NLY - Earnings call transcript Q4 2020 | Annaly Capital Management, Inc.

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Operator

Good morning and welcome to the Annaly Capital Management fourth quarter 2020 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. please then question, your withdraw press two. star To being note this is event Please recorded. like conference turn Kensil, would to I now the Investor Vice Relations. over President, Sean to Please ahead. go

Sean Kensil

call the Good may are welcome today’s filings. outlined impacts, in including materially our annual call certain Actual filings. earnings Risk our forward-looking most forward-looking to fourth with events annual for to during Annaly We subject from in and quarter differ SEC statements morning the made Capital to which XXXX quarterly risks addition and are our statements. read results section these Factors respect the to Any Management. and and release COVID-XX earnings recent uncertainties, you in and quarterly in encourage to disclaimer

call obligation of not contain revise update is date content information that of conference any only do this hereof. We the disclaim sensitive to this accurate specifically time as the or information. and may undertake Additionally,

we GAAP measures is present call, non-GAAP our release. earnings During both in to financial and measures. reconciliation GAAP included this may A of non-GAAP

Executive routinely interested to monitor Regulation materials and and disclosing information financial media both As in basis. Annaly our of information can similar other parties complying for regular to found posts encourages fourth the public Mike call FD intends Chief found Chief event company’s company’s and presentations Securitized on non-public Head Financial obligations means investor in Officer; call material today’s analysts, Annaly’s I’ll our also Annaly time David. Ertas, addition Ilker webpage Chief posts as Content under of and to the Credit; Fania, Head press this XXXX of from note a Tim Estate. Please David reminder, Commercial for of other Officer; call and a use that, in Gallagher, conference with be to is Officer With the it update the Investment and on Residential disclosure information Serena investors, investors to Officer; include filings, and post Participants our XXXX Presentations section this investor quarter being to website, Wolfe, fourth over website company’s a presentations, quarter Head morning’s Products; the www.annaly.com. on presentation time turn website. of on referenced under Credit webcasts, the supplements, website. its and calls, Real Chief Finkelstein, Annaly SEC Coffey, releases, Tim following recorded.

David Finkelstein

activity, us hedging our Thank and will Ilker call. outlook. you follow review our results. on Serena Head our Sean. joining for Good credit activity, earnings update the up agency Securitized of commentary fourth our Ertas, on Today trends, for I’ll quarter provide financial capital our morning our thanks an specific and will market, everyone and allocation including with Products broader and

disruption particularly portfolio return of return a we management performance risk third As quarter Sean accommodation X.X% ensuring that the context March. provide with for additional rate and Fed’s in coupled is for consistent delivered during quarter, drove volatility. backdrop considerable present faced given our Q&A. largely active strong fourth year notable an our noted, the are for the as The themes contained This all other our business close with positive we economic provided to primary assets markets to which in heads dominated quarter XXXX, shareholders policy the also support monetary out our The for narrative. are historic interest

of outweighed and end yield macro environment, the curve year. bear quarter virus the to light steepened fourth the the negative cases economic resulting recovery, the growth in in record developments lackluster economic post-COVID the to of the about which Turning optimism

thus January in the XXXX recovery labor Federal Reserve seen largely this branch the for results of markets run-off election Furthermore, of of stimulus. monetary U.S. We assets it government shortly. at remains purchasing control Fed rates the be of We their continuation forward in a XXXX anchored. is to a prospects rates, to longer movement rate tail leading the front to and to Democratic do greater higher the keep in meaningful through expected a prudent higher and hedge committed gradual; have to of accommodation the due witnesses current each risk the the until as spike will readings, to we’ll discuss think inflation shift end continue while pace the will guidance nonetheless, term remains

tightening and service consumption can us economy leverage. a for be on continued of cautious monetary portfolio healthy landscape does credit. constructive run-off, how spread policy the should broadly higher allocation, our the tailwinds should leave reasons remain Ilker agency but ensure and for market influences once and vehicle as consumer stimulus Fiscal to for capital backdrop the reopens agency primary levels will comfortable spending we which more Now maintain this resume, the positioning discuss, address of reinvestment with

allocation range optimism opportunities modestly the quarter. of associated continue $XXX of the liquidity that our cyclical our we to middle drove specifically, approach targeted and spread unrated sector to discussed lower disciplined necessitates market credit risk however, residential residential given attractive, tilting relative during which in consistently security growth towards RPL the as for NPL largely increased value and With as certain our began should It be securities see noted, recovery, our and teams at very portfolio system quarter, end marginally residential credit. Our in to investment the respect found the XX% the a million the sponsorship to which lending, strong contraction selection assets business pockets quarter in much we asset employ. of and to credit a last equation we as and back fourth credit

of our have this purchased rallied profiles prepayment XXX the Within our universe, structure on securities strong of the elevated given year. light fourth duration the the to Spreads have have rotated basis a quarter in focus spread on over CRT very up capital in that with market investments points we speeds. strength short assets de-leveraging the non-agency date

our of relative part as they to portfolio see important gain opportunistic an we provide remain traction again market. once loan securities encouraged non-QM were Although volumes the within value,

prime are on whole continues residential within be effort expanded sourcing we new relationships builds loan and focused for grow to our strategic optionality us Our priority to a which further capabilities, finance.

