Q3 2024 Annaly Capital Management Inc Earnings Call
Yeah.
Speaker Change: Now as the third quarter unfolded in higher coupons lagged into the rally, particularly in September we did rotate an additional 5% of the portfolio from intermediate coupons to higher coupon collateral on a relative value basis.
Speaker Change: Now as it relates to our hedge portfolio, we maintained conservative interest rate exposure throughout the quarter, while benefiting from a steepening bias as rates rallied we proactively managed our rate exposure as mortgage durations contracted but ended the quarter with minimal duration, thus, helping prepare us for the recent sell.
Speaker Change: <unk> is the fourth quarter has unfolded.
Speaker Change: Now shifting to residential credit the portfolio ended Q3 at $6 $5 billion in economic market value with $2 3 billion of dedicated capital representing 18% of the firm's equity.
Speaker Change: Market value of the portfolio increased by 535 million quarter over quarter, driven by the continued growth of our correspondent platform with our whole loan and retained Ob X securitization portfolio, increasing by $640 million.
Speaker Change: Residential credit spreads were range bound during the quarter with new issue AAA non QM securities trading in the 10 basis point range, providing a supportive backdrop for our <unk> securitization platform.
Speaker Change: Capitalizing on the firmness in credit spreads, we priced six securitizations totaling $3 3 billion in <unk> since the beginning of the third quarter and have now priced 18, securitizations totaling $9 4 billion in 2024, maintaining Onslow Bay as the largest non bank sponsor in the residential credit market.
Speaker Change: And second largest overall year.
Speaker Change: Year to date. These transactions have led to the organic creation of over $1 3 billion in market value of routine there'll be ex securities across annually and our joint venture with projected ROE on deployed capital of 12% to 15%.
Speaker Change: Our correspondent channel produced record volumes again in Q3 across both locks and fundings at $4 4 billion and $2 9 billion, respectively, and we have now achieved 11 consecutive months of expanded credit lock volume in excess of 1 billion per month.
Speaker Change: And the momentum of the channel continued into Q4 as we have a current lock pipeline of $2 2 billion with strong credit characteristics and limited layer risk representing a 754 weighted average FICO and a 68 LTV.
Speaker Change: Our disciplined focus on underwriting sound credit risk in our proactive asset management has led the envelope based non QM securitizations, having the lowest delinquencies across the top 10 issuers in the market and while the overall the serious delinquency rate on the entire gap portfolio remains nominal at under one 4%.
Speaker Change: And our resi business is very well positioned given the optionality of our ever growing corresponded channel and our ability to manufacture high yielding assets across all spread environments.
Speaker Change: Post-footed end, we implemented an additional MSI warehouse facility for 300 million, adding 12th substantial availability.
Speaker Change: Analyze Unincomement Assets increased to 6.5 billion in a so-called competitor to 5.4 billion in the second quarter, including cash amounting to come to the agency and BS of 4.7 billion.
Speaker Change: In addition, we have approximately 900 million of federal and MSR that have been placed to commit a warehouse facility. There remain unborns and can be quickly converted to cash, subject to market advance rates.
Speaker Change: We have approximately 7.4 billion in asset development for financing, up 1.1 billion compared to last quarter.
Speaker Change: Finally, turning to expenses that was efficiency ratios improved during the quarter. Due to low-up, other DNA costs and higher average equity balances.
Speaker Change: This resulted in now up exactly the ratio of decreasing 10 basis points to 1.48% to the quarter. On a year-to-date basis, our up-execuity ratio remains in line with historical amounts at 1.46%.
Speaker Change: That concludes our prepare remarks. We will now open the line of questions. Thank you, operator.
Speaker Change: Thank you. We will now begin our question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys.
Speaker Change: If at any time a question has been addressed and you would like to withdraw your question, please press star then too. And at this time we will pause momentarily to assemble our roster.
Speaker Change: The End.
Speaker Change: And the first question will be from Richard Shane from J.P. Morgan. Please go ahead.
