8-K: Annaly Capital Management Reports Strong Q3 Performance Driven by Strategic Portfolio Growth

Annaly Capital Management delivered a strong economic return and earnings available for distribution in excess of the dividend for the third quarter of 2024, driven by strategic portfolio growth and improved market conditions.

Summary

• Annaly Capital Management reported a strong economic return of 4.9% for the third quarter and 10.5% year-to-date.
• Earnings available for distribution (EAD) was $0.66 per average common share, exceeding the declared quarterly dividend of $0.65 per share.
• The company's total portfolio reached $81.8 billion, with $72.5 billion allocated to highly liquid Agency MBS.
• Annaly's Agency portfolio increased by $6.4 billion, utilizing a portion of the $1.2 billion raised through common equity offerings.
• The Residential Credit portfolio grew by 9% to $6.5 billion, driven by strong correspondent channel activity.
• Loan fundings since the inception of the correspondent channel in April 2021 have surpassed $15 billion, with $3 billion in whole loans purchased during Q3, a quarterly record.
• The MSR portfolio remained relatively stable at $2.8 billion, representing 21% of dedicated capital.
• Annaly announced a strategic subservicing relationship with Rocket Mortgage to handle servicing and recapture activities for a portion of its MSR portfolio.
• Economic leverage decreased slightly to 5.7x from 5.8x in the previous quarter.
• The company has $7.4 billion in total assets available for financing, including $4.7 billion in cash and unencumbered Agency MBS.
• Annaly's Residential Credit Group remains a leading issuer of Prime Jumbo and Expanded Credit MBS, pricing 18 securitizations totaling $9.4 billion in proceeds since the beginning of 2024.
• Financing costs were stable, with an average GAAP cost of interest-bearing liabilities of 5.42% and an average economic cost of 3.93%.

Sentiment

Score: 8

Explanation: The document conveys a positive sentiment due to strong financial results, strategic growth, and favorable market conditions. The company's performance exceeded expectations, and the outlook is optimistic.

Positives

• Annaly delivered a strong economic return and EAD in excess of the dividend.
• The company maintained a responsible leverage position and bolstered its liquidity.
• Annaly strategically grew its investment portfolio following accretive common equity raises.
• The Agency portfolio increased significantly, deploying capital into higher coupon specified pools and TBAs.
• The Residential Credit portfolio saw substantial growth due to the strength of the correspondent channel.
• The company achieved record quarterly whole loan purchases.
• Annaly secured new and expanded credit facilities, increasing financing capacity.
• The company is well-positioned for growth in both bulk and flow MSR markets.
• The strategic partnership with Rocket Mortgage is expected to enhance recapture capabilities.
• The company is a leading issuer of Prime Jumbo and Expanded Credit MBS.

Negatives

• MSR valuations decreased modestly due to a decline in interest rates in the third quarter.
• Prepayment risk modestly increased, though below historical averages.
• The weighted average days to maturity for repurchase agreements declined slightly to 34 days.

Risks

• Changes in interest rates could impact the company's performance.
• Changes in the yield curve could affect profitability.
• Prepayment rates could fluctuate, impacting asset values.
• The availability of mortgage-backed securities for purchase could change.
• The availability and terms of financing could be subject to market conditions.
• Changes in the market value of the company's assets could occur.
• Credit risks related to investments in credit risk transfer securities and residential mortgage-backed securities could impact performance.
• Operational risks, including cybersecurity incidents, could pose a threat.
• The company's ability to maintain its qualification as a REIT could be challenged.
• The company's ability to maintain its exemption from registration under the Investment Company Act of 1940 could be at risk.

Future Outlook

The company expects the onset of the Federal Reserve's rate-cutting cycle and a more favorable macro backdrop to provide a tailwind for the sector, offering attractive returns at current spread levels. They also expect continued growth in the residential credit and MSR businesses.

Management Comments

• Annaly delivered a strong economic return and EAD in excess of the dividend as the operating environment continued to improve.
• Annaly maintained a responsible leverage position and bolstered its significant liquidity and financing capacity during the quarter.
• Annaly strategically grew its investment portfolio in Q3 following accretive common equity raises and robust origination activity.

Industry Context

The report indicates a positive shift in the macroeconomic environment, with the Federal Reserve expected to ease its restrictive policy, creating a constructive environment for fixed income investors. The company is also benefiting from strong money manager inflows and growing bank and overseas demand for MBS. The residential credit market is also seeing robust issuance, with Annaly being a major player.

Comparison to Industry Standards

• Annaly's economic return of 4.9% for the quarter is strong compared to other mortgage REITs, which have seen varied performance depending on their portfolio composition and hedging strategies.
• The company's leverage ratio of 5.7x is within the range of its peers, indicating a balanced approach to risk management.
• Annaly's growth in the residential credit sector, with $9.4 billion in securitizations year-to-date, positions it as a leader in the non-bank space, surpassing many competitors in terms of issuance volume.
• The strategic partnership with Rocket Mortgage is a unique move that could give Annaly a competitive edge in MSR servicing and recapture, setting it apart from peers who may rely on more traditional subservicing arrangements.
• Compared to companies like AGNC Investment Corp. and Two Harbors Investment Corp., Annaly's diversified approach across Agency MBS, residential credit, and MSR provides a more balanced risk profile.

Stakeholder Impact

• Shareholders benefit from the strong economic return and dividend payout.
• Employees are likely to be positively impacted by the company's growth and success.
• Customers of the residential credit business benefit from the company's continued lending activity.
• Suppliers and partners benefit from the company's increased business activity.
• Creditors are likely to view the company's strong financial position favorably.

Next Steps

• Continue to focus on active management of the portfolio with a bias towards up-in-coupon, high-quality specified pools.
• Continue to build out flow purchase capabilities and well-positioned for bulk acquisitions given complementary buyer to originators/servicers.
• Continue to build out flow purchase capabilities and well-positioned for bulk acquisitions given complementary buyer to originators/servicers.
• Continue to build out flow purchase capabilities and well-positioned for bulk acquisitions given complementary buyer to originators/servicers.
• Rocket Mortgage is expected to begin servicing loans for Annaly as early as December 2024.

Key Dates

Keywords

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