Annaly Capital Management's Strategies for Navigating Market Conditions and Expanding Market Share
2023-08-01
The company held a call meeting with key executives and analysts, concluding with closing remarks and gratitude for the participants' engagement. During the meeting, the CEO and CIO, David Finkelstein, discussed the company's approach to credit and spreads. Finkelstein emphasized the importance of credit quality and stated that the company only engages with durable counterparties, highlighting their focus on working with reliable partners. This indicates the company's prioritization of risk management and stability in their transactions.
Finkelstein also addressed the expectation of spreads tightening due to the attractiveness of the asset. However, he mentioned that it is not their preference and they are prepared for spreads to remain wide. This demonstrates the company's adaptability and their strategies to navigate different market conditions. They expressed confidence in their ability to generate yields and reinvest at wider yields when there is runoff.
Another notable topic discussed was the company's preference for premium coupons, specifically sixes and six and a half, when high-quality securities are available. This suggests that the company is actively building a portfolio in this area, potentially seeking higher returns through these premium coupons.
In terms of the market outlook, it is expected that inflation will slow down due to factors such as lower used car prices and improvement in shelter inflation. There is an increased likelihood of a soft landing in the economy, leading to the expectation that the Federal Reserve will maintain higher interest rates for a longer period. Despite elevated mortgage rates, the housing market has performed better than expected, with home prices increasing for five consecutive months. The banking sector has faced challenges, but the market has managed to absorb a significant portion of stressed assets.
The company's plans for product and service expansion include growing their correspondent channel in the residential sector and further penetrating the market. They also aim to expand in the mortgage servicing rights sector by adding partnerships and leveraging their platform. Additionally, they have significant unpledged assets available to unlock liquidity and maintain a comfortable liquidity position.
The company's outlook for the quarter and year is positive. They expressed satisfaction with the economic return generated for the quarter and achieving a positive return year to date. Despite market uncertainty, they have managed to keep book value largely unchanged. They attribute their ability to navigate through volatility to their diversified capital allocation, prudent hedge portfolio, and responsible leverage position. They also mentioned that the U.S. economy remains strong, with healthy gains in the labor market and economic growth.
The company has made progress on its strategic initiatives. In the residential sector, they anticipate further expansion of their correspondent channel and have already onboarded approximately 160 counterparties. They also have a strong post-quarter-end lock volume and an expanded credit pipeline of $900 million. In the mortgage servicing rights sector, the company is well positioned for growth as a top 20 servicer and has been adding partnerships and relationships. Overall, the company is actively working towards expanding its presence and market share in the residential and mortgage servicing sectors.
The call meeting included key participants such as David Finkelstein, the Chief Executive Officer and Chief Investment Officer, Serena Wolfe, the Chief Financial Officer, and Sean Kensil, the Director of Investor Relations. Analysts from various firms, including Keefe, Bruyette and Woods, Piper Sandler, BTIG, JMP Securities, Credit Suisse, JPMorgan Chase and Company, JonesTrading, and UBS, were also present. Additionally, other important individuals in the company's operations and financial management, such as Ken Adler, the Head of Mortgage Servicing Rights, Mike Fania, the Deputy Chief Investment Officer and Head of Residential Credit, and V.S. Srinivasan, the Managing Director, attended the call.
During the meeting, discussions revolved around the company's portfolio performance in relation to inflation, interest rates, and the housing market. Inflation was high but started to slow down in June, leading to the expectation that the Federal Reserve will maintain higher interest rates for a longer period. The housing market has been performing well, with home prices exceeding expectations and experiencing consecutive months of price increases. Despite high mortgage rates and low affordability, the market has been supported by low inventory. The banking sector has absorbed assets from regional bank stress. The company's portfolio made tactical adjustments, reducing agency exposure and shifting into higher coupons. They also took advantage of opportunities to replace TBAs with specified securities.