8-K: Annaly Capital Management Reports First Quarter 2024 Results, Highlights Growth in Residential Credit and MSR Portfolios

Annaly Capital Management announced its first quarter 2024 results, showcasing growth in its residential credit and mortgage servicing rights portfolios, alongside a stable Agency MBS strategy.

Summary

• Annaly Capital Management reported earnings available for distribution of $0.64 per average common share for the first quarter of 2024.
• The company's book value per common share was $19.73.
• A quarterly common stock cash dividend of $0.65 per share was declared.
• Annaly achieved an economic return of 4.8% for the quarter.
• The total portfolio stood at $73.5 billion, with $64.7 billion in Agency MBS, representing 88% of total assets and 59% of dedicated capital.
• The residential credit portfolio increased by 4% to $6.2 billion, driven by record growth in the correspondent channel.
• The MSR portfolio remained relatively stable at $2.7 billion, representing 20% of dedicated capital.
• Economic leverage decreased slightly to 5.6x from 5.7x in the previous quarter.
• The company has $6.2 billion in total assets available for financing, including $3.5 billion in cash and unencumbered Agency MBS.
• Annaly's Residential Credit Group priced eight residential whole loan securitizations totaling $3.8 billion in proceeds since the beginning of 2024.
• Financing costs increased modestly, with the average GAAP cost of interest-bearing liabilities at 5.40% and the average economic cost at 3.78%.

Sentiment

Score: 7

Explanation: The sentiment is positive, reflecting growth in key areas and a stable financial position, but there are some concerns about rising financing costs and the impact of interest rate changes.

Positives

• Annaly's residential credit portfolio experienced a 4% growth, reaching $6.2 billion, driven by a strong correspondent channel.
• The company's MSR portfolio remained stable at $2.7 billion, representing 20% of dedicated capital.
• Annaly is the largest non-bank issuer and second largest overall issuer of Prime Jumbo and Expanded Credit MBS.
• The company has a strong liquidity position with $6.2 billion in total assets available for financing.
• Annaly's Onslow Bay correspondent channel continues to generate record whole loan production.
• The company has a diversified hedge portfolio that should provide book value stability.
• Annaly's Agency CMBS position is accretive to overall portfolio returns and improves convexity.
• The company has a unique, strategic network of MSR sellers, sub-servicers, and recapture partners.
• Annaly has a conservative economic leverage position with significant liquidity.
• The company has continued to rotate the portfolio up in coupon with a focus on higher quality, prepay protected collateral.

Negatives

• The average GAAP cost of interest-bearing liabilities increased to 5.40%, up 3 basis points quarter-over-quarter.
• The average economic cost of interest-bearing liabilities increased to 3.78%, up 36 basis points quarter-over-quarter.
• The hedge ratio decreased from 106% to 97% due to the maturity of short-term swaps.
• Annaly's MBS portfolio prepaid 1.8 CPR faster than the MBS universe.

Risks

• Changes in interest rates and the yield curve could impact the company's performance.
• Prepayment rates could affect the value of mortgage-backed securities.
• The availability and terms of financing could pose challenges.
• Changes in market conditions and the general economy could impact the company's business.
• Credit risks related to investments in credit risk transfer securities and residential mortgage-backed securities could affect performance.
• Operational risks, including cybersecurity incidents, could disrupt business activities.
• The company's ability to maintain its REIT status is crucial for tax purposes.
• The company's ability to maintain its exemption from registration under the Investment Company Act of 1940 is important.

Future Outlook

The company expects continued pressure on non-bank origination profitability and healthy supply for MSR in 2024. Annaly will remain focused on collateral with strong credit and minimal convexity risk. The company anticipates that eventual Federal Reserve easing of monetary policy should support Agency MBS.

Management Comments

• Annaly continues to be highly selective in our MSR strategy, favoring the stability of low coupon MSR.
• Credit discipline remains a focus in the current environment; locked pipeline exhibits FICO of 750+ and LTV of ~68%.

Industry Context

The report reflects a broader trend of increased activity in the residential credit and MSR markets, with Annaly positioning itself as a key player in these sectors. The company's focus on high-quality assets and strategic partnerships aligns with the current market environment.

Comparison to Industry Standards

• Annaly's residential credit group is the largest non-bank issuer and second largest overall issuer of Prime Jumbo and Expanded Credit MBS, indicating a strong market position compared to peers like Redwood Trust and other non-bank lenders.
• The company's MSR portfolio growth of 47% year-over-year demonstrates a significant expansion in this area, outpacing some competitors who may be more focused on origination or other asset classes.
• Annaly's economic leverage of 5.6x is within the range of other mortgage REITs, but the company emphasizes a conservative approach, which may be more prudent than peers with higher leverage ratios.
• The company's focus on low coupon MSR and high-quality specified pools in Agency MBS aligns with a strategy to mitigate prepayment risk, which is a common concern in the industry.
• Annaly's securitization activity, with $3.8 billion in proceeds since the beginning of 2024, positions them as a significant player in the non-agency RMBS market, comparable to other large issuers like Invitation Homes and Blackstone.

Stakeholder Impact

• Shareholders will benefit from the declared dividend of $0.65 per share.
• Employees will be impacted by the company's continued growth and strategic initiatives.
• Customers and suppliers will be affected by the company's activities in the residential credit and MSR markets.
• Creditors will be impacted by the company's financing activities and leverage position.

Next Steps

• Annaly will continue to focus on high-quality, prepay-protected collateral.
• The company will maintain a conservative economic leverage position.
• Annaly will continue to rotate the portfolio up in coupon.
• The company will continue to be highly selective in its MSR strategy.
• Annaly will continue to grow its correspondent channel.

Key Dates

Keywords

MBS, Mortgage Servicing Rights, Residential Credit, Agency MBS, Securitization, Real Estate Investment Trust, REIT, Interest Rates, Leverage, Fixed Income, Non-QM, Whole Loans