Richard Shane: Thanks everybody for taking my question this morning.
Richard Shane: Look, the history of mortgage rates suggests that the known risks are pretty manageable. It's the unexpected risks. It's when you think rates are going up and they go down. It's when you think rates are going down, that they go up.
Richard Shane: and the experience, the greatest turmoil.
Speaker Change: Fourth quarter has started with face rates going up, spreads widening, higher volatility. Can you tell us a little bit about how your managing that in particularly in light of political uncertainty over the next two and a half weeks?
Speaker Change: Hi, Rick, and thank you. That's actually a good question to kick off the call here. So we came into the quarter with virtually no rate risk, as I mentioned in our prepared remarks, and if you look at our rate shots that reinforces that notion, and our leverage was down at touch heading into the quarter. Now at the onset of the quarter we got payrolls, which was certainly stronger than expected, and we proactive we managed the portfolio selling roughly 2 billion in agency MBS, given the pick-up in fall in higher rates. And we've actively managed the rate risk as the market has sold off. We probably sold a little over 3 billion tenure equivalents, over the course of the month.
Speaker Change: on the October, but nevertheless the portfolio has extended, we're operating it today, approximately a half a year, in duration, which were perfectly comfortable with here, notwithstanding the election uncertainty. When we take a step back and look at the rates market, you know, here we're sitting here with today, with 10-year real yields, approaching 2% nominal yields, you know, on the 10-year board 20, which is 135 basis points, or thereabouts above the rest of the G7, which looks reasonable.
Speaker Change: Well I asked at 370 as a proxy for future short rates. Looks perfectly reasonable to us.
Speaker Change: and the five year note of four percent or just about four percent here, it looks fair. Now, in the three 40s, as we sat in mid September, it looked certainly rich, and that's why we didn't carry any rate risk.
Speaker Change: Martin is pricing, a terminal funds rate, 50 basis points higher than where the Fed is at, which is a big reversal.
Speaker Change: from where we were at before, and that's encouraging. We were respectful of the data which has been quite strong, and so we understand the volatility that's materialized. And obviously as you point out, the election is front and center.
Speaker Change: and it weren't maintaining a very conservative position. Given that we sold mortages, our leverage position has maintained the leverage position and we feel good about it. And as we go through the next couple of weeks, we're going to be very disciplined about managing our rate and basis risk here because this is a big unknown. If we do get a red wave, then the point I made about market pricing may look a little too optimistic and we'll see where that plays out. But for now we're keeping things close to home. We like our basis exposure and we're going to manage our rate risk here.
Speaker Change: Is that help?
Speaker Change: and the very helpful. Thank you guys and thank you for squeezing me in this morning and appreciate it. You've got red, have a good morning.
Speaker Change: The next question will be from Buzz George from KBW, please go ahead.
Buzz George: and everyone good morning. Can I start just with asking for an update on book value?
Speaker Change: Chair, both good morning. Through Friday we were off just a little over 1% and book value that's pre-dividend and cool if you consider the dividend accrued roughly half a percent off.
Buzz George: Well, okay, great, thanks. I mean, in terms of David and I guess you've commented that you're comfortable through 24, you're ready to sort of discuss the outlook into 25, how you feel about the David and
Speaker Change: Well, as we sit here today, we feel good about the dividend. We're in a safe place here. We do expect to modestly earn a little bit more of this quarter, the fourth quarter than in Q3. We expect our nim to increase modestly. But we have to see how things play out. We need to understand the Fed's direction, the markets direction before we can really understand where the dividend is going. Obviously there's been dividend increases over the course of the last number months in the sector, but a lot of that was coming from very low levels to get, you know, not so low levels. And some others that were essentially approaching or contextual with our...
