Good morning everyone, and welcome to the Q4 2024 Annaly Capital Management Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. And at this time, I'd like to turn the call over to Sean Kensil, Director of Investor Relations. Sir, please go ahead.

Good morning, and welcome to the fourth quarter 2024 earnings call for Annaly 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 fourth quarter 2024 investor presentation and fourth quarter 2024 supplemental information, both found under the Presentations 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 Wolfe, 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. Serena will then discuss our 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…

Thank you, David. Today I will provide brief financial highlights for the fourth quarter and select full year measures for the period ended December 31, 2024. 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. As of December 31, 2024, our book value per share decreased 2% from $19.54 in the prior quarter to $19.15. After accounting for our dividend of $0.65, we achieved an economic return of 1.3% for Q4 and we were pleased to generate an economic return of 11.9% for the full year 2024. Our portfolio strategy delivered sound results despite higher interest rate volatility and a rate sell-off. For the quarter, we incurred losses on our Agency MBS portfolio of $4.14 per share and on our resi credit portfolio of $0.26 per share. However, our hedge position gains of $3.74 as well as $0.21 in gains from our MSR portfolio nearly offset agency and resi declines. Earnings available for distribution per share increased significantly to $0.72 and exceeded our dividend for the quarter due to lower borrowing costs as our average repo rate decreased 57 basis points to 4.93%. Additionally, coupon income increased on higher average agency investment balances and our continued rotation up in coupons. The resi credit business contributed additional income due to the platform's continued growth as the debt securitized $2.3 billion in assets sourced through the envelope, a correspondent channel during the quarter. Lower net interest income on swaps partially offset these increases which declined due to lower average net rates give the decrease in [indiscernible] during the quarter. Average asset yields ex-PAA increased modestly 1 basis point to 5.26% in Q4. However, the 57 basis point decline in average repo…

[Operator Instructions] And our first question today comes from Bose George from KBW. Please go ahead with your question.

Hey everyone, good morning. Actually, I wanted to first ask about the stronger earnings power this quarter, that $0.72 EAD looks like it equates to around a 15% net ROE. Would you characterize this level of EAD as in line with the current normalized economic return of your portfolio?

Generally Bose, over the course of the quarter we didn't really see much of a change in spreads and you could see Agency at 15% to 17% and probably at the higher end of that and with expenses which are now lower given the equity raise, that's reasonably contextual. And in terms of run rate, we don't have longer-term guidance, but for the first quarter we feel like earnings with all we know today will be contextual with where we're at in Q4.

Okay, great. And then just in terms of an update on the dividend, just given the run rate of earnings, I guess it's fair to say the dividend looks well covered.

Yes, I think we feel that for 2025, the dividend certainly feels safe and it's obviously a conversation we have every quarter with our Board and as we evaluate the dividend, we always look for durability. So we don't take those decisions lightly and we go through a thorough evaluation. We feel good about where things are at and our outlook is optimistic that we'll be able to maintain this run rate.

Great, thank you.

Thank you, Bose.

Our next question comes from Rick Shane from JP Morgan. Please go ahead with your question.

Good morning. Thanks for taking my question. Look, obviously investment in MSR is a really important part of the strategy and one of the things that you've noted over the last couple of quarters is a migration from sort of low coupon to higher sort of on the run MSR. The competitive dynamics in that space are changing pretty significantly as you've got a lot of originators focused on recapture. We're now looking potentially at expectations for lower origination volumes in 2025 versus what we were looking for even three or four months ago. Curious how that's impacting the competitive landscape and if that sort of shifts your view at all in terms of that opportunity in the short-term?

Hey, thanks for the question. This is Ken. Look, we're actually super excited about the opportunity because as there is lower volume, there's also lower profitability within the mortgage industry. So these lenders are less able to retain MSR. So while there might be less MSR created industry wide, there's also less industry that is retained by those lenders originating it. So they really are in need to kind of, you know, monetize that MSR very quickly as those loans are originated in a way that hasn't been the case in the last few years. So we're kind of super excited to set up for that opportunity. And you know, as we continually mentioned, we are the strategic partner to the lending world. So yes, we're out there growing our network of partners that will need this sort of execution.

