$NLY – Annaly Capital Management Inc.

Annaly Capital Management, Inc. (NYSE: NLY) is a leading diversified capital manager specializing in mortgage finance. Established in 1996 and headquartered in New York City, Annaly operates across multiple investment groups:

• Agency: Investments in agency mortgage-backed securities (MBS) collateralized by residential mortgages.
  
• Residential Credit: Focuses on non-agency residential mortgage assets within securitized products and whole loan markets.
  
• Mortgage Servicing Rights (MSR): Involves rights to service residential mortgage loans, earning a portion of the interest payments.

As of December 31, 2023, Annaly’s investment portfolio was valued at approximately $81.8 billion, with 88% allocated to agency MBS. The company employs a leverage strategy, primarily through short-term repurchase agreements, to enhance returns. This approach capitalizes on the net interest spread between asset yields and borrowing costs.

Annaly has expanded its operations through strategic acquisitions, including the purchase of Fixed Income Discount Advisory in 2004 and Hatteras Financial in 2016. The company is recognized as one of the largest mortgage real estate investment trusts (REITs) and is ranked 857th on the Fortune 1000 list.

The executive leadership team is headed by CEO and Chief Investment Officer David L. Finkelstein, with Serena Wolfe serving as Chief Financial Officer. Annaly’s diversified investment strategy and experienced management have established it as a significant entity in the mortgage finance sector.

Comprehensive Review and Analysis of Annaly Capital Management’s Q3 2024 Investor Presentation
This report evaluates the financial performance, strategic initiatives, and market positioning of Annaly Capital Management as detailed in its Q3 2024 Investor Presentation. Annaly’s diversified approach across Agency mortgage-backed securities (MBS), Residential Credit, and Mortgage Servicing Rights (MSRs) offers valuable insights into its operational resilience and future outlook.

Key Financial Highlights

• Earnings and Book Value:
  • Earnings Available for Distribution (EAD) stood at $0.66 per share, covering the $0.65 dividend.
    
  • Book value per share (BVPS) was $19.54, reflecting stability and modest growth compared to Q2 2024.
    
  • Economic return for the quarter was 4.9%, contributing to a year-to-date return of 10.5%.
    
• Portfolio Overview:
  • Total investment portfolio reached $81.8 billion, with 89% allocated to Agency MBS.
    
  • Residential Credit portfolio grew 9% to $6.5 billion.
    
  • MSR portfolio remained stable at $2.8 billion in market value.
    
• Leverage and Liquidity:
  • Economic leverage slightly decreased to 5.7x from 5.8x in Q2.
    
  • Liquidity remained robust, with $7.4 billion of assets available for financing, including $4.7 billion in unencumbered Agency MBS.

Performance Across Business Segments

1. Agency MBS
Annaly’s Agency portfolio expanded by $6.4 billion in Q3 2024, emphasizing high-quality specified pools and TBAs. The company leveraged its proprietary analytics to enhance portfolio composition by shifting toward higher coupon securities, which improved performance in a rate-sensitive environment.

Key Metrics:

• Portfolio yield increased, with the weighted average coupon rising to 4.95%.
  
• Prepayment speeds were slightly higher, reflecting seasonal trends and a declining rate environment.
  
• Annaly maintained a conservative hedge portfolio to mitigate interest rate risk.

2. Residential Credit
The Residential Credit segment capitalized on strong origination activity, achieving a record $3 billion in whole loan settlements. Annaly remains the largest non-bank issuer of Prime Jumbo and Expanded Credit MBS, supported by its proprietary securitization platform, Onslow Bay.

Key Achievements:

• Priced 18 residential whole loan securitizations totaling $9.4 billion in proceeds year-to-date.
  
• Maintained high credit quality with a weighted average FICO of 754 and a loan-to-value (LTV) ratio of 68% at origination.

3. Mortgage Servicing Rights (MSR)
The MSR portfolio provided diversification and a hedge against prepayment risk. Annaly’s strategic partnership with Rocket Mortgage enhances servicing and recapture capabilities.

Highlights:

• Valuation declined modestly due to lower interest rates, but fundamentals remained strong.
  
• Float income and low prepayment speeds continued to support stable cash flows.

Macroeconomic and Market Dynamics

• Interest Rate Environment:
  • The Federal Reserve’s anticipated pivot to rate cuts provides a favorable backdrop for Annaly’s portfolio.
    
  • Declining volatility in the MBS market, coupled with a steepening yield curve, has improved asset performance.
    
• Housing Market:
  • Home price appreciation slowed to 2.4% year-over-year, but regional disparities persist.
    
  • Mortgage delinquencies remained low at 3.3%, reflecting stable credit conditions.
    
• Liquidity and Financing:
  • The availability of financing in the repo market remained strong, with Annaly expanding its credit facilities by $860 million across Residential Credit and MSRs.

Strategic Initiatives

1. Portfolio Optimization:
   • Annaly’s rotation into higher coupon MBS and selective acquisitions in Residential Credit and MSRs align with its focus on enhancing risk-adjusted returns.
     
2. Partnerships and Innovation:
   • The Rocket Mortgage partnership exemplifies Annaly’s ability to leverage external expertise for operational efficiencies.
     
3. Risk Management:
   • Prudent leverage and a robust hedge portfolio underscore Annaly’s commitment to managing interest rate and credit risks.

Strengths and Opportunities

• Diversified Investment Strategies: Annaly’s allocation across Agency MBS, Residential Credit, and MSRs provides stability and growth potential in varying market conditions.
  
• Market Leadership: Annaly’s position as a top issuer in the residential credit market highlights its operational scale and execution capabilities.
  
• Favorable Macro Backdrop: The expected easing of monetary policy and improved technicals in the MBS market create tailwinds for Annaly’s asset classes.

Risks and Challenges

• Interest Rate Volatility: While rate cuts are anticipated, unexpected policy shifts could impact portfolio valuations and funding costs.
  
• Credit Risk: Slowing home price appreciation and potential economic headwinds may affect credit performance, particularly in the Residential Credit segment.
  
• Liquidity Constraints: Tighter financial conditions or repo market disruptions could pressure funding availability.

Conclusion and Outlook
Annaly Capital Management demonstrated strong financial performance and strategic execution in Q3 2024. Its diversified portfolio, robust liquidity position, and strategic partnerships position it well to navigate an evolving macroeconomic landscape. While challenges related to interest rate volatility and housing market dynamics persist, Annaly’s disciplined approach to asset selection and risk management provides a solid foundation for continued growth and shareholder value creation.