Speaker Change: and David in currently, but at 13.5% roughly a dividend yield on book, I think 13.3%. It's a solid return, and we're much more focused on economic return and making sure that we can deliver the dividend. And as the market and policy plays out, heading into 2025, we do certainly recognize that the Fed's posture provides a tailwind to a lot of aspects of our business and certainly the EAD and we're hopeful that we do get the cuts that are priced in and we'll see how it goes.
Speaker Change: I'm great, thank you.
Speaker Change: Thank you both.
Speaker Change: and an excursion is from Doug Harder from UBS. Please go ahead.
Doug Harder: Thanks. Can you talk about how you're thinking about equity allocation, capital allocation, to the three businesses and how different rates and areas might change your appetite for that capital allocation.
Speaker Change: Sure, and look, as I noted in my prepared remarks, all three of our businesses weren't growing. We can generate good returns across the three businesses, but right here, given where we're at in the cycle at the beginning of a sequence of rate cuts agency does look the best. Now, we understand volatility is high, but spreads are considered of that. And the technicals in the agency market have become much more supportive. So at the margin agency looks a little bit better, and you can see that in our capital allocation in quarter-end as we raise capital, the vast majority did go into the agency sector. Now, we do want to get the resident credit business higher, certainly.
Speaker Change: will have to see how originations materialize.
Speaker Change: But when you look at the returns in that business through skier-disation from loans acquired to our correspondent channel, we want to keep growing that and we expect to do so, but we got to be responsible at credit or with respect to credit here at this point in the cycle. But we feel like we can keep that engine going. And then in MSR, that does tend to be episodic. We, again, would like to grow it. And we'll see, you know, the extent to which packages do come to market.
Speaker Change: and will be certainly aggressive as that materializes. But at the margin, agency is where the marginal dollar is going and we'll keep a balance over all though.
Speaker Change: I guess just on your comment that all three businesses kind of weren't an investment, you know, with that comment, you know, how do you think about continued capital raising in this environment?
Speaker Change: Turn Look!
Speaker Change: As we've always said, we'll only raise capital if it's a creative and if assets are priced appropriately. So to the extent that those stars line up, we'll consider it, but we have ample liquidity. If you look at where our liquid box is, Serena mentioned 4.7 billion in agency MBS cash.
Speaker Change: We don't need to raise capital. You know, a lot of the justification in our minds for the capital raise was obviously a creative and assets, but also the ability to generate more scale to these businesses without impacting our operating expense ratio. And we feel like we have.
Speaker Change: Great of resources now to be able to make investments and things like technology as well as broadening the correspondent channel and the Rezy efforts and other things to where we feel good about capital raising because you know I'm to characterize it as Offensive scale we're clearly fully scaled across our businesses and we are among we are the most efficient For anybody who has this broad of a business mix in the market running these three businesses is about 150 based points of opx to equity But it does help to raise equity so that we can make the appropriate investments to Generate more initiatives that will ultimately benefit the shareholder of the long term. So
Speaker Change: That's just a little thought process around raising capital. We don't need to but if the market is telling us to do so, we'll consider it.
Speaker Change: Great, thank you David.
Doug Harder: Thank you, Doug.
Speaker Change: and the next question is from Jason Weaver from Jones Trading. Please go ahead.
Jason Weaver: Good morning. Thanks for taking my question. David and maybe Mike can provide some input too. It was wondering if you're seeing anything in this curitization date out there just given your visibility that might indicate any kind of early stress like first time to leak with these slow pays, grace period maximization.
Jason Weaver: Yeah Jason this is this is Mike Thanks for the question. I think in terms of the a lot of the commentary around the consumer it's more focused on the the lower end consumer the low-to-beadinging barber that's not consistent with the type of barber that we're lending to so if you look at non-QN-15 the latest transaction that we price
Jason Weaver: that average loan size is $9,9,680,000, that's $730,000 property value.
Jason Weaver: are average bar where it makes $250,000 per year. So when you think about the type of bars we're lending to, it's very sophisticated self-employed bar where it's...
Speaker Change: and the National Health Service.