Yes, and Rick, I'll just add, that's how we set up the business, you know, to be a capital partner for the origination community. And while bulk volumes as I mentioned have slowed down, there is still ample amounts of MSR on originator balance sheets and we're here to provide liquidity.

Got it. So guys, that's a really helpful answer and in some ways, not in some ways, but you guys answered that question from a supply perspective and it's really great context and it's a good reminder. I guess what I would say is that totally makes sense, but also it does feel like the demand side has picked up a lot as well. Is the supply opportunity offsetting that demand increase?

Yes, look, the assets perform well, so there's a lot of capital. There is capital that's flowed in this space. You know, the advantage we have is we're just a reliable source of partner, a reliable source of capital, and we are this great partner. So it's, it's really, it's not just bond trading. It's really establishing this network of relationships and kind of being there on a regular basis. So we do notice, you know, most of the lenders are operationally constrained and they really do limit themselves to one, two or three partners. And, you know, we just show very well given how much capital we have and how kind of reliable we can be as an execution.

Got it. I really appreciate it. Thank you, guys.

Thank you, Rick.

And our next question comes from Jason Stewart from Janney Montgomery Scott. Please go ahead with your question.

Hey, thanks for taking the question. On GSE reform and the expanded credit markets maybe you can give us some thoughts on how you see that progressing and what opportunities you see emerging as we go down that path.

Yes, it's a good question. There's obviously been a lot of talk about the GSEs as of late, Jason. And you know, look, our view is that the hurdles for meaningful transformation of the GSEs are quite high. There is still the matter of the liquidation preference whereby Treasury is owed $334 billion, which we don't see being, you know, going away, certainly insofar as it's owed to the taxpayer. In addition, you do have an ROE constraint amongst the GSEs. It's hard with the capital requirements that are prescribed for the GSEs to raise capital at current ROEs. And also there is a considerable amount of industry pushback with respect to the model and what could happen and it's not just the industry, it's a lot of policymakers as well. I think the way we look at the GSEs is it's an incredibly effective mechanism to provide housing finance. If you think about it, private capital takes rate convexity and credit risk. The GSEs and originators do a very effective job of intermediating that risk and the government provides catastrophic risk, which works very well. Government just prices that risk much more calmly than private markets. So we're certainly hopeful that that's well recognized and we're having every conversation you could have to make sure that everybody understands the criticality of the GSEs and the association with the government, but we're watching it closely and we're eyes wide open. With respect to opportunities in credit and that is the silver lining with respect to changes with this administration. At a minimum, we do feel like the footprint of the GSEs will be somewhat reduced going forward. And if you think about it, roughly 20% of what the GSEs guarantee is what's considered non-core. So for example, loans on second homes, investor properties, higher loan balance loans and cash-out refis, you could see higher LLPAs on those types of products, which opens the door for private capital. And Mike and his business is perfectly set up to provide that liquidity. And if you think about the growth of the residential securitization market, I think it was $140 billion last year. There continues to be strong demand for residential credit and I think the market would welcome a reduction in the footprint because private capital is right here.

Great, that's helpful and Mike, congratulations on the new roll, well deserved. And then just quick follow up in case I missed it. I didn't hear a book value update. If it was given, I apologize.

No, we didn't actually. So heading into the week, as of weekend, we are up just a fraction of a percent. Pre-dividend accrual with the dividend, call it a little over a percent. And there's been improved, a little bit of improvement this week, so as of last night, all in a little over 2%.

Great, thanks a lot.

Thank you, Jason.

Our next question comes from Doug Harter from UBS. Please go ahead with your question.

Thanks. Hoping you could talk about the outlook you have for each of your businesses and kind of how you think about the cost of volatility in that and then kind of in that construct, kind of how you're thinking about the outlook for volatility this year?

Sure. So I missed the first part of your question. You just said the outlook for returns.

