Annaly(US:NLY)2022-04-28 16:52Financial Data and Key Metrics Changes - The company experienced an economic return of negative 12% in Q1 2022, with total portfolio size reducing by approximately $5 billion to end the quarter at $84.4 billion in total assets [10][38] - Book value per share decreased by $1.20 to $6.77, primarily due to lower other comprehensive income of $3.4 billion or $2.34 per share on higher rates and spread widening [38][39] - GAAP net income for Q1 was $2 billion or $1.37 per common share, up from $418 million or $0.27 per common share in the prior quarter [40] Business Line Data and Key Metrics Changes - The middle market lending portfolio was sold for $2.4 billion, which is expected to be accretive to book value and allows the company to redeploy over $1 billion into cheaper assets in core strategies [19][21] - The MSR position increased by 91% to over $1.2 billion, driven by net purchases and mark-to-market gains [33] - The residential credit portfolio ended the quarter with $4.4 billion in assets, with a capital contribution closing at $2.1 billion [34] Market Data and Key Metrics Changes - The U.S. economy showed robust growth despite a slowdown, with inflation reaching 8.5% in March, leading to a sharp repricing of fixed income assets [9][11] - The unemployment rate fell to 3.6% in March, indicating a strong labor market that could lead to higher wage pressures [12] - The Federal Reserve is expected to deliver a total of 250 basis points of rate hikes in 2022, with significant sell-offs in treasury rates observed [13][14] Company Strategy and Development Direction - The sale of the middle market lending portfolio aligns with the company's strategy to become a dedicated housing finance REIT, focusing on non-agency mortgage finance and solidifying its role in the MSR and residential credit sectors [22][23] - The company aims to increase capital allocation in non-agency mortgage finance and expects MSR to represent a greater steady-state capital allocation [24] - The company is positioned for growth with a diversified portfolio backed by three distinct but complementary businesses [26] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenging macroeconomic environment and extreme volatility in fixed income markets, but remains optimistic about the long-term growth potential in housing finance [27][37] - The outlook for agency MBS has improved significantly, with wider spreads compared to historical averages, creating an attractive investment environment [37] - Management expressed confidence in maintaining dividend coverage despite anticipated moderation in earnings available for distribution [50][52] Other Important Information - The company maintained a strong liquidity profile with $7.2 billion of unencumbered assets, down from $9.3 billion in the prior quarter [45] - The efficiency ratio worsened during the quarter due to income compensation expenses and one-time items, but is expected to improve following the sale of the middle market lending business [45] Q&A Session Summary Question: Long-term dividend coverage outlook - Management indicated that they have consistently outearned the dividend since Q2 2020 and feel good about the current dividend coverage, although they expect earnings to moderate towards the dividend in the future [48][50] Question: Comparison of returns between agencies and credit - Management stated that returns on agencies are in the low to mid-teens, similar to residential credit, while MSR returns are currently in the high single digits [54] Question: Trends in funding costs and implications for investment spreads - Management noted that funding costs have remained stable despite volatility in short rates, and agency repo rates are expected to be about 20 basis points higher in Q2 [65][67] Question: Growth opportunities in prime jumbo and expanded credit MBS - Management highlighted strong origination activity in the non-QM market and the potential for continued growth in this sector due to partnerships with originators [70] Question: Opportunities in the bulk purchase side of non-QM - Management acknowledged seeing opportunities in the bulk market but noted challenges due to rising non-QM rates impacting originators [73]