Good morning and welcome to the Annaly Capital Management Fourth Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Willa Sheridan. Please go ahead.

Good morning and welcome to the fourth quarter 2014 earnings call for Annaly Capital Management. Any forward-looking statements made during today’s call are subject to risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the forward-looking statements disclaimer in our earnings release, in addition to our quarterly and annual filing. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information. Participants on this morning’s call include Wellington Denahan, Chairman and Chief Executive Officer; Kevin Keyes, President; Glenn Votek, Chief Financial Officer; David Finkelstein, Head of Agency Portfolio; and Bob Restrick and Michael Quinn, Co-Heads of Annaly Commercial Real Estate Group. I will now turn the conference over to Wellington Denahan.

Thank you, Willa. Good morning, and again welcome to Annaly Capital's fourth quarter 2014 earnings call. We have a few prepared remarks and then we will open the call for questions. I would like to start by summarizing the global landscape with a few statistics that were compiled by Wall Street research department. Global Central Bank assets now account for $22.5 trillion of some larger than the combined GDP of both the U.S. and Japan. The Feds balance sheet represents 23% of U.S. GDP. Since Lehman Brothers collapsed in the fall of 2008, there have been 550 rate cuts worldwide which is equivalent to a rate cut every three business days. All of which is largely responsible for the next set of statistics. 52% of all government bonds in the world currently yield 1% or less. 83% of the world's equity market capitalization is supported by zero interest rate policy. There was approximately $7.3 trillion of negatively yielding government debt in the Euro zone, Japan, and Switzerland before the most recent sell off. When a Fed Governor was asked recently if he saw any evidence of an obvious bubble, he replied and I quote "I don’t think there is anything on the scale of the housing or internet bubble right now. The only candidate is bonds, government debt, and other kinds of debt. But I am not counting that, I guess because that's us". As if often the case with humanity, we fancy our present selves as the most intellectually sophisticated and tend to look back upon our predecessors as somewhat naïve in light of our current knowledge base. There are certainly good reasons for that attitude, here are a few examples. Up until the late 1800s bloodletting was a popular prescription for many ills, in fact George Washington was…

Thank you, Wellington. On last quarter’s call we shared some of our specific views on the state of the macro economy. We pointed out that even after 4.5 trillion of quantitative easing, signs reporting to deflation rather than inflation. I also stated that there were numerous red lights flashing in the global markets which served as evidence of global economic growth slowing rather than expanding. Since our third quarter call in the beginning of November, the market moves have certainly validated our skepticism. 10 year treasury yields have declined another 15%. Global sovereign yields contracted even more from historic lows by an average of 40% and even the price of oil which at the time was at a three year low has since fallen by another 35%. Officials at the Federal Reserve seem to agree with us that their most recent policy making meeting in January and in Chairman Yellen's testimony yesterday. We’ve stated that we view lift off as inevitable this year while also reasserting and I’ll use Yellen’s words from yesterday, that quote "economic conditions may for sometime warrant keeping the Fed funds rate below levels the committee views as normal in the longer run". So the past four months have been quite eventful. Our current view on the next four leading up to June and the potential Fed lift off and for many months to follow quite frankly is that more consistent volatility will return to the markets we operate in. Contrary to what certain observers say about the mortgage rate sector, we welcome and are prepared for the return of all which not coincidentally we have expected to arrive following the end of QE in the United States. I will put it simply, volatility equals opportunity for Annaly. Given our size and liquidity we are prepared…

Thank you, Kevin. Regarding agency MBS specifically we wanted to initially give a brief recap of 2014 and the drivers of our agency performance before discussing the fourth quarter and beyond. As some may recall from our fourth quarter earnings call last year, we went into 2014 with an optimistic assessment of both the interest rate landscape as well as agency MBS valuations. This view led to three primary strategic initiatives which meaningfully added to our performance in 2014. First, we added nearly 10 billion of assets early in the year. Second, with what we believe to be overly aggressive policy tightening priced into the front-end of the yield curve, we lifted a significant portion of our shorter dated hedges. And lastly, as our -- our asset purchase strategy throughout the year was focused on high quality 30 year specified pools which were priced at what we believe to be inexpensive levels throughout much of the year. Strong positioning heading into the year combined with the direction we took the portfolio throughout 2014 led to a 4.1% economic return for the fourth quarter and an 18.1% return for the year while operating at 40% less leverage than the sector. With respect to the fourth quarter specifically, as you know we experienced a significant rally in the long end of the yield curve and a meaningful pickup in volatility this past quarter. While we felt that we were well positioned heading into the quarter, we did make minor adjustments to the portfolio in light of lower rates and the potential for higher MBS prepayments. The assets we sold were predominantly 30 year higher coupons with heightened prepayment sensitivity while our purchases were focused on the 15 year sector where we had been under weighed all year. The underperformance of 15 years…