Yes. Sorry. Just that return ranges that you give, whether that includes kind of your estimate of the cost of volatility or if that could be a drag on those returns?

Well, with respect to Agency, what I'll say is, volatility does erode those returns to some extent. That's the nominal return on Agency MBS. And our objective is to manage the portfolio in a way that extracts the vast majority of that nominal spread and minimize our hedging costs, which I think we've done a very effective job in. But to the extent volatility materializes, then there's always a cost associated with that. In resi and MSR, given residential credit, there is negative convexity in a lot of the securities, but it's not meaningful. So I wouldn't characterize it as material at all. And then our MSR portfolio is certainly subject to some level of volatility. But when you consider the note rate at 3.2%, that volatility is quite minimal associated with that. So to sum it up, yes, if volatility picks up Agency, you don't extract that entire amount of return. But I think we've done as good as job as any managing the hedge position and dynamically hedging the portfolio to get the most of that return. And then part of the benefit of having a diversified model is you can rely on resi and our MSR portfolio to buffer a lot of that. And it enables us, because really you're only talking about 60% of your portfolio roughly of your capital being subjected to that volatility. It enables us to sit on our hands a little bit more when a market is oscillating and not have to be as reactive. And I think if you look at the last couple of years of our returns that really shows up in the economic return, 12% last year, 6% the prior year. We're pretty happy with how it's performed.

Great. And I guess just then, how do you think about the outlook for volatility this year?

There are a couple of components to that question. First of all is rate volatility and then the second is spread volatility. As it relates to rate volatility, some of that is uncertain, but what we've seen as of late has been somewhat encouraging in terms of volume. We think we're in somewhat of a range bound market. The long end of the yield curve is going to stay elevated for reasons that everybody understands with respect to deficits and debt, it's a little bit fragile. But with real yields, 10-year part of the curve north of 2%, we feel like it's reasonably well priced. And then the front end with the two-year note at 420 just sitting right below where short-term rates are, we feel like it is somewhat anchored. We do think the curve could steepen a little bit more, but generally we think the outlook for rate volatility is better today than it has been in the past couple of years. And as it relates to spread volatility, and that's something that's a really important point as it relates to the Agency business, what we've seen over the recent past is much lower spread volatility in the Agency market. The Agency market is healing well from volatility in 2022 and 2023 and we've gone from 4 basis points a day of spread volatility to today, it's less than a basis point, which is quite encouraging. So we feel like spread volatility is contained and it gives us a lot of comfort in investing in the Agency market. And a lot of that has to do with the fact that the market and the Agency market is just in much better balance today from a technical standpoint. You have much broader participation. Banks are back involved. Money managers are taking in a lot of AUM. REITs are growing a little bit and supply is relatively light. Fed is still running off the portfolio, but that's reasonably predictable. So we feel like the market is in good balance and when spreads widen, we see demand come in, so we feel generally good about it.

Great, I appreciate it. Thank you.

Thank you, Doug.

Our next question comes from Matthew Erdner from JonesTrading. Please go ahead with your question.

Hey, good morning guys. Thanks for taking the question. So turning to non-Agency, with the expected growth to kind of be 20% year-over-year there, how do you guys keep and grow your market share with increased competition in the space? And then kind of as a follow up to that with second liens and HELOCs, you know, how big of a player do you guys want to be when it comes to those kinds of products?

