• Economic Return: 4.9% for Q3 and 10.5% year-to-date.
• Economic Leverage: Decreased slightly to 5.7 turns.
• Common Equity Raised: $1.2 billion since the beginning of Q3.
• Agency MBS Portfolio Growth: Increased by over $4 billion notional.
• Residential Credit Portfolio: Ended Q3 at $6.5 billion in economic market value.
• Securitizations Priced: Six totaling $3.3 billion in UPB since the beginning of Q3.
• Book Value Per Share: Increased from $19.25 to $19.54.
• Dividend: $0.65 for Q3.
• Earnings Available for Distribution: Exceeded the dividend, decreased modestly from Q2.
• Average Asset Yields ex-PAA: Increased 11 basis points to 5.25% in Q3.
• Net Interest Spread ex-PAA: Improved by 8 basis points to 1.32%.
• Unencumbered Assets: Increased to $6.5 billion in Q3.
• OpEx to Equity Ratio: Decreased to 1.48% for the quarter.

• Warning! GuruFocus has detected 4 Warning Sign with NLY.

Release Date: October 24, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Annaly Capital Management Inc (NYSE:NLY) generated an economic return of 4.9% for Q3 and 10.5% year-to-date, exceeding their dividend.
• The company successfully raised $1.2 billion of accretive common equity since the beginning of the third quarter, highlighting strong institutional demand.
• Annaly's agency portfolio grew by over $4 billion notional, benefiting from price appreciation and strategic capital allocation.
• The residential credit portfolio increased by $535 million quarter over quarter, driven by the growth of the correspondent platform.
• Annaly's MSR portfolio remained stable with minimal valuation decline, demonstrating the durability of their holdings.

Negative Points

• Interest rate volatility remains above pre-COVID levels, posing a challenge to Annaly's investment strategies.
• The company's earnings available for distribution per share decreased modestly in Q3 compared to Q2, due to an increase in share count and higher preferred dividend expense.
• Annaly's net interest margin ex-PAA declined by 6 basis points to 1.52%, indicating pressure on profitability.
• The MSR portfolio experienced a slight decrease in valuation due to lower mortgage rates, impacting overall returns.
• Political uncertainty and potential election outcomes present risks to Annaly's market positioning and strategy.

Q & A Highlights

Q: How is Annaly Capital Management managing the current market volatility and political uncertainty? A: David Finkelstein, CEO and CIO, explained that Annaly entered the quarter with minimal rate risk and slightly reduced leverage. They proactively managed the portfolio by selling approximately $2 billion in Agency MBS due to increased volatility and higher rates. Annaly is maintaining a conservative position, especially with the upcoming election, and is comfortable with their current duration exposure. They are prepared to manage rate and basis risk as the situation evolves.

Q: Can you provide an update on Annaly's book value and dividend outlook? A: David Finkelstein noted that the book value was down just over 1% pre-dividend accrual. Regarding the dividend, Annaly is comfortable with the current payout through 2024 and expects to modestly earn more in Q4 than in Q3. The company is focused on economic return and delivering the dividend, with the Fed's posture providing a potential tailwind for 2025.

Q: How is Annaly approaching capital allocation across its three business lines? A: David Finkelstein stated that all three business lines are generating good returns, but the agency sector looks most attractive given the current rate cycle. While they aim to grow the residential credit business, they are cautious with credit at this point in the cycle. MSR growth is episodic, and they will be aggressive as opportunities arise. Overall, agency MBS is receiving the marginal dollar, but they maintain a balanced approach.

Q: Are there any signs of stress in the securitization data, particularly in non-QM loans? A: Michael Fania, Deputy CIO and Head of Residential Credit, indicated that Annaly's borrowers are typically high-income, sophisticated individuals, and they are not seeing stress similar to lower-end consumers. The delinquency rate in their portfolio is low, and they feel confident in the credit quality of their borrowers.

Q: How does the Rocket Mortgage partnership impact Annaly's MSR strategy? A: Ken Adler, Head of Mortgage Servicing Rights, explained that the partnership with Rocket Mortgage enhances Annaly's recapture capabilities and competitiveness in purchasing new MSRs. The increased competition among subservicers is leading to better pricing and economics for Annaly.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.