’s actually a little bit lower than that given higher book value, but current levered returns are reasonably consistent with the yield.

Got it, and then Ilker, just curious - when you think about the trajectory of the forward curve, how does that impact your both tactics and strategy in terms of where you want to play in the coupon stack?

Forward? Obviously as everyone knows, the curve is extremely flat and inverted in some parts of the curve, in terms of the curve, and forwards are also inverted, so that basically tells us that we can hedge down the stack a lot better than what we used to, so basically we are arranging that in our hedges and then we are using coupons to also take advantage of that. But it doesn’t provide that much challenges; if anything, it makes hedging relatively easier.

Got it, okay. Thank you very much.

Thanks Rick.

Our next question comes from Doug Harter with Credit Suisse.

Thanks. You guys talked about the return opportunities across your asset classes as being incredibly attractive. Can you talk about your appetite to continue to grow the portfolio, whether that’s through increased leverage or additional capital?

Sure, let me talk about leverage first, Doug. Leverage is a function of three factors: first, capital allocation, and obviously higher allocation to agency, you’re going to have more leverage; and then second, liquidity of the portfolio, and asset valuation. Now, if you look at our portfolio over the past six months, for example, we actually have increased leverage and we feel good about it. The way we evaluate leverage is we have a baseline level of leverage, and if we think that there will be capital appreciation associated with the assets, then we’ll increase leverage and vice versa. We are above our baseline level of leverage, thus expecting capital appreciation which, to start the quarter, that’s materialized. Now, another important point to note is where we are versus historical. Our leverage currently is the highest its been since March of 2020, and we feel good about it. That being said, we have ample liquidity and we can increase it more. One of the things we’re waiting on, and you’ve heard a lot about this, is just a decline in macro volatility. We’ve taken steps in the direction of increasing leverage, but should we see a more definitive decline, we can increase it. Now with respect to capital raises, we obviously did raise capital in the second quarter. A number of conditions have to be met: it needs to be accretive to book value, and assets have to be attractively priced such that there could be accretion to earnings. Another factor is governance-related issues, and the three of those considerations all have to line up, and they did in the second quarter. As a consequence, we were able to raise capital.

Great, appreciate that. Thank you.

Thank you Doug.

The next question comes from Trevor Cranston with JMP Securities.

Hi, thanks. Good morning. Can you talk a little bit about what you guys are seeing in the residential credit whole loan markets, particularly, I guess on the non-QM side, there were some companies that seemed to have difficulty managing through all the rate volatility to start off this year, so I was curious what you guys are seeing in terms of origination volume in the non-agency loan space and where you think returns would be on newly acquired loan securitization as the market stands today. Thanks.

Sure Trevor, I’ll start and then hand it over to Mike. I actually alluded to the turbulence in the origination channel in my prepared comments, and the fact of the matter is yes, there has been disruption amongst firms, and I think it as primarily related to capital markets, given the volatility in the market. The way we look at it is we are a partner to originators, we’re a liquidity provider, and as the market has evolved over the past six months, the world has turned from scarcity of assets to a scarcity of capital, and that puts capital providers like us in a better position, and we’re absolutely taking advantage of it, but responsibly. With that, I’ll hand it over to Mike to go into more details.

Yes, thanks David. Trevor, I think that when you look at the market, some of the originators that have entered bankruptcy or have closed their doors, it’s a misallocation of capital markets distribution, nothing to do with the actual loans being originated or the ability for the market to digest those loans. We do think it’s an isolated incident regarding un-sophistication around hedging both rates, credit, and the ability to distribute that risk. In terms of the non-QM market, we still believe that volumes are healthy. I would say Q2 through our correspondent channel, we have $1.2 billion in lots, virtually all non-QM. In the month of June, it’s been $440 million of lots - that’s the highest lot volume that we’ve seen to date, and really what you’re seeing is large non-bank originators are entering the space given declining margins, declining volumes, and you’re also seeing small thinly capitalized originators that were bulking and selling it by the bulk market to come to the correspondent market. With that being said, our volumes are at the healthiest levels that we’ve seen. Right now, we see current coupon non-QM, call it a one or two dollar price, you know, 7.75% gross WAC. We think it’s a low, mid 7% unlevered yield, mid-teens levered ROE on warehouse, and then through securitization without any recourse leverage, we’ll call it the bottom 8%, we think is a low, mid double digit return.

Got it. Okay, that’s helpful. I think last quarter, you mentioned that there weren’t any specific company acquisitions that you were looking at, at the time. As market volatility has continued throughout the second quarter, could you maybe provide an update on whether or not there are any companies out there that might make sense for Annaly as a sort of add-on to the businesses you guys are growing in? Thanks.

Sure Trevor. Look - we’re always looking at the market and evaluating opportunities in the M&A landscape, but the fact of the matter is if you look at the evolution of the company over the past couple of years, our organic build strategy has been very effective in both residential credit through the correspondent channel, as well as the MSR build, so we feel very good about our ability to acquire assets. Really, a transaction in the mortgage origination space would be based on the ability to secure flow, and as I mentioned, the world has shifted from asset scarcity to capital scarcity, and we’re not in a position to where we can acquire the assets we want, so the organic build has been very effective. It’s got a lot of momentum associated with it, but we’re always looking at opportunities in the M&A landscape, whether it’s a peripheral product or something that could enhance our own platform, but there’s nothing to report right now.

Thank you.

You bet, good talking to you, Trevor.

Thanks.