Thanks David. The U.S. continues to be the largest and most liquid institutional commercial real estate market in the world. The competitive landscape continues to expand as investors from around the world are attracted to the relatively higher yields and perceived safety in our markets. Fundamentals are very positive as the economy slowly expands, demand for space remains strong with increasing rents and decreasing vacancies across all asset classes. And in general new supply remains in check in most markets. However, we see many deals out there today where asset pricing seems to indicate that this situation will continue indefinitely. We know historically that this is unrealistic so our challenge continues to be identifying and executing on investment opportunities with a current reward matches the risk being taken. In 2014 we reviewed over $20 billion of transactions and invested almost 440 million in both debt and equity. We also had over 310 million in payoffs which were all debt, yielding about 9.8% while our new debt investments were at 8.2% reflecting the lower return environment we are in. 98% of these payoffs were before maturity as our borrowers realized their business plans and either refinanced into low rate CMBS debt or sold their properties at attractive cap rates. In the fourth quarter we invested $185 million in both debt and equity and as of the end of 2014 our portfolio stood at approximately 1.7 billion with a weighted average yield of 9.6. Our strategy in 2015 is to continue the same credit focus we’ve always had as a balance sheet investor. Of course in a lower yielding environment we’ve accepted low returns in exchange for maintaining our credit standards. As a lender we intend to continue to originate debt deals with strong sponsors, sound credit metrics, and actionable business plans. As an equity investor, we are focused on deals that provide durable current cash flows with less emphasis on value appreciation. In addition these transactions allow us to take advantage of the currently low long-term interest rate debt available in today’s conduit market. As Kevin mentioned so far on the first quarter of 2015 our investment activity has increased. We currently have $250 million closed with another 200 million in closings for a total of 450 more than we invested last year. And finally we have almost $2 billion in the early stages of enquiry that may match our credit and return targets. In summary, we believe that asset prices seem to fully reflect the current positive operating fundamentals of the market. We believe growth will continue but not indefinitely. Therefore we are aggressively managing our credit risks as we invest new capital and continue to pick our spots prudently and profitably for our shareholders. And with that I’d like to turn over to Glenn to discuss our financial results.

Thank you, Bob and good morning everyone. I am going to provide a very brief overview of the key financial highlights for the quarter before opening the call up for questions. Beginning with our GAAP results, we reported a loss of approximately $658 million in the quarter. This was largely attributable to unrealized swaps losses that resulted from the decline in interest rates that we experienced in Q4. Our core earnings which exclude realized and unrealized gains and losses on derivatives, asset sales, and certain other non-recurring items were just under 300 million or $0.30 per share, this compares to $0.31 in Q3. And our annualized core ROE was about 9% versus 9.3% for the prior quarter and about 8.9% for the year which was up about 10 basis points from the prior year. Our net interest income was relatively flat sequentially with net interest margins at 156 basis points for the quarter. Excuse me, I am battling a little bit with cold here. Our margins were down slightly sequentially but up about 20 basis points year-over-year. Our net interest spread also experienced a similar trend to that of our margins for the quarter as well as for the year. Our G&A expense was up approximately $7 million, the majority being related to new commercial real estate investments which included the related transaction cost associated with those deals. Turning to the balance sheet, the agency portfolio was relatively flat at the end of the year at $82.9 billion while our commercial portfolio which includes corporate debt grew about 7% in the quarter to $1.9 billion. Our book value ended the year at $13.10 a share, this compares against $12.87 for the prior quarter which is driven by unrealized gains on agency securities. And finally our capital position as Kevin alluded remained solid with leverage of 5.4 times, well below the industry average and unchanged from the prior quarter, and our capital ratio ended the year at 15.1%. So with that Andrew, we are ready to open it up to questions.

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Dan Altscher from FBR. Please go ahead.

Thanks and good morning everyone and appreciate you taking my call today. The press release indicated the expectations for some policy shift from the Fed in the first, this year and your comments today clearly seem to think that as well. Is there any thought on at least the hedge side of the portfolio of giving something there to account for that expected shift as opposed to just asset allocation?

I am going to let David elaborate on it.