and portfolio up was quarter, we first billion. middle to of picked to and lending, million Turning Of XX% lien grow activity the $X.X the new borrowers. nearly and included market sector nearly as liquidity able quarter XX% in the re-entered in our the were to $XXX activity gross existing fourth both

on through strategy market to close. and EBITDA continues portfolio lending LTM our our fundamentals relative underlying borrower investment has calls, XX% credit initial average to our As targeted disciplined differentiate proven recent increasing peers, by with out strong group’s earnings focus since itself discussed our middle on

watch maintain dialog by the and and borrowers performance our our list an active this to our XX% quarter, underscoring sponsors with continue We improved health of portfolio.

estate real decreased commercial over quarter portfolio quarter. somewhat Our

would healthcare sale has periods signals the conditions The in decade-plus ample more and portion resume accommodation. were also to offset flat this of two that borrowing of past as XX our $XXX affords It’s past shifted pay points. nursing Serena quarter, fund liquidity but and detail, our origination we of in facilities, note in structure Shifting the MBS nearly for fourth financing well price the a absolute mere just opportunistic the the the discuss not able inside the the best of $XXX level history. activity in equity I persistence monetary like market While of during did multiple. us of we’ve system times had volume an rate today the capacity that for of basis fall, the not to two much will than The portfolio, sell also term to in resulted portfolio seen the agency the in out in of curve, a million borrowing low repo closed a downs portfolio. an skilled exist greater year to to are the which which million just ability as borrower the company’s which IRR advantage XX% our so

Additionally attractive redemption, standpoint since financing a Prevailing attractive pre-pandemic momentum preferred inside leverage and stock series more balance cost both on whole the asset sheet strategy our generation capital evidenced securitization as in transactions and execution front, capital continued which of made in dynamics was securitization of structure preferred term follows than and our on the management This environment, financing of for provides structural have and loan business. financing from bolster reduce efficiency current rebounded funding resulting capital substantially, equity. to and our both our diversify to XXXX non-recourse recent markets levels. leverage have a prudent by

leverage amount seen higher growing by sector a We ourselves more Annaly on have managed. which capital is common and returns Proactive and repurchases the following and that stable priority, the important leverage lead if REIT accretive volatility management our a size, XXXX. repurchase expense is of from total our an slowly stock leverage common afford in authorization relatively we’ve manage as maintaining to if $XXX in million a unique program others exclusively to our capital structure equity, in flexibility higher in liquidity capital structure well differentiated ratio us we capital portion fashion. not in remains renewed of

in to times disciplined our of deliver current risk-adjusted and since quarter X.X profile. overall Lastly, yield forward. since the and our quarter-over-quarter, balance and of through each sheet reduced our we’ve earnings funding, with going despite leverage XXXX the the leverage the stability had last value We’ve lowest for at attractiveness leverage to construct leverage is maintain We return of the year remain respect end we I’m strive first appropriate highest to shareholders confident and book risk XXXX. quarter

hand deeper agency that, into with our to dive activity. Now Ilker to I’ll portfolio it over

Ilker Ertas

you David. Thank

yield investor also performing Lower As solid strong prior volatility, had Fed contrast rate to realized directly implied demonstrated agency low demand, as however, David from benefited interest the quarter TBAs pools in episodes by were and part strongest market both of purchases; the they specified QE, steepening healthy mentioned, portfolio coupon curve. supported agency performance. of and the a have

from pay-ups current desire the steeper current muted. MBS the by In C&I bid a the bank we curve appetite quarter longer the led and loan level banks commercial while experienced community. remains into and for prepayment rates assets, demand over of deposit for strong the growth environment, Given robust, agency cash seeing environment, flow higher withstand are growth duration are Apart strong notable seeing XXXX. and remains more elevated Fed, the certainty mortgage from

the lowest have pool benefits directly which loan chosen MBS deposit seen XX With is we in to the specified for banks ratio rise, and securities deposits continuing valuations the to the portfolios, years. have fact, to past their the sector In grow market. strengthens

aggregate, in was twice the last MBS Looking at year. more trillion which data, [indiscernible] XXXX agency banks supply over $X available net than

to This flow predominantly lower rate quarter. Approximately portfolio, diverse providing quality The approach of TBAs evidenced while which levels higher universe of composition our coupons selection nominal our or the of by which stability benefits value largely in XX than in with XX% on of market beginning under just speeds consists mainly experience from prepayment while cash the roll interest high is protection, portfolio and prepayment our of MBS MBS dollar remain XX variable specified pool the seasoned provides maximizes roughly CPR carrying asset the pools. are from liquidity Turning our our pools, our coupon in across environments our pools over the remainder are while slower burnout. holdings pools. prepayment CPR, to portfolio coupon concentrated us improved is the and of higher convexity

also of portfolio in rotated was In activity, reinvested TBAs and terms coupon out pools. some into our run-off we coupon specified lower of portfolio of higher TBAs