The next question comes from Kenneth Lee with RBC Capital Markets.

Hi, good morning. Thanks for taking my question. Just one on the credit portfolio, specifically what characteristics are driving you to increase the allocation versus agency? You talked about increasing the durability of earnings, but just wanted to see if you could further expand upon that point and perhaps any other key points there. Thanks.

Sure Ken, and good morning. Look, expanding residential credit, and MSR for that matter, is a longer term objective. From a capital allocation standpoint, agency is always going to the anchor of the company - the liquidity benefits are just so demonstrable that that’s going to be the mother ship for the company. That being said, we do know that adding incremental credit will be beneficial to the risk-adjusted returns of the portfolio over the long term. Now when we look at where we’re at now with respect to the cycle, as I talked about in my prepared comments, we do expect housing to soften certainly, so we’re certainly a little bit more cautious; but to the extent that Mike has opportunities that are very healthy from a credit standpoint, we’re going to add. But we feel good about the allocation now, it’s just that over the longer term, we expect it to be higher.

Got you, very helpful. Just one follow-up, if I may. Wanted to get your thoughts around any of the key potential risks for any further negative impact to the book value when you look over the near term there. Thanks.

Sure. It’s volatility - that’s plagued, I think, the market over the last number of months, and that’s certainly something that we think about continuously. That being said, it appears to have declined when you look at implied volatility in the market, and so we feel good about the direction we’re going, but we have a lot of data coming up and we’re always going to be cautious about an increase in volatility, but that’s the main risk.

Got you, very helpful there. Thanks again.

Good talking to you, Ken.

As a reminder, if you do have a question, please press star then one. Our next question comes from Eric Hagen with BTIG. Please proceed.

Hey, thanks. Good morning. Going back to the liquidity for just a second, right now you have $4.5 billion of excess agency liquidity. How much liquidity do you think you’d use in levering up another turn? In your answer, if you could talk about any differences in margin between pools and TBAs, maybe revisiting the hedging tail. Maybe just as one follow-up to that, is there a threshold for excess margin which you aim to run the portfolio, regardless of how much debt to equity you’re using?

Yes, so first of all, let me answer your second question first in terms of margin. Our business is liquidity management, and we’re incredibly conservative with respect to liquidity. For the past 25 years, we’ve always led with making sure that we maintain ample liquidity, and $4.5 billion is probably excess liquidity but nonetheless, volatility is elevated, and so we’re going to run in a conservative fashion but there is capacity to utilize that liquidity. To your question about a turn of leverage and what that would do to liquidity, if you think about if you buy 10 billion mortgages with a 5% haircut, you’re talking about half a billion in liquidity, so it’d be a 10%, a little over 10% reduction in liquidity.

Okay, I figured there might be some margin associated with hedges also included in there.

Yes, there will be, but nevertheless that’s a rough estimate. Another point to note is that when you increase your overall portfolio, your value at risk increases, and that informs our model and our minimum liquidity that we carry as well, so it’s an iterative process.

Right, that’s helpful. On the MSR, oftentimes when MSRs get sold, as you guys know, there is recapture provisions or non-solicitation agreements for the seller or the sub-servicer to abide by. Can you talk about how you structure those provisions into the MSR that you’re buying and how it drives who you buy from and where you subservice?

Sure. Actually these non-solicit provisions in the old days used to be, like, the seller used to give it to buyers, so basically sellers used to tell buyers that, look, I’m not going to solicit your borrowers, so you are buying , I’m not going to sell you to and then go those guys. But the last four or five years due to the wholesale channel, a lot of non-bank originators making broken promises to brokers that they will not solicit their borrowers, and that’s why now in this case, sometimes buyers end up giving sellers non-solicit provisions. Obviously that reduces the value of the MSR that you are buying, especially for the operating entity, but the ones that we are buying, as you know, they are deep discount ones, sub-3% gross rate portfolio, and for that the recapture, the value of recapture is much less, so that’s why at least from time to time prefer those reverse non-solicit deals because the value of the recapture is a lot less. Then another thing about that one is a lot of bank buyers are not involved in that reverse solicit MSRs, and that makes that buyer base a lot lower and that enables us to extract extra value from them. But that was a very good question.

Yes, that’s helpful. That’s really interesting. Do you mind if I sneak in one more here? You mentioned some of the different types of buyers that could step in to buy MBS as the Fed rolls off its balance sheet. What do you think are some of the things that will drive more levered buyers to step in, like what do you guys think is holding back that demand right now with spreads at 1.30, 1.40?

Obviously levered buyers, the most important thing for the levered buyers - I’m assuming you mean hedge funds in this case and obviously REITs, but mostly hedge funds, for them it’s risk and they will be looking at the volatility, implied volatility as David has been alluding. As implied volatility has been subsiding and then you are seeing, like last couple days even before the Fed, the implied volatility was declining, you see levered money coming in. But most of the time, though, supply-demand imbalance cannot be met with the levered money buying, you need money managers, and we will expect more money managers buying in these instances because like fixed income, as we said in our prepared remarks, there’s the negative correlation in rates and the risk assets finally starts appearing, fixed income money managers will be getting subscriptions, and that will be the marginal demand on the MBS until banks clear their RW issues.

Got you. Thanks for the perspective this morning.

You bet, thanks Eric.

At this time, there are no further questions in the queue, and I would like to turn the conference back over to David Finkelstein for any closing remarks.

Thank you Chris. Everybody have a good rest of summer, and we’ll talk to you in the fall.

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.