Sure, thanks Dan. What I would say is that a lot of the likely Fed tightening is priced in the market so when we talked about for example last year when we lifted those front end hedges there was a very aggressive Fed tightening priced into the market at that time. For example, the two year note, one year forward was priced yield 1.35%. Today, that same two year note three months forward now through the passage of time is about 78 basis points. So, rates certainly are lower and the expectations for the pace of tightening is not as aggressive as it was before but nonetheless we do think that the tightening that is priced into the market is we would say not overly aggressive. If anything we think it will be slightly less aggressive than that which is priced in.

Okay, thanks for that. And then book value was up nicely in the quarter, do you guys kind of have maybe an expectation or a sense of what maybe it was as of January or even maybe as of yesterday?

You know what I would say, I would point to our supplement and the chart on page 20. We breakout rate sensitivity as well as spread sensitivity and the vast majority of book value fluctuations are attributable to that. Rates are lower, spreads are little bit wider, so we are probably modestly lower but not materially by any means. And I would use that as a roadmap to help you determine what our book value would be throughout the quarter.

You know one thing I would add is that and I think I speak for a lot of mortgage investors out there, that with the level of interest rates where they are that a lot of us would benefit more greatly from an earnings perspective than what we would lose from book perspective with a reduction in amortization expense. With the curve is flat as it is, as low as it is that fluctuation and volatility in that expense is far more impactful than modest reductions in book value that would accompany higher rates.

Yeah, I know that totally makes sense. I mean a little bit back upon the long-end of the curve probably wouldn’t necessarily be a terrible thing at this current level. Yes, not totally. And then maybe just a quick follow-up for Bob, it sounded like the commercial side is growing very fast or relatively very fast in the first quarter. You referenced 400 million plus of acquisitions or investments, can you just give us a sense of color of what those look like, whether it is debt equity, property type, etc.?

In the 400 number that is primarily debt. Although we have a lot of opportunities in the pipeline not at that stage that are in the equity side.

Okay, thanks so much everyone.

Thanks Dan.

The next question comes from Douglas Harter of Credit Suisse. Please go ahead.

Thanks. I was hoping you guys could help me understand your thinking around kind of the duration of your hedged portfolio and some of the long tenor of that kind of given some of your commentary that policy response might be slower and if that happens maybe result in more of a flatter yield curve?

One thing I would point that out that doesn’t necessarily make its way into our hedge table is the fact that we do have a lot of longer term repo positioned that are in the shorter end of the market, that are somewhat comparable had we put them in those buckets and marked them along with swap positions that they would exhibit the same kind of characteristics had you gone out and hedged in the short end of the market. So you know -- and as David mentioned a lot of the move with the Feds moving in the short end is priced into the market, may be overly priced into the market thus far.

And Doug just add to that to Welli’s point if we did factor in those sort of longer dated term repo contracts into the average life of the swaps and bring it down to probably about 6.5 years in terms of the average length of the liabilities, another point to note with respect to the asset side of the balance sheet is that mortgages as you know have contracted in duration with the rally in the market. And so as a result you would see a little bit of an imbalance between the duration of our swaps and our asset durations. That being said, when we look at the profile, the cash flow profile, the MBS market and our portfolio right now in terms of convexity there is more extension risk in the portfolio then contraction risk at these rate levels. So while we don’t necessarily expect to sell off a meaningful sell off anytime soon in the event that we did see higher rates, what would happen is those asset durations would extend more and then they would be compatible with the average life of that swaps portfolio.

Great, thank you.

The next question comes from Joel Houck from Wells Fargo. Please go ahead.

Good morning. Question has to do with, I keep asking about the mortgage basis but typically past patterns have Fed tightening you’ve got generally your curve shift upward or is the economy strong enough or at least there is enough inflation expectations to move the longer end of the curve and hence what we observe is a tightening in the mortgage base of a generally obviously good for some mortgage REITs, in this case this year though with tenure still sitting around two, if the Fed Chairperson still goes through with this it looks like we are not going to have a typical steepening and probably have some type of flattening or who knows. What are your expectations with respect to the mortgage basis, do you think it will hold a historic pattern or there are other things that make you nervous just given that there doesn’t appear to be a lot of flexibility here in this tightening cycle when I use that term loosely because I don’t believe they are going to engage in a full tightening cycle. But nonetheless even at 25 to 50 basis point hike something needs to be dealt with?