On the mostly in the the remain the our environment. hedging [indiscernible] Hedging fourth in from side, XX-year we and treasury part yield rate low which futures costs curve, quarter. and added the relatively in inexpensive benefited to of volatility positions low this steepening

medium the scenario under higher We leads term. interest also the optimism to rates longer economic on to want the be the yields in further where positioned and recovery rise a for in

due performed repo rolls markets we reinvestment since of dollar will repo as has the rolls, for a remain number than and being has attractive for term. our coupon to call, market, the production with somewhat funding collateral delivered which roll beyond the is the net landscape factors: last how cost outlook David forecasted and a risk over near quarter specialness and new availability over negative current in expect the somewhat we MBS been agency assets with as RTBS We on well second for attractive roll that moderated modestly however, the still of addressed [indiscernible]. Given agency markets. earlier achieved year; constructive financing XXXX, the repopulated first, of remains have half the the less special

expect the persist prepay carry yield very that of the despite profile over give agency of continued and for improved burnout to year the To is point, and backdrop greater data of more we there is than we universe for Secondly, having on MBS in recent nominal early XX% strong spread bank expand resulting course curve demand incentive. finally XX points technical basis from potential steeper narrowing from and demand, the observe signs refinancing prepayments. of primary secondary than of that this

easily targets has eligible XX since a not days as to loans almost as from the borrowers, spring, steadily increased big coupon that higher late. universe refinanced for for prepayment this suggests of In headwind the decreasing XX time find of for This so last addition, is average environment efforts to requiring may refinance spring days to time past MBS. of originators, first incremental be the

final we a point, As agency MBS at we in note cannot look isolation. that

QEs, nearly not all to into rotate During these to asset lagged products tightened agency the if risk investors QE gave and other contrast, MBS. In spread private MBS during in assets current opportunities tightening classes. line, more than previous

the we result, for MBS. a constructive outlook As on remain agency

to turn Now the call the Serena over results review our will financial quarter. I to for

Serena Wolfe

morning Thank you Ilker, everyone. good and

with the as Before comment just XXXX company I to first my marks that wanted get December started with I numbers, CFO. year the

face. we exceptionally well the Over challenges the given performed company the year,

reinforced human technology, support Our XXXX our legal, I around functions. resulting robust the and the in during team, was terms infrastructure and join Annaly which capital, the differentiate reasons compelled risk include culture, of other to businesses finance, performance built

I’ll demonstrated Annaly XX, discuss as adept for December With nature XXXX, today steadfast financial highlights agility. the provide metrics. ended a industry a XXXX backdrop, leader’s brief During XX-year-old that while select company’s year-to-date quarter exhibiting and an

GAAP this core While our core results, all our non-GAAP metrics, related PAA. earnings focus and I’ll results both release discloses and on morning excluding

per summary extension results of preferred last drivers million QX. offset core million $XXX David increased increase aggregate on $XXX set common comprehensive the share of and interest mentioned $X.XX net book of of We managing per by share, for PAA loss $X.XX, or GAAP themes financing were partially generate other and environment To QX, with a $X.XX quarter. per value primary Book to while or the prior earlier, quarter. $X.XX of value an leverage. the of advantage share earnings our prudently the excluding was income from share. a from and As of dividends X% performance We or took rate $X.XX per stage decrease some generated information, from per X.X% share the strong

X.X%. $X.XX Combining quarterly generated X.XX%. year We economic return of of saw XXX% XX%-plus total Our we with core return was performance dividend, we represent and value of a and earnings full return also QX, shareholder the core back-to-back of ROE. our quarters of our during X.XX% economic common book our declared dividend a

interest decreased income lower agency primarily QX; fewer gains on driven versus While compared year. common QX, higher share in earlier income per we unrealized the proud from years, are positive GAAP from prior investments sales GAAP by net income realized we Delving per GAAP swaps resulting $X results, on from $XXX XXXX however, into we unprecedented given or the higher $X.XX down rates. market return our to due generated common the quarter. billion faced rate deeper GAAP conditions benefited net down net for share this in of million QX prior or to gains $X.XX of MBS

on and other fair higher billion. balances, option $XX.X gains gains from offset points in points, recorded by expense largely and derivatives, from XX lower billion loans down lower interest we XX to average lower $XX.X repo rates, and securities repo futures, down on basis value average basis Additionally, lower to

we and continue models quarters. the the current market with CECL this in reserves, economic consistent relatively improvement were see CECL specific in general to reserves process. we and use a prior sentiment now on quarter Moving in to Total

a CECL provide [indiscernible] on prior quarter X.XX% recorded reserves with in comprise our and economic funded $X.X estate portfolios our transparent reserves. loan and commitments with real credit the as of by in increase net immaterial an primarily CECL million the to remain specific general in continue that we’ve on a provides to disclosure, of as associated Total color MML in partially assumptions our we associated business reserves and will We as portfolios the reserves. continue reserve in of comfortable asset increase investor our existing As detail utilized additional versus included end. and driven our slide reserves, XX, future now and presentation specific projections reserve. during QX the commercial offset an of decrease of evaluating XXXX We monitor December CECL X.XX% we charge-offs determine by performance

to back earnings wanted the impacted core quarter. quarter factors provide most that earnings, more Turning over surrounding significant detail to I

drivers, expense third lower interest the First, strike relative to fourth dollar increased modest consistent to as around prior swap to quarter quarter We expires. the $XX and TBA lower roll in lower the coupon high and two in specialness expenses due to related receiver the balances. interest for quarter. than rates with million than of more $XXX in component $XX the my receive due rate interest the market quarter $XX million million million $XX of reset swaps net lower million average slightly had portfolio swap commentary and was of GAAP repo to million income was $XXX prior of CMBS rates

expenses. G&A in improvement continued a experienced we Finally,

the this XX preceding in versus to funds in year. X.XX% The front, XX points the quarter. brought of of all-in X.XX% financing year was average the prior versus quarter basis funds points fourth average cost quarter basis full our the On cost

quarter weighted days maturity the XX Our versus are average to with compared down XX. at prior days

compared from average quarters. results repo the natural longer roll down trades executed we our QX weighted QX duration to prior reduction in slight Our days’ from

zero part would that upon to treasury guidance continue last in tell flatten. view based was on curve latter year set the Fed’s the forward view I of Our is that term this we group’s XXXX treasury XXXX, What abundant can you in in down system balances. and as as continued into account well the meaningful in at already remaining increase lower reserves a the in both a general from draw QE bound

are ended term fruition repo come add this in MBS repo duration year, we this further for in agency to financing, bilateral beginning repo for we’ve book be our high Concerning our to tighter as improvement the upper increasingly lower we terms to credit view As securities currently. one-year the has with quarter. new Consequently, spreads. and can in haircuts locked teens see credit