Speaker Change: We are not necessarily seeing that stress that other products are seeing, you know, like credit cards like that lower end consumer like subprime motto You're not seeing within the portfolio David mentioned it earlier in the call, but you know the D60 plus of our entire portfolio to 137 basis points
Speaker Change: and when we look at just the non-to-end of the FCR part of the portfolio, it's around 2%. So I think we'd be all very good with the type of credit that we're originating and the bar we're specifically that we're targeting.
Speaker Change: Thank you, that's helpful. I was wondering more in a macro says just seeing if there's any persistence into that higher level credit quality, but it sounds like not. And then going back to your remarks on the rocket partnership, I think you had mentioned seeing some greater competition among sub-services.
Speaker Change: should we take that to expect any better pricing on subsurvising expense or any change in the economics that are more favorable to Antelope.
Speaker Change: and we'll have 10. We'll take you to the question. It's absolutely MSR. There's been substantial and we're trading in the last few years.
Speaker Change: The amount leaving some servicers and going to owners who service their own loans has been material, so there's been a contraction in the share of...
Speaker Change: Oval Motor Service in Rights Handled by some services and that's created a lot of competition. In the market, so we are seeing lower pricing and better economic.
Speaker Change: Alright, that's helpful. Thank you for the color.
Speaker Change: Thank you, Jason. And the next question is from Eric Haken from BTIG. Please go ahead.
Eric Haken: Thanks for your time. So when we look historically at the portfolio, the book value has been consumed by higher bond premium. I think at one point the premium in the agency portfolio was like a third of book value.
Eric Haken: vs. now the premium risk is a lot more dialed down into the pre-payment exposure might be characterized a lot differently on the balance sheet.
Speaker Change: Do you feel like that in any way drives your philosophy around leverage and capital allocation versus how you've managed in the past and how we should expect you guys to manage going forward?
Speaker Change: We certainly can the convexity profile of the agency portfolio is going to inform how we think about leverage. Right now the agency.
Speaker Change: At Rich Kupon, I think it's about 4.95, so we're a little par. We have a lot of people who have been in Kupon as I talked about. And the convexity obviously has convexity exposure.
Speaker Change: has increased and it's now off a little bit or it's now a little bit better with the cello, but nevertheless, it is a consideration and Serena will feel free to elaborate on how we think about it. But that's from the overall managing the portfolio stand at the agency for a fully or standpoint.
Serena: Yeah, I mean, to a large extent, we have gone up in coupon, but we have stayed in fairly high qualities, but five poles as David alluded to in its opening remarks about 70% of the portfolio is very high quality poles, so we don't have...
Serena: The same amount of duration drift that you would have if you are in lower quality, during the general discourse.
Serena: So given that the dollar prices are generally higher for the quarter as very early and the durations are lower, so which means you are heading across on your amount of hedges you need against them is lower, it creates more liquidity.
Serena: Okay, that's all for.
Speaker Change: Yeah, that was a helpful explanation. Thank you guys. You know, return to the non-QM a little bit. You guys have been really active there. I mean, how do you think that portfolio may be benefits from the Fed cutting rates? And do you think lower rates will catalyze originators to create more non-QM?
Speaker Change: We certainly hope so. We've been pretty happy with the growth of the correspondent channel as obviously we discussed in the prepared remarks. Presumably if you do get lower rates, it'll spur more housing activity and certainly should benefit non-QM. Oftentimes, you know, the originators are in a lower rate environment, more focused on the agency market, but it feels like the markets in a healthy place and can grow as rates do come down.
Speaker Change: I can't really regard... Yeah, with respect to the back book, I mean, how do you feel like the back book of non-Kiome, I've been asked from the side cutting rates since it's a sixth rate portfolio?
Speaker Change: Yeah, about 85% of the portfolio is fixed right. But we do look at that portfolio on a hedge basis. We're hedging that on a macro level with the MSR portfolio and with the agency portfolio as well.