Yes first of all Joel with respect to the shape of the curve and what’s priced into the forward, that’s a very good question. Obviously with what's going on globally there has been downward pressure on longer-term U.S. yields and as a result when we look out the horizon for example three to four years from now, the yield curve is priced perfectly flat four years from now with the two year yielding 250 and the 10 year yielding 250. And so we have to ask ourselves over the long-term do we think that is a realistic possibility or do we believe that story. And obviously when the Fed enters a tightening cycle the yield curve flattens considerably and even potentially inverts. But the one, there is a couple of things different this time around; number one, the absolute level of rates are very low so when we think about whether or not a 10 year note yielding 250 with very little upside from potential from a price appreciation standpoint can compete with shorter term yields of the same magnitude, we do question whether or not that private investors who will ultimately be left to be the determinants of value across the curve will really make that trade off and the curve will be that flat. Number two, when we think about this normalization of policy, this time it will be unlike times in the past because we will have both the increase in short-term rates as well as ultimately allowing the portfolio to run off. And so the run off of those assets will ultimately lead to the reissuance of longer-term assets which very likely will put pressure on the long end of the yield curve out the horizon. For example in 2018 and 2019 we have approximately 500…

Alright, thank you. I appreciate the response.

The next question comes from Rick Shane from JP Morgan. Please go ahead.

Thanks guys and I really certainly want to tie together Dan's question and Joel's question which is giving what you are describing as a very extended time for tightening and your previous position to essentially hedge that by going further out on the swap curve. If your expectation is that over the next year you are going to have greater opportunity to grow the left side of your balance sheet, given volatility does it make sense in this mobile, low rate environment to even further expand that swap book right now?

You mean in terms of hedge more?

Yeah, I mean I know it is expensive but if you really think that you are going to have the opportunity to grow the left side over the next 12 months, does it make sense to get in front of that on the right side with the swaps?

There is a considerable risk associated with that. The way we look at the portfolio is we try and manage for any scenario. We obviously had a significant rally in January and that is a meaningful possibility going forward and one concern is what the implications are if that were to repeat itself and even move further. So, we keep duration on the balance sheet to cushion that eventuality, lower rates on a flatter curve would impact as Wellington mentioned our amortization expense. And so as a result we think of our duration as a hedge against an environment like that. And we also think of our low level of leverage as a hedge against a higher rate environment. So, what we do is we attempt to strike the best balance particularly right now given the fact that there is not a strong consensus in the market in terms of the direction we are going. Obviously, global rates are very low. U.S. rates are 100 basis points above the rest of the G7 countries and that puts downward pressure on our own interest rates and could lead to further flows into the U.S. market. And they obviously have had meaningful impact thus far. But at the end of the day, our economy is doing rather well, particularly relative to Europe and Japan and we are at a very different stage in the monetary policy cycle than those countries. So, there is arguments to be made for lower rates and also arguments to be made for higher rates and we have to think about all of those scenarios and manage the portfolio that is in a fashion that strikes the best balance.

And Rick, in a perfect world we would love it if we could time these things perfectly where we put all of our swap book on when rates are low and then buy all of our assets when rates are high. Unfortunately that is not how it goes. And as David mentioned, on a global -- from a global landscape I think the U.S. market and even our market where it looks cheap on a relative basis. So irrespective of and as levered players all these years we have to constantly strike a balance and be prepared to be wrong with our stance. I don’t think that you’re going to see runaway type of movements in yields given the fact that this comp economy is so dependent on Central Bank liquidity and Central Bank policy. So I think you will have periods of volatility that the portfolio is well positioned to withstand but you’re not going to have you know extended moves in the market that make it difficult to right size your balance sheet.

Got it, it clearly is not easy, the low leverage frankly is your opportunity if it presents itself, so we get it. Thank you guys.

Thank you.

The next question comes from Brock Vandervliet from Nomura Securities. Please go ahead.

Hi, good morning. Thanks for taking the question. I am surprised that it hasn’t been asked already but could you talk about the decision on the dollar role strategy, how you arrived at that, was it a broader discussion or a more of just point in time given the rally in mid January and the collapse and specialness that you decided that it was a good time to dip a toe in, thanks?