We QX generated to warehouse realized our have and renegotiated XXX cost NIM, as support basis our the offset portfolio moment also the of basis primarily points ago. yields roll a XXX by the asset average of funds by driven cost decline points income, accordingly. I savings mentioned businesses and lending facilities have The that down from of decrease reduced of direct in proactively dollar

range As ratios, the a XXXX cost focus in The fourth savings X.XX% see ended company’s shareholders, efficacy year cash unencumbered benchmark. are I that, profile with $X.X Q&A. of transaction improvement an liquidity $X.X including opex said Having for equity appropriate full being of our to of would continue agency comparison up, now eye within unencumbered prior disclosed for on and some to expected XXXX, we and we billion target for to value closing back providing it internalization opening management opex on quarters X.XX% our team, the assets, disclosed excellent $X.X of MBS of to our X.XX% reiterate it year a the David keen before prior with quarter in up in billion. remarks the with to of we annual I’ll for expenses. in compared consistent billion, and announcement, wrap turn the for X.XX quarter year. including the X.XX% QX to the To QX things with Annaly last an as results X.X%

David Finkelstein

Thanks Serena.

Q&A, two before I’d onto Lastly, I move broader in perspective thought we provide areas.

responsible and an historical is and earnings, S&P fundamentals. raised a for at tight XXX are underscore SPACs the capital. all-time that yield balance spreads, consensus increasingly there of reaching as to rise, market Broadly, First, to of however, a indices high disconnect the deploy abundance further it’s challenging metrics XX has them to records to the the times market of liquidity valuations and growing continue out portfolio yield and between calls channel. credit continues a be billion $XX flowed proximity of Annaly, where in year source

supply out-earned As stable dividend yield and into our I backdrop positive assets. are demand at a mentioned seen continue financing sloping the XXXX value with rate investors the cost, and upward low few and our to Annaly low book outset, and We’ve volatility, fundamentals interest for environment quarters. for a past our for have strengthen curve, strong the

the We dividend XX%, historical is in pace lowest of with in line few the earnings yield over at of acyclical been economic that to are the yield Annaly are risk strategies S&P one decade. X.X% XXX delivering it’s recovery. average, our represents of or less the countercyclical past a while yield of

are equity zero at provide market without money we near yields returns and sacrificing real funds lows. treasury portfolio diversification earned record while Additionally,

shift be strength earnings and once again focus coveted. investors’ will events balance unforeseen As stability to sheet fundamentals, will

our of about purpose this attractive to to end, talked utilize marked kept have economic our To we needs forbearance extend we trying and support mission climate the generate Annaly, year the societal capital with have response that supported returns on American our individual is to borrowers government periods. in homeowner. and and our Secondly, to the At leading policies focus XXXX. that

workforce. meaningfully to of respect hour we’re investment in programs consider and to a Through culture provide security, capital something combat we our and women and their our both we advance focused we time human Q&A. the communities their volunteered in responsible live homelessness, our underrepresented it food time our up seek is Yorkers where and stakeholders. of with yielded work. invest New Operator, employees that very need, of, high overall With have and to initiatives, Annaly to contribute has that, with dollars for energy and can philanthropy where it corporate we open impact have the proud vulnerable partnerships and used serve have groups We on to undoubtedly to our impact

Operator

The [Operator question Steve come JMP Please instructions] will first Securities. from with ahead. Delaney go

Steve Delaney

me morning we thanks so question. my on on on in in Ilker’s, came indicate for certainly Wondered comments into conclude heard everyone, quarter, could derivative I would word higher tightening the Good play, side and David, that Annaly for six the should first any that taking your moved the based weeks that value and if first would your offer several unless compressing, the it something times, observation to yields have book you that. of the year.

David Finkelstein

and to in has coupon, but up portfolio moved has Sure, spread pretty a this attributable bias now. Tuesday, towards a point half quarter X.X% well partially we morning. value but year. as where still of curve, outperformed we - steeper left hi far on book tightening we’re as There’s good the as on up in about were also your Steve, feel which good of positioning thus go, at coupons our lower Yes, terms to quarter, the roughly up

Steve Delaney

that CRE back residential growth X especially, to adjust bucket debt would of every did looking credit should I to a when decline there but step you about in that and book loan in so, seems we Tim’s it you sharing table market? determine, Then deck and Appreciate at just as expect the was looking credit trend at immediately. areas; for virtually that continue? change Thanks. that. like the could the Page outlook the If what little and into $XX a highlighted, We’ll you that comp is million, bit,

David Finkelstein

part we but with it Sure, $XXX took early stressed dynamics I’ll CRE, recovery I’ll on the our and to attributable had start we we’ve we’re - to off calls, terms Tim. commercial We so--yes, of sale of good is to of mentioned, outlook off origination to CRE and a it’s With in front estate on society. it respect decrease the basically to portfolio profit the respect million then a past real healthcare a the in Tim. deliver the facilities, virus run-off, given of that over done, opportunity over still as The a as the which pass it opportunistic. notable how using little in Look, marginally. get the pass a of in a again that. also decreased It very advantage did fall deals was return to and on couple to did I