Sure. Thanks. Matt. This is Mike. I appreciate the question. I think in terms of our current market share and where we're at, we did $13 billion of loans that we closed on throughout 2024. If you look at our correspondent channel, it was $11.7 billion. And we think total origination is probably about $75 billion to $80 billion. A lot of the industry publications, they undercount non-QM and DFCR origination, but we think that we have a fairly consistent market share. I would say that we've addressed this on previous calls in terms of the competitive landscape. I think what we provide our correspondence is a certainty of execution and stable capital. Right? So we're in the rate, we're in the market, since April of 2021 with a stable rate sheet, consistent pricing and that's from the stability of our capital. A lot of our peers, it's private equity. There are periods of times where they have to fundraise, they have to back out their pricing and they're not providing that certainty of execution. So, I think the infrastructure that we put together, the architecture that we put in place, it's led us to have a competitive advantage virtually across the majority of the market. I’d also say that we are providing a white glove service. We have a fully staffed scenario desk. We respond to exceptions, we make common sense exceptions and our speed to funding we think is an industry standard. So I think we're in a good position to keep our market share, potentially grow our market share. When we look at what's growing within the non-QM and DFCR market, a lot of it is the large non-banks. The large non-banks have kind of doubled down their efforts on the product. They like the margins that…

Got it. That's very helpful. Thank you.

Thanks Matt.

Our next question comes from Eric Hagen from BTIG. Please go ahead with your question.

Hey, thanks. Good morning. Maybe just building off some of these previous questions. I mean do you have perspectives on the level of mortgage spreads and how you're managing leverage from the context that we have this near-term outlook for a huge supply of treasury issuance. Right? And that, having any impact on where along the yield curve you might add incremental hedges going forward?

Yes. So look, as I said we've been very happy with how range bound spreads have been. There is room for tightening but that will be driven by ball coming down if it is to do so and also a pickup in bank demand as deposits grow. So generally, we think spreads are fair to inexpensive right here. There's some room for tightening, but we don't expect a lot. As it relates to treasury supply and hedges, look we're keeping our hedges at the long end of the yield curve consistent. There is fragility out there and we expect 2 trillion or thereabouts in net treasury issuance and that has to be absorbed. The market is, term premium has increased a lot in the treasury market and the market is well priced for it, but there could be an increase in rates and we're going to maintain discipline as it relates to the hedge profile.

Yep, got you. All right, so with Annaly being the largest mortgage REIT in this space, I mean, do you guys use your stock valuation as sort of a proxy or a benchmark of any kind for like the level of MBS demand? And like, how do you treat the opportunity to maybe grow from here when you think about the macro drivers for MBS and where the sources of demand might come from and how you kind of retrace that back to your own stock valuation?

Well, look, we think our valuation is a function of a number of factors. First of all, the economic return that we generate, our EAD, which we've obviously just exhibited, acceleration in, our low leverage and the health and liquidity of our balance sheet and the stability of the model. So that's the key to valuation of the company, all of which I think we hit on all cylinders. As it relates to being a proxy for the broader MBS market, look, it's a massive market, a $7 odd trillion market and you have many large players and we happen to be one of them. So it's the collective demand from all sources of capital, whether it be REITs, banks, money managers. I think it's the movement of all of those participants that drive the valuation. And right now it feels as though demand is widespread, but spreads are elevated and they're going to stay elevated, we think, for the foreseeable future with some, again, room for some tightening. And the back half of your question? I'm sorry, Eric.

No, I think you got it. I mean, that was really helpful. I appreciate you guys.

Well, thank you, Eric.

Our next question comes from Harsh Hemnani from Green Street. Please go ahead with your question.

Thank you. So we spoke a little bit about the competitive landscape and residential credit. Maybe one more thing that I wanted to touch on there is, what's your outlook on sort of the difference between whole loan spreads and the spreads on private label securitization? So you mentioned that securitizations have tightened quite a bit, especially at the end of last year, but at the same time we've sort of seen competition on the whole loan side come in not just from private equity firms, but also insurance companies and asset managers. So that's the demand side on that front, but it seems like there might also be some more private lab whole loan supply because of lower footprint on the GSE. So when you sort of put that all together, what's your outlook on the difference between the whole loan spreads, where you acquire these and where you can securitize these?