You know, it’s been in discussion for quite some time. We’ve always had TBA positions both long and short for hedges and we evaluate the TBA market relative to the pool market. At the beginning of last year for example, as I said specified pool pricing was very cheap. Just to give you an example, something common on the run so to speak in full form or moderate loan balance staying in force with the 110,000 loan balance max. Those pools at the beginning of last year traded up a quarter point from TBAs and they were very -- we thought to be very cheap and you didn’t have to hedge them much longer than TBAs because of that very low pay up. That seem to us to be the more attractive alternative. The dollar role trade might have been the easier trade with the Fed still involved heavily in the market and they’re exhibiting some specialness at the time. But the fundamental value equation was in the pool trade. So as the year progressed and rates trended lower, specified pool pricing relative to TBAs appreciated. Obviously they are supposed to appreciate given their longer durations but if you take these Fannie 4 [ph] moderate loan balance pools for example they appreciated to roughly two points in pay up form late in January. So from a quarter point up two points we think that the differential in hedging of those pools relative to TBAs is worth about three quarters of a point. So that should be -- that means that the initial pay up plus what they should have appreciated is a point and the additional point is out performance. So we’d looked at that and we said to ourselves given this out performance and given these high pay ups which is a risk in the portfolio, pay up is exposure, something we have to hedge with longer duration is more expensive and reevaluated in terms of risks and return from that standpoint. And we opted given performance of pools as well as that pay up, we opted to reduce our exposure in the sector. Now we don’t expect meaningful dollar roll specialness in the TBA market this year. That was not the value proposition there. We do think that production coupon TBAs do have a little bit of a tailwind with the Fed still involved, and money managers reducing their under weights to overweight to closer to neutral and they are typically dollar role investors. So there are some positive technical’s in the TBA market right now. But we are not banking on extreme specialness like we’ve seen in the past. They are financing, current coupon pools are financing very slightly negative right now and that’s better than short term repo financing. So, we are comfortable with it.

Got it, okay. Thank you.

The next question comes from Steve Delaney from JMP Securities. Please go ahead.

Thank you, good morning Wellington and congratulations to the team on a strong performance in 2014.

Thank you, Steve.

You’re welcome. I just have one strategic question for you this morning and its interesting with the comments that David made about the GSE risk transfer, so that’s kind of where I am going here, so the manager is now approaching the broad mortgage market with two distinct pools of capital and of course at one point you had three separate entities. And as you look out as this market evolves over the next couple of years, can you envision a scenario whereby Annaly shareholders to where you think they would benefit from the manager being in a position to face all segments of the mortgage market with a single and larger capital base?

Of course, that is the general idea behind how we set the company up and anybody who has been following us for a long time understands how we approach these markets and how we segregated the risk. But in light of everything that has gone on over the past six years from a policy perspective and a regulatory perspective that, that model certainly creates issues internally for us as we try and allocate capital. Now I will say that even though we do have another public company out there that we do manage, that there is internal allocation policies with respect to opportunities that arise and Annaly has always had it and by virtue of our ownership in the stock of Chimera we’ve always had exposure to the mortgage credit space. Certainly both companies are of a size to take advantage of opportunities in the market alongside each other.

Relative to the allocation procedures that you mentioned, so you now hear in first quarter are doing the GSE, the credit transfer rates, could we expect that moving forward that you could even move into whole loans or other credit related assets within the Annaly portfolio using that allocation system and being fair to both sets of shareholders?

Yes, absolutely. And it’s really driven by the economics and the overall economics not just fleeting economics and how we would approach those businesses.

So I think what you’re saying there, there needs to be a business there and not a trade?

Sure, I mean I think that it’s going to be interesting at some point what the world ultimately looks like absent so much influence from Central Bank policy. I can see a time when regulator start to rethink and I think they are doing it on the edges right now to try and reengage. I mean they’ve encouraged the banks to get out of so many businesses yet, they penalize those opportunistic entities that are trying to fill the gap. So I think there is still a lot of murkiness with respect to how these things ultimately will play out and we probably won’t get a good clear picture until you get market based pricing and you know lot of the legal overhang ultimately dissipate.

Steve, it is Kevin, I would just take out my wedge and chip in here with one comment, I mean it kind of cuts both ways in this market. Right, where the 8 of the 10 hybrid or non agency companies have greater than 50% of their books in agency assets. So in a world of we’re all looking for returns in similar markets, allocation procedures for every company I think is prudent not just us. So I think everybody is searching for yield and opportunity. I think where we are differentiated is our size and our relative low leverage right. So if we want to move on something we have the lines drawn, legal, accounting, everybody. It’s very clear what we can do, when we can act, and how we can do that. And I think it’s going to be an issue not just for us frankly, less for us but more for others that don’t have our capital base and don’t have our liquidity.

The comments are really helpful and appreciate it. It will be interesting to watch how the opportunities unfold and my personal view is that a more flexible diversified Annaly is going to be seen as very attractive by the investment community. So, thank you.

Thank you. We think so too.

Okay.

Thank you very much for your question.

This concludes our question-and-answer session. I would like to turn the conference back over to Wellington Denahan, Chairman and Chief Executive Officer for any closing remarks.

I just want to thank my team for doing a tremendous job again in challenging markets. They have really have exceeded my expectations and I am very proud of all of them. I also want to thank the shareholders for taking the time to listen to our call. If there is any questions you need to ask please feel free to give us a call and we will speak to you again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.