Tim Coffey

I happened the - as to look a one-quarter think right with is I think this quarter Yes, that’s what in sale. to fourth respect that

We’re capital, of about like where people being space. a lot we cautious deploy our in

into can focused multi-family, in particular good the that we one and We’re degree lot whole to we’re opportunities I quarter. on and industrial the find there, doing that. wouldn’t decrease a read

look to continue we’ll at heal, opportunities. to continues market the As

Steve Delaney

you comments. That’s helpful. for the both Thank

David Finkelstein

bet, You Steve.

Operator

with Rick question Please next from JP go The come will ahead. Shane Morgan.

Rick Shane

reducing--or David, morning, in of silver guys, of and lots end at thanks - Hey questions. the of but and linings I lots good my are staying kind leverage. of that lower terms Look you for something think was that interesting said there taking here,

now of touch that We’re hear and to has into I’m this exceedingly so sucks how where historical an theory and through a rates not environment are exceedingly are in system. period. defensive liquidity low, well yields grey your on you’ll leverage necessarily curious the precedent low, because be ending lower of much particularly it

David Finkelstein

dominate yields eventuality. that We of our have MBS again of have market a like be we feel fair shake-up mindful very volatility, spreads at and that terms be the is extent but a to any asset it’s some and end still the to runway want are local day, sectors Rick. across the great are or spreads we for we leverage. amount of agency Yes, lower tight, of in we prepared XXXX Yes, do question, for spreads. and to To in there carry

it’s Now, increase suggest that’s are right the just from keep spread these ways that not maintain. leverage levels, widening think but we we to away it. we’d low at would to would a approach say We

is perfectly generating a posture yield. and shareholder, that income being. providing we’re the the to for more and It able still maintain with for the we’re We’re do to time less double-digit content

Rick Shane

the it it, quarters, out-earning at because interesting dividend and to the last you’ve Got couple point. very clearly this is talked a about path

running this didn’t of context lower in How You do the that comment leverage some with spreads tightening? you of the feel and make quarter.

David Finkelstein

we in about still we quarter, last Sure, to in over good but to the so at feel coming where for the we first have but dividend expect near core very term. the the out-earn the not extent are do earnings quarter,

Rick Shane

I Terrific, puppy thanks, in apologize the yawning for the background. and

David Finkelstein

it expect We now.

Rick Shane

Thanks.

David Finkelstein

You bet, Rick.

Operator

is Eric Hagen with next BTIG. Please The go ahead. question from

Eric Hagen

morning guys. Lots aggressive numbers where A you said the on and feels heard strongest offered Hope the year. weigh to see of well. can Thanks. the you the you strongest upwards Hey, of I XX% Can much considering last turnover couple the the out money you and opening getting XX% your market I’ve suggesting, in overall in of Then of right there of remarks, you’re how cohorts refi. the already specified and there maybe incentive portfolio, cohorts was questions think good market, on here. now carry is, for how which coupon pools? that in just talk of think being the offer specified you pools strong value? including about rationalize you think various stack That

Ilker Ertas

Sure.

the basis thing, XX points, as long XX In like, terms we money--we gross in use, look basis points we as people use pool the it at money, coupon and a the of it’s basis it, call and call just as basis the points as refi points in the money. XX in we what also similar XX long incentive, of

right in For are X.XX, you but XX% that is clearly can’t that’s rate example, universe that the pointed you best borrowers if now, say the getting primary of getting we not out the money, all this guys around not and in problem of you the take is is get X.XX, said that signs this. out because these burnout the some we remarks, prepared you take our are with like of everybody refinancing, seeing guys have that perfectly

of where only as for characteristics, balance specified all yes, example higher time but stuff, there some the are around and there and with still non-owner balance still and that unlike meaning higher coupon, opportunities buying, this In in terms banks X% pools, of still we pool case, pockets pools also are loan specified characteristics. other coupon I But loan are were occupied and that in some so in other opportunities. said, pools finding previous this kind of are with tighten make Fed was will attractive, opportunities, buying line, QEs, reasonably specified X.X%

David Finkelstein

Does help, Eric? that

Eric Hagen

Yes, thank much. guys you very

David Finkelstein

Eric. Thanks

Operator

will question KBW. George from next Please go be with The ahead. Bose

Bose George

morning. good guys, Hey

to incremental wanted returns. a up there returns, on bit Just the follow little

on could all get specialness, you’re think market the just In a specialness, add double-digit out bit, in said now just it then you then Ilker, terms if and up, ROEs quantify just the of you that incremental expect can little capital? modest that specialized incremental seeing and return you you I of pools, a

David Finkelstein

I’d single this but is David. in, while yield TBAs comments, digits certainly TBAs achievable the prevalent, remain to Fed’s getting on a and it expect context do certainly the difficult. high we’re talking latter of that in say specialness very on we’re Hi buying. pools in We Bose, double somewhat. was in digit but dissipated To Ilker’s XXXX, has half earlier It is

Bose George

[indiscernible] you great. you’re That’s look the helpful. from help walk Okay, actually Then recent RPLs, returns those at you’re just over the to through and returns switching at seeing par. selling NPLs Can when assets? we just the deals, in they’re us that seeing