Speaker Change: I do think that the majority of investors look at non-QN in terms of the AAA investors down to the difficulty. They're looking at it on a spread basis and not necessarily a yield basis, so I think to these then that rates do rally and there's a realization of these Fed cuts.
Speaker Change: I think it does put origination volumes up, hopefully it puts man to them's secureization volumes higher and, you know, from a spread perspective.
Speaker Change: We do think once we get past some of these volvents.
Speaker Change: and the election that spreads could continue to tell you. So I think it's a conducive environment for us to the extent that it does ease as kind of the market predicts and you do see a little bit rally from here in rates.
Speaker Change: Thank you guys very much. Thank you, Eric.
Speaker Change: The next question will be from Harsh, Hamnani, from Green Street. Please go ahead.
Harsh Hamnani: Thank you. Maybe in light of this rocket, more disproportionate ship and also perhaps the desired glow, the MSR book into the end of the year. Could you comment on how your view in relative value between sort of the higher coupon MSR but with recapture of opportunities?
Speaker Change: vs the Lord who pointed MSR to our card in the door for you.
Speaker Change: Absolutely. We capture it's absolutely a component of valuation.
Speaker Change: and you know with the rocket partnership that's just another edition to our portfolio of recapture and subsurfaceing partners.
Speaker Change: and the whole story is about the opportunity given that there's...
Speaker Change: You know, leading customer retention rates and customer satisfaction.
Speaker Change: It's also been a great work with the rocket team.
Speaker Change: You know, each of our partners has differing.
Speaker Change: Strategies and Approaches to Subsurface and Recapture, so they are part of our portfolio and we're prepared to opportunity to be on the higher note rate or mobile note rate and building our infrastructure just adds to this capacity.
Speaker Change: Okay, thank you, I'll leave it there.
Speaker Change: Thank you, Arch. The next question is from Jason Stewart from Jenny Montgomery Scott. Please go ahead.
Jason Stewart: Thanks for taking the question.
Jason Stewart: I wanted to pull together the concept of offensive capital raising leverage in the election and maybe if you could David put a pin and whether that's a sign post that would lead you to take leverage up or their other issues that you're looking at. And if you just pull those three together for us and maybe another signpost to take leverage up and how you're thinking about those.
Jason Stewart: and so as a relates to raising capital.
Speaker Change: You know, that's a better alternative than taking leverage up in our mind right now. The way we look at it is if you really like agency and BS.
Speaker Change: It's, you don't need to raise capital, you raise leverage. We do like agency and BS, but it was more advantageous to raise capital than to level up because of all these ball events on the horizon now. If we fast forward a couple of weeks and we get...
Speaker Change: and how come on the election imminently after.
Speaker Change: Tuesday, Tuesday, two weeks from now. And the market, you know, comes down. We could certainly take leverage up because mortgages have cheapened about four to five basis points thus far on the quarter. They look perfectly reasonable but vol as high. And we have to be respectful of it. And we don't need to take leverage up or certainly earning an adequate return. But if we feel like there's a tactical opportunity or even more intermediate term opportunity to do so, we certainly have the capacity to do so. But we've got to see how things play out.
Speaker Change: Okay, that's helpful. Thanks for taking the question.
Jason Stewart: Thank you Jason.
Speaker Change: The next question is from Dawn Fandetti from Wells Fargo. Please go ahead.
Dawn Fandetti: Good morning.
Dawn Fandetti: You talk a little bit about your sort of view on agency and BS spreads, and I think there's still a little wide versus historical.
Dawn Fandetti: You know the bulltases, maybe the banks come in and you could see some tightening. Do you subscribe to that or pre-sortar more thinking we're arranged down for a while?
Speaker Change: So just stepping back, the big picture is that Monti Policy that has been restrictive for a while has now normalizing along with.
Speaker Change: and Labour Market Salvation. So from a fundamental perspective, I think you're likely to see the Inca steep enough and interesting volatility decline, all of which are positive for energy MBAs.
