Annaly Capital Management, Inc. Q3 FY2025 earnings call

• Macro Landscape: U.S. economy resilient in Q3, GDP on pace with Q2. Inflation near 3%, labor market weakened, yields fell, curve steepened.
• Portfolio Performance: Generated 8.1% economic return in Q3, 11.5% year-to-date. EAD of $0.73 per share, out-earning dividend. Raised $1.1 billion of accretive equity in Q3.
• Agency Strategy: Portfolio up 10% QoQ, spread tightening, supply/demand dynamics improving. Shifted purchases to specified pools in 5.5% and 6%.
• Residential Credit Strategy: Portfolio increased, Onslow Bay active, correspondent channel record volumes. Focus on high credit quality, own proprietary assets.
• MSR Strategy: Portfolio increased, bulk supply from large participants, pricing stable, opportunistically added, new partnership with PennyMac.

Agency

• Portfolio ended the quarter at just over $87 billion in market value, up 10% quarter-over-quarter. Total growth of Agency portfolio was $7.8 billion in market value, with about 15% from Agency CMBS and market value appreciation. Agency spreads tightened by 8 to 12 basis points to treasury in the quarter.

Residential Credit

• Portfolio increased to $6.9 billion in economic market value, representing $2.5 billion of the firm's capital. Investment-grade Residential Credit assets tightened, non-QM AAA spreads ended Q3 15 basis points tighter. Onslow Bay closed 8 transactions for $3.9 billion in the quarter, year-to-date 24 transactions. Correspondent channel locked $6.2 billion in whole loans and funded $4 billion in Q3.

MSR

• Portfolio increased by $215 million in market value to $3.5 billion. Purchased $17 billion in UPB across 3 bulk packages in flow network during the quarter and committed to purchase an additional package for $9 billion in UPB subsequent to quarter end. Valuation multiple decreased very modestly quarter-over-quarter.

• Investment strategies well positioned for balance of year with declining macro volatility, Fed cuts, and healthy fixed income demand.
• Agency spreads still compelling despite tightening, sector fundamentals improving.
• Residential Credit to benefit from growing private label market.
• MSR portfolio with low note rates provides predictable cash flows, expects MSR supply to remain healthy.

• Market volatility and interest rate changes could impact portfolio returns.
• Regulatory changes or shifts in bank demand could affect Agency MBS market.
• Uncertainty in housing market and prepayment speeds could impact Residential Credit performance.

Q: How does capital allocation look for Agency, Resi, and MSR?

A: Still overweight Agency, patient to increase Resi and MSR weightings.

Q: Where is bulk supply for MSR coming from?

A: From large participants not previously sellers, pricing stable.

Q: Break down Agency returns in terms of OAS and swap spread?

A: Spread to swaps vs treasuries around 35-40 bps, blended yield about 160 bps, option cost 60-65 bps.

Q: Thoughts on rotating into higher coupon specified pools vs lower coupon?

A: Specified pools have longer options, more attractive as TBA underperformed, better than buying general collateral.