David Finkelstein

was resi call we’ve advantage the then sector start that on that and throughout it being This to Mike. over hand quarter of about meaningfully they something wider certainly attractive taken now, as fourth are took of I’ll but advantage QX terms RPL think and the talked it were quite is today. of, is in into than active very in of at acquiring a our trade where The spreads that we in AXs last I and QX. not Mike Mike Sure, earnings part

Mike Fania

XXX say would you’re the teens. double the I closer would we low, David. say leverage. of and not very To that XXX, levered single the and achieve been thanks of NPL/RPL maybe single now ROEs, now, focus, Sure, has RPL we probably XXX high NPL again that call digits a much more still think I amount the mid then low probably assets to able so to AXs AXs, very we space, probably are are to throughout that and so prudent kind of XXX right that’s yield, high on levered think which digits, a to of unrated frame digit AXs, added terms ROEs. on right market ZV, that QX, XXX a curve, recourse in that’s

do deleveraging unlevered In XXX, to weighted of to of you’re but to MXs, assets, and terms mostly XXX been both these one- they seeing in know, would characteristics terms have so of--you average [ph], seasoned know, a redeeming high tighten they’re those assets. spreads It’s landscape. the products, been and these active. pre-COVID ample I life number terms of significant say liquidity CRT, sheet assets continued for see and credit we’ve two-year have very we given - have in been balance are--you of there’s lax gross of

what of saw we as think not quarter, So opportunity. as that we still pockets but last there attractive are

Bose George

helpful. That’s Thanks. great. Okay,

David Finkelstein

Bose. bet, You

Operator

The next Please ahead. question comes from Doug Harter go with Suisse. Credit

Doug Harter

the that the position we markets liquidity to holdings in one-year Acknowledging the as how for and level liquidity you volatility, even think hit normalized heal, of environment? over Thanks. a term right do anniversary your what about the today, long continue haven’t

David Finkelstein

about and this great the have Doug, past. over a fair it’s Yes, we a talked question amount

Mike’s was. in think saw to episodes maintained to good volatility, basis, things this, liquidity do that reserves these and others very quite As is of be he at always go-forward comes having in leverage to Fed’s strength, just execution we’re without a lot residential provide that that’s I’ve to sheet there said, of so just do, effort case our the REIT of balance opportunities do, level that a position they middle confidence sponsors and business. and a of do partners. of on and know our other in and it have for in to and can’t significant we the to that there’s pretty in accomplish and investing, the our volatility. that through do of where or not benefits about coming for the aren’t certainty to also beyond originators than able having March it’s manage its same very business of place can’t other The able lenders market we’ve ourselves about a things on it’s it as put can others we unique March, have, through liquidity Tim’s a we They the the a when liquidity, that, have to We is business position sheet being conveys some and we does volatility The manage the lower your balance state model inspiring with that unsee is of light steady simply of got so lending, to that that things a where what example, that all going inform in on we out liquidity being paramount. look base can consequence not he does to capital in

strong good our do coming So there’s We liquidity think being case able to look for both the as of forward we foreseeable of it and about. future. that the remain aspect opportunistic with just an foundation a having but conservative things there’s terms we out feel aspect March, will also that in

Doug Harter

that kind in other capital are Then year? just of Thanks. forward? the thinking about changes you coming you envision on Any structure, also how would the going that

David Finkelstein

of capital when talked we call our preferreds points note XX% capital. own, and certainly the the those existing of you reset about cost capital is overall our good of between X%. common. post to about, issued in currently respect when of our spreads where we rest Sure, good and existing in that that, structure, preferreds reset, basis to forwards prevail we about are entirely capital The the in where that preferred, preferred, preferred the with I we It’s feel which preferred particularly with cost our about with low that feel do will important basis we’re XXX at points, look XXX and talking a the of context very

a we last in the balance is then consequence foremost sheet good There’s and quarter, of there’s best now, leverage capital there’s within right as look the system, overall portfolio, forms sheet just three at Currently advantage form leverage, that’s function a and taking of leverage that’s structural of first amount and capital of is, how of balance and the leverage. leverage. about. what we’re structure we there’s structure leverage, what Now, as the our then feel reserves and said that’s we incredible

mainly resi amount of balance consequence--you spreads at the also way agency as a are that. With a businesses from get affected to yields we preferreds other are retaining and have we an sorry, but cost leverage, on credit across between structural and we where we respect the that issue. We’d in the market, all leverage at the example, now--or just sheet leverage the leverage, where triple-A system. invest, structure hasn’t example business can sheet take on it’s But for quality leverage, would capital versus then that just triple-As, not in the an and available pref where in sheet securitization, that’s very benefit terms a of that need it respect agency point by we structure and the in of leverage. know, is, in it to so balance triple-As the tight, impact can don’t starts with we’re intention to of I’m know, greater had important balance ample very for capital advantage available we our at preferreds with much a Now so increasing of look these structural right spreads MBS the leverage, our availability spread note for current our to structural of example our that products also high like in it’s use system--you MBS, assets selling

Doug Harter

Great, thank you.