Speaker Change: and what you'll do to supply the man's technical subbedded today, then anytime since 2022, banks with shared about 200 billion in 2020, 3 have modestly added to MBS this year.
Speaker Change: So looking forward, I think, if the federal cutting cycle continues as we expect all of the Fed expects, we should see an increase in bank demand, and we should also see foreign buyers coming into the LTMBS market. So the technical also looks pretty good for the LTMBS market.
Speaker Change: So we've been trading, put some numbers on it, we've been trading in 15-145 range, this point range are counter-bound spread to blend the treasury curve for the last four or five months.
Speaker Change: and I think if as we get past election and vote led, we could see that spread tight into 110-130 basis point range.
Speaker Change: What we don't expect is that we'll go back to Spencer's job pre-COVID, which was close until say 65 to 85 basis points when both the consequences of the Fed were actively involved. I think we will remain wide of those levels, but we could definitely tighten another...
Speaker Change: The range can move down by 2015 vs points from where we are today.
Speaker Change: Thank you.
Speaker Change: Thank you, Don.
Speaker Change: Can again, if you would like to ask a question, please press star, then one. The next question is from Trevor Cranston from Citizens JMP. Please go ahead.
Speaker Change: Thanks.
Speaker Change: There was some news recently about a large asset manager making a move to get involved in the non-QM space.
Trevor Cranston: Can you guys maybe talk a little bit about generally what you guys are seeing in terms of new participants coming into the market and what that might mean for the competitive landscape and overall economics and documents space. Thanks.
Speaker Change: Sure, thanks Trevor. I would say that we actually think it's a little bit of the opposite where...
Speaker Change: and to these that have fully scaled platforms with dedication of significant resources are in a really good spot right now. With where we're at if you include October, we've already funded 9 billion of loans year to date. Now, when you look at the market, it is hard to put a patent what the actual origination volume is within 9 to M and NDSDR.
Speaker Change: but we think we're anywhere to attend a 15% market share.
Speaker Change: The market share that we're experiencing is continues to increase. A lot of that is signing up to new correspondence, we're signing up about 15 correspondence per each quarter. We've started to roll out additional originator tools, the ability to underwrite bank payment income.
Speaker Change: A lot of the capital rains that David talked about, you know, we're putting a lot of those resources towards helping improve the velocity of funding loans.
Speaker Change: So I would say actually a little bit of the opposite river, like we've actually feel as if we continue to gain market share and the margins that we're putting out on a daily basis or a racy or increasing. So while you certainly only have participants and asset managers that want to participate in this product without the extensive architecture that we put in place without the infrastructure, the ability to things 240 plus correspondence, it's hard to buy those assets.
Speaker Change: and the same pricing that we have. So I think we've been ahead of the game. We want this correspondent in 2021. We've been buying non-QL loans since 2016-2017. So I think we've been done by the opportunity a lot earlier than others, and I think we feel really good with kind of where we're at. Yeah, and then I'll just add, Trevor, there are a huge part barriers to entry in this space. You know, we've, like said, we started the correspondent, Jell, in 2021. We've been in non-QL since around 2016, and we've been consistent. We've been a durable partner to a lot of the originator community. Through COVID, we funded everything we committed to in 2022. You know, as volatility hit capital markets efforts, some most originators.
Speaker Change: were in a precarious position. We were there for them and as a consequence we've established very deep relationships in the originator community. Our infrastructure is as good as anybody's.
Speaker Change: We provide white glove service to our partners, and we have the distribution through our securitization brand that leads to very competitive spreads, and as a consequence, the originator community gets better
Speaker Change: pricing and more durable commitments from us. So we feel like we're in a good place.
Speaker Change: Got it. Very helpful. Thank you.
Trevor Cranston: Thank you, Trevor.
Speaker Change: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to David Finkelstein for any closing remarks.
David Finkelstein: Thank you, Chad, and thanks for joining us, everybody. We'll talk to you soon.
Speaker Change: Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: [music].