ANNALY CAPITAL MANAGEMENT INC

The first quarter 2024 was characterized by a gradual move higher in interest rates, which nonetheless remained largely rangebound due to several offsetting factors. On the one hand, U.S. economic growth and the labor market remained stronger than widely expected by market participants in the quarter. In addition, inflation accelerated relative to a slower run rate in the second half of 2023. These changes led markets to significantly reduce the number of expected interest rate cuts by the Federal Reserve (“the Fed”) and delayed the timing of the first cut. At the beginning of 2024, markets had penciled in the equivalent of more than six 25 basis point cuts to the Federal Funds Target Rate starting this spring. However, current expectations have been pared back to less than two such cuts starting in the second half of the year.

On the other hand, demand for fixed income securities has strengthened of late, with the largest quarterly inflows into mutual funds and electronically traded funds (“ETFs”) in more than two years. Meanwhile, banks increased their security holdings in the first quarter as well after having net sold securities for much of last year. On balance, the strong fund inflows and the improved bank demand broadened the investor base, particularly for Agency MBS, a welcome development after two years of elevated supply and more concentrated demand to money managers and foreign investors.

Annaly’s portfolio performed well in the first quarter, as our diversified housing finance strategy delivered a 4.8% positive economic return in the quarter, with all three businesses contributing to the positive economic return. Moreover, these results were generated at the lowest economic leverage in several years at 5.6x, while generating earnings available for distribution of $0.64 per share.

Turning to Annaly’s individual business lines, Agency MBS spreads tightened modestly, by up to five basis points, led by production coupons, as interest rate volatility declined from recently elevated levels. With respect to portfolio activity, we continued to gravitate the Agency MBS portfolio up in coupon, with the weighted-average portfolio coupon increasing marginally to 4.69% at the end of the quarter. We once again invested in high-quality specified pool securities in production coupons that provide the widest nominal mortgage spreads and, as evidenced by the price action in the first quarter, some of the best economic returns in a rangebound interest rate environment. These production coupons also stand to benefit from potential spread tightening should interest rate volatility continue to decline or the yield curve steepens. Despite the positive longer-term outlook, the Agency MBS performance has been challenging in recent weeks given the strength in economic data and a delay in the potential start of Fed rate cuts. Finally, our aggregate portfolio performance was helped by incremental excess returns in our Agency CMBS portfolio as well as our increased allocation of interest rate swaps in the hedge portfolio, which benefited from wider swap spreads.

Annaly’s Residential Credit business continued to grow its portfolio and benefited from meaningful spread tightening in the first quarter, as positive sentiment towards credit assets and sound housing fundamentals supported the sector. The growth in the portfolio was sponsored by our wholly-owned subsidiary Onslow Bay Financial LLC’s (“Onslow Bay”) strategy of whole loan purchases, non-qualified mortgage (“Non-QM”) securitizations, and retention of part of the resulting MBS. Meanwhile, given the tighter spreads in the sector, we opportunistically reduced segments of our third-party securities portfolio during the quarter.

The Onslow Bay (“OBX”) correspondent channel had another record quarter, registering $3.7 billion in rate locks during the quarter. The correspondent channel settled $2.4 billion of loans in the first quarter, leaving the OBX pipeline with roughly $2 billion in locks at quarter end and continued strong momentum into the spring selling season. Supported by strong origination volumes, we benefited from supportive capital markets by pricing eight securitizations totaling $3.8 billion since the beginning of 2024.

MSR transactional volumes remained elevated in the first quarter given challenging originator profitability while demand and pricing remained firm. Despite elevated supply, we remained selective and disciplined, adding no bulk packages during the quarter, but committing to purchase one package after quarter end.

We remain confident that we have constructed one of the highest quality conventional MSR portfolios in the market over the last two years, characterized by our industry leading 3.1% note rate and strong credit quality (757 FICO, 69% loan-to-value). Fundamental performance of the MSR portfolio has continued to outpace our initial expectations with the portfolio realizing a 3-month annualized prepayment speed of 3.0%, rising float income given increased escrow balances due to tax and insurance increases, and minimal borrower delinquencies. All of these factors have contributed to our MSR portfolio exhibiting highly stable cash flows with a double-digit return profile.

Earnings available for distribution, economic leverage, and economic return are non-GAAP financial measures. Refer to "Non-GAAP Financial Measures" for additional information, including a reconciliation to its most directly comparable GAAP results.