David Finkelstein

bet. You

Operator

The go next from question ahead. Piper is with Kevin Sandler. Barker Please

Kevin Barker

what us currently M&A. and in happening capital Could you a like, of other give a combined Just your market for of view view just looks that’s markets hear to going your activity bunch appetite the acquisitions you, with in good the love categories? lending disruption just within on a various lot perhaps morning. on Thank what’s on given

David Finkelstein

Sure Kevin.

acquisition: for three I catalysts The two acquisitive number is at number been the is is way it three assets, one look the have there’s in fit. price, strategic is number We past.

we’ve seen characterize there traded they’ve as candidly past, of and a couple I in wouldn’t has that Now, the at that been compelling. combinations recent prices

get where the trading, make today given liquidity, versus do between that can so our we’ll attractive got provide a we’re acquire as portfolio, we’ve else say there’s got and and to profitably, just to but sure there’s and will be the not we it’s extent on-boarding consider want where going do For where absolutely opportunity. may a operational our to somebody a fit the time, pricing, to the we’ve what for paid for disconnect us to trading need we risk I of assets forward. company, of liquidity

but we out something place. organically. certainly about are need very the there, do a good do changes and we point there catalyst. we’re now, strategic third now right of the how of what can and our we equipped we’ll but well at out certainly fit our we’re at businesses, Now, To to there’s that our If good would is we accommodate extent across feel businesses in something third a all it, it, businesses look right there performing look to feel is that

Kevin Barker

market the Sure. to categorize of the flow be you’re the or seeing you of you than Would equal amount were seeing today? what given that state just pre-pandemic opportunities better or M&A levels, the

David Finkelstein

chasing I work of you But certainly with really Again, more expect It’s a would can a more firms, be not episodic. to companies yes, it expect question XXXX. of firms operating it activity terms do to inefficient expenses buy. what of but in to We of what generated M&A depletion occurred this should does relative answer it, to out get to more last a can returns year type you would scale, lot activity look across do would be going to have sector, for there to extent so where because expect of candidly. there we’re That’s to forward. Annaly, there just are hard point we early the and activity be not in be so capital at in

Kevin Barker

Okay, you very much. thank

David Finkelstein

bet, You Kevin.

Operator

ahead. be will with go UBS. Please next Vilas The question from Abraham

Vilas Abraham

Interesting how guys, on MBS. agency are you? Hey commentary for bid commercial bank

you how play does over think Just also I curious, that of maybe about the are Thanks. and is material guess year, do events leverage course of tying to go? that on what that where you of how Could out taper, then transpire? thinking kinds those back could now, where events, the spreads those the higher the are and Fed guys go it into as and

David Finkelstein

and in Vilas. to strong really to to billion commercial banks, Sure banks direction been respect has it Between commercial take they the advantage activity $XXX XXXX. over market. were buy of With there a XXXX, the In securities. of, deposits very flush with lending a in they bid wasn’t was those the--you MBS, so sectors had know, treasuries took added banks and agency in lot

they’ve I securities was banks, the me if slightly serves Now, for in you continue. strong the even to quarter $XX negative very the being example data we of fourth a alone, January, tightening, billion; another agency correctly, - so roughly and $XXX spread for that compare point that been MBS, net to - QE QEX, sector billion memory strong expect for and in got we the a growth been in flat, banks about have is so contributor prior episodes that do think just to agency bid

very a XXXX to place. conversation I’ll past, different with gained a a XXXX what very very the in and in Fed’s lot recent place in with a the in say market market’s The of different Now taper the is we obviously and different respect that’s a taper, over tantrum. than in experienced the this environment

going Now, consequence, better the market drop-off for intend you learned to Fed from see tantrum good fully forward lot the transparency, greater a in cessation of a we they and guidance, about and, as taper the much or how a prepare so purchases securities, feel is the Fed out. how form guidance they’ll message to is on plays do that may get XXXX, signaling But QE to to the in think a that eventuality. that off change the from current will we’ve exist ways we we’re reason think depending we its got economy and market. through The

it XXXX, point because the as be felt much and almost is to a case. Fed’s it was the to In was market had a out place turned market if put it the Now, is of in the that not position, option different XXXX XXXX. than note in another like in obviously

is appears much the looked see if about Here market positioned, on in CFTC, lot versus the a XXXX, more Then the Morgan higher a the out you look long in price that of short defensively is price - think about puts of bit market of the short portfolio conservative positioned for and from higher so appears a of little puts, at and option standpoint, calls, the the at of in it positions example, the at like survey the is also market JP meaningfully some fixed statistics when the market insurance rates. hedged, you than price data feel hedged. it I pricing, and income for does least you short,

activity the the there XXXX, more MBS at was in banks with a so better sell-off roughly REITs did the Today, lot the who but spread in Another point not At also and widening a It’s contribute actual agency and were of agency XX% of owning holds point. and to the the that rest note the of today. of market, about to is to the MBS time, universe levered, the rest, convexity the that with be lot profile, more and XX% XXXX. at the and own the just banks Fed Fed convexity instruments, the in in the hedged. year just in market rest owned convexity the is of the the had market end. and sell-off and

better is year the doesn’t convexity and Fed we’re The this it, market Fed fast to very is Now, a of Fed like market, forward much better to always is will hedge a to so we watchful. we’re going the and place, prepared. better number the XX% and of in demand job little the the feel messaging, hedge we banks doing much agency and if be but of last if in out, it how was with what again pace, that its play grow year maintains then MBS bank should consistent

XX% much make we’re of we standpoint and where we and We swaptions, going to good a have about portfolio stay hedged to but that, optionality, vigilant have so that we roughly hedged going convexity our of fully moves. duration from rate and we’re is of feel the Does profile agency help? on any top pretty the be sure portfolio with