Sure Harsh, thanks for the question. I would say that the whole loan market is incredibly efficient in terms of when securitization spreads tighten. As what we've seen, whole loan spreads also will subsequently tighten. So we've issued 20 securitizations since the beginning of 2024. The spreads at which we've issued those AAA securities, it's been incredibly stable. It's been 115 basis points over on our last deal of 2024 to 145 basis points. So we've issued within a 30 basis point range. But when you do see that execution move up and down, you do see corresponding changes to your whole loan spreads. I think that the majority of the, of the competition that we face is still, private equity, it is other REITs, it's asset managers. We think that 60% to 65% of the production of non-QM DSCR ultimately goes to entities like ourselves. So given the stability that we've seen within spreads, it's allowed us to grow the platform. There is a lot of commentary on insurance companies. This has been the commentary that we've heard over the past number of years. The reality is yes, they are an active participant, but in terms of their size and their scale, we don't think that they drive the market. So if you look at the end of 2023 insurance companies, and this is S&L filings, it's all public. Insurance companies had $88 billion of residential whole loans on their balance sheet. If you look at Q2 of 2024, so through the first half of 2024, the number was $93 billion. So the insurance companies only net increased their residential holdings by $5 billion over that six month period and that also includes jumbo loans, non-QM, DSCR loans and RPO loans. So it’s certainly they are a competitor in terms of how they buy. They don't really buy through correspondent. They're not willing to put out the infrastructure and the architecture that we have. We now have 260 plus correspondence. So we certainly need to be reactive to market conditions and we understand where they come out in terms of where they're buying. But I think we feel very good in terms of where we're positioned. We also do sell loans and insurance companies are one of the takeout's in terms of our capital markets distribution. So we think that they're actually accretive and have had -- provides liquidity to the market.

Okay, got it. That's, that's helpful commentary. Thanks for that. And then maybe on the relative value of your three business strategies, it sounded like at the end of the third quarter you were maybe viewing Agency MBS as more attractive relative to credit and MSRs, but the allocation over the quarter to Agency MBS came down a little bit. Could you maybe touch on what's driving that decision through the quarters and how it might progress going forward?

Yes, so we did allocate capital at year end to Agency. Mike was going into the market right at the first day of the year with a resi transaction. So we held a lot of loans unencumbered on our balance sheet which took some of the capital. And also to note as we onboard MSR purchase last quarter this quarter you'll actually see all else equal a further decrease in capital allocated to Agency. There will be some leverage put on the MSR, but generally should be in the mid to upper 50s. But look, the marginal dollar would go to Agency MBS. We did add a fair amount of Agency in the third quarter with capital raised and to the extent that we have runoff or other forms of capital agencies where the marginal dollar goes for the reasons I mentioned earlier.

Okay, thank you.

Thank you, Harsh.

And our final question today comes from Trevor Cranston from Citizens JMP. Please go ahead with your question.

Hey, thanks. Good morning. Another question on the MSR portfolio. Can you talk a little bit about the profile of bulk packages you guys are seeing in the market today, particularly in terms of like what kind of note rates you're seeing and how you, how you'd expect that to look as more packages come out in 2025, relative to the super low note rate of the existing portfolio? Thanks.

Yes, sure. Hi, thanks for the question. This is Ken. Yes. The vast majority of bulk packages are lower note rate relative to current coupon and they're being sold because you know, Mortgage lenders need liquidity and they prefer to sell the customers that are less likely to be active refinance candidates for them in the, in the future. So the low note rate MSR, it has actually a higher price because of the prepayment profile and it's also less valuable as a customer and a future revenue opportunity for a mortgage lender. So, you know, that's really what folks look to sell first. And then, the overall theme that's going on is mortgage lenders are holding less MSR overall. So when we do see higher note rate packages, they're often much smaller in size because it's the last one, two or three months origination. So it's not quite flow, but we would use the term like mini bulk or something like that.

Trevor, another point to make is that the average no rate of the overall universe is still quite low and a lot of the MSR associated with that remains on the balance sheets of originators and banks, and that's likely the type of note rate that would come out with some mixing in of more current note rate MSR.

Right, that makes sense. Okay, thank you.

Thank you, Trevor.

And at this time we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to David Finkelstein for any closing remarks.

Thank you, Jamie. And thank you everybody for taking the time today and we will speak with you soon.

And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.