Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Annaly Capital Management Inc (NLY, Financial) delivered a roughly 1% economic return for the second quarter and a 5.7% return for the first half of the year.
- Earnings available for distribution exceeded the dividend by $0.03, demonstrating strong returns with prudent leverage.
- The company actively managed its agency portfolio, growing it by approximately $1.6 billion notional during the quarter.
- The Onslow Bay correspondent channel experienced record growth in Q2, locking $4.1 billion of expanded prime loans and settling $2.8 billion.
- Annaly remains a top 10 non-bank holder of servicing rights, with MSR holdings increasing by $135 million quarter over quarter.
Negative Points
- Book value per share decreased from the prior quarter to $19.25.
- Rate volatility and modestly higher treasury rates resulted in a net increase of $0.96 per share on the agency MBS portfolio.
- The company experienced a modest decline in the residential credit portfolio, driven by the sale of third-party securities.
- Transactional activity in the MSR business slowed due to the portfolio being nearly 30% higher year over year.
- The efficiency ratios were impacted in Q2 due to the timing of certain expenses, with expectations for expenses to normalize.
Q & A Highlights
Q: Can I start just with getting an update on quarter-to-date portfolio?
A: As of Tuesday's close, we were up roughly 2% with the dividend accrual and a little over 1% net of this dividend. (David Finkelstein, CEO & CIO)
Q: In terms of the hedges, you were replacing the maturing swaps with treasury futures this quarter. Can you talk about the advantages of that?
A: There are multiple advantages, including concerns with rate and spread volatility, differences in initial margin and liquidity, and putting on a curve trade for yield curve steepening. Our swap position is strong, with no more low pay rate swap runoff for the rest of the year. (David Finkelstein, CEO & CIO)
Q: Can you talk about the risk profile of new MSR and the relative attractiveness of adding those to the existing portfolio?
A: New MSR has more prepayment exposure and relies on a different hedging strategy. However, it also provides an opportunity for recapture, which is an additional revenue stream. (Ken Adler, Head of Mortgage Servicing Rights & Portfolio Analytics)
Q: Can you remind us where you are in terms of recapture agreements and your capabilities to execute?
A: We currently have four recapture partners with different strategies. We compare results and allocate initiatives to the best performers. We also have strategic discussions with potential new partners. (Ken Adler, Head of Mortgage Servicing Rights & Portfolio Analytics)
Q: How do the economics work when there is recapture?
A: We share in the gain on sale by taking the MSR back at a below-market price. This effectively assumes origination economics. (Ken Adler, Head of Mortgage Servicing Rights & Portfolio Analytics)
Q: Are you seeing peers whose economics are focused on origination making MSR pricing less attractive for you?
A: Yes, the comfort with pricing in recapture has increased. We are protective of the borrower and avoid subservicing relationships that could damage returns. (David Finkelstein, CEO & CIO)
Q: Could you provide disclosure on the coupon distribution for the MSR portfolio as you transition to more of a flow business?
A: That's a consideration. Currently, the vast majority of our portfolio is very low rate and non-refinanceable. (David Finkelstein, CEO & CIO)
Q: Do you have any thoughts on the CFPB's proposed servicing rule regarding foreclosures and its impact?
A: The proposed changes could result in more complex loss mitigation processes and higher subservicing costs. However, our high-quality portfolio with low delinquencies should not see a significant cost increase. (David Finkelstein, CEO & CIO)
Q: How are you looking at hedging specified pools up in coupon to protect value?
A: We buy higher quality pools and model how the value will move in a sell-off. This provides ample spread and durable yields, hedging away negative convexity. (Michael Fania, Deputy CIO & Head of Residential Credit)
Q: How will mortgage spreads respond if the Fed cuts more aggressively?
A: We would be optimistic on mortgage spreads. A steepening yield curve and better demand for agency MBS would lead to strong performance. (David Finkelstein, CEO & CIO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