Vilas Abraham

thank It’s very you. helpful,

more just anytime CPRs normalized maybe quickly the Just get getting you pretty in elevated positive like see guys to prepay a a the do Thanks. as is you being--you have it little what you may still Can to a thought? talk there. cadence level you previously sounds are or bit on elevated for speeds, just incrementally there soon, know, than about less be going while, we it

Ilker Ertas

called all well that because so collateral so rate, that so at that these that know example, not they that kind easy money, it borrowers Ilker refinance, good happened money to known. collateral. But makes in by or expect what refinance, Xs, refinance, lender guys, from are Also, a become have and is and seeing second and and point form very non-bank are the is [indiscernible] two really the and refinanced all at channels, now, be brand been means stuff, elevated. in first you the the we more also, points borrower But refinance, for elevated, recent electronic Yes, the efficient, the expect sharply, high brokers. burnout for bet and [indiscernible], channel that year, like the biggest you example a calls, borrower and [indiscernible] a they near do haven’t soon. COVID, of or XXXX calling very a to in money calls to and Sure, reason on is of likewise, happens see more XXXX burnout were then recently we here. the stay they current that have term it it’s good guys because basis like XXXX prime outgoing off XXX so we this are getting the signing these point refinancing. refinance calls recent is very than broker you extremely how will it which documents in may The for one reason coupon the and over to to mentioning, because obviously burnout channels: these was of quickly some borrower if IPOs, reaches that originators becoming the not profitable will in Xs that X.Xs are issued I’m made for so and all of on new IPOs they

So like more mentioned, some be first channel and will we’ll this more I collateral show the burnout, seeing in that balance burnout itself the seasoned and loan collateral. in

burnout. As overall were little will collateral we new getting to, the it a take on for end that burnout bit accustomed see help? year will of the the brand it we the longer time, probably Does that

Vilas Abraham

you guys. Yes, thank

David Finkelstein

Vilas. bet, You

Operator

is next go Once Please one. ahead. Markets. then again, The Kenneth Capital a have press if please from question, star with you RBC question Lee

Kenneth Lee

expand about or you curve. impact returns question. Hi, you from Wondering net benefit your upon if share to forward. a further some Thanks. some could investment spreads prepared could any seeing thanks going remarks for if potential steepening taking thoughts potentially Wonder yield my

David Finkelstein

actually Sure. we good a curve, we billion in we $XX also longer in added year, There’s a positioning. say said, from on. about very yield the little steepener first bit couple a early do feel and hedges a positioning at of end quarter so of have roughly the fourth added the of components, in as We I standpoint, quarter Ken. I the will the this modest

profile and think. of five of that, steepening from just duration that, we pure modestly spreads and curve yield our hedge the average portfolio so of right unchanged, years would We’re standpoint, from that half a our roughly we mortgage with benefit is around

somewhat while your is to as the pay new the a it is more rate receive yield low because steeper very hedge on double-edged end of sword it front stays Now, the your goes hedges the - is rate up expensive anchored. curve,

roll mark-to-market would curve note of deterioration Another a that. a Ikler? and your point than as do steeper do, there as down they assets hedges occurs, at pace But the nonetheless, roll that modestly some consequence roll-down is so agency is benefit down curve quicker to us. a much that

Ilker Ertas

helps prepayments a very market the but points, steeper steeper those option good Yes, and were a lot curve be burnout, lot, really these about on curve mortgages. helps are We Also, a cost David. the also segmentation beneficial. talking can

very because will consequences we option as curve and As and also looking more derivatives steeper But the swaps, there is opportunities can on of execution, for the the are be so investors the manage cost steepens, opportunities long we should steeper there on cognizant that. be mortgage hedging mortgage nice for curve so the investors. very coupon welcome we David is curve that mentioned, want, will and most of be those, the as

Kenneth Lee

helpful. very that’s Great,

Just if may. I one follow-up,

current out view maturities term towards you that adding repo the the I that’s of think bit extending a nature. little to Wondering opportunistic, duration advantage in longer things the or remarks, of prepared or Thanks. any were you primarily of costs, finance is book. if kind the either mentioned there just of taking that

David Finkelstein

Sure Ken.

a zero on lower to out funding simply us you fact rates incredibly now as duration for that close it. - rates, consequence, to in advantage term low. three expect to and don’t that a book rate for to to over added don’t just are example, have function taking see costs basis shame can the I We one-year as inside the attributable of talked about points. environment, of, bound, advantage of take a we That’s prepared comments, and months, are negative year, repo the we of that the the XX extent the a just if in lock is We

basis simply and to repo view the fourth the let function quarter, that of average actual just lock in we talked more days Serena terms about, down the As more cash need with system run even the advantage desk’s term, did collateral between seen market and of taken there’s a collateral we’ve that the book rates collateral, a was and for liquidity just in of. in entering demand overnight, with overnight up or the lock at above XX for we’re up participants just willingness that points it to that out though we’ve and less and term to

Kenneth Lee

helpful. very that’s Great, Thanks again.

David Finkelstein

You bet, Ken.

Operator

to over the turn this and like conference Ladies our David gentlemen, closing would to I session. remarks. concludes any back question answer and Finkelstein for

David Finkelstein

hope to thank and We for joining today. you, and safe, stays everybody Thank we’ll soon. everybody you talk you us

Operator

has Thank attending you sir. now The today’s conference concluded. you for Thank presentation.

You may now disconnect.

Annaly Capital Management (NLY) 11 Feb 212020 Q4 Earnings call transcript