Good morning, and welcome to the third quarter 2015 earnings call for Annaly Capital Management, Inc. Any forward-looking statements made during today's call are subject to risks and uncertainties, which are outlined in the Risk Factor 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 these forward-looking statements disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date of the earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information. Please also note this event is being recorded. Participants on this morning's call include: Kevin Keyes, Chief Executive Officer and President; Glenn Votek, Chief Financial Officer; David Finkelstein, Head of Agency and Residential Credit; and Michael Quinn and Jeffrey Thompson, Co-Heads of Annaly Commercial Real Estate Group. I'll now turn the conference over to Kevin Keyes.

Thank you, [ph] Clia. Good morning and welcome to the Annaly third quarter earnings call. To begin, I'd like to revisit some of the basic market benchmarks we've talked about over the past few years, which continue to provide a clear picture on the state of the global macroeconomic environment as well as the broader markets. This same time last year, on our 2014 third quarter earnings call, we framed certain market comparison over a two-year timeframe, from the beginning of QE3, in September of 2012 until it ended in October of 2014. At that time, we pointed to numerous red lights flashing in the global markets, even as the Fed's balance sheet had grown to $4.5 trillion. Specifically, we discard the historic low levels of U.S. treasury and European sovereign yields, commented on oil prices sitting at a three-year low, described Chinese GDP growth at a five-year low and even dissected third quarter 2014 U.S. GDP to illustrate how the 3.5% annual growth rate at the time was misleading and not sustainable on an annual basis. In the past 12 months, as the Fed's balance sheet has remained flat, fiscal policy stagnant and revised tax policy nowhere to be found, these fundamental markets and macroeconomic indicators not only continue to flash red, but each measure has increased in volatility, while deteriorating significantly. U.S. and European yields have grinded anywhere from 15% to 40% lower, with 30% of European sovereign debt now having negative yields, around $1.9 trillion worth. Oil prices have continued to fall another 40% since this time last year. On a year-over-year basis, Chinese GDP growth is now below 7% for the first time since 1999, and last week U.S. GDP number was more than 30% lower than the revised level of the previously mentioned third quarter…

Thank you, Kevin. And as Kevin discussed, both volatility and fixed income markets continued in the third quarter, as global economic pressures materially impacted virtually all financial markets and left the Federal Reserve on hold through September. Interest rates retrace much of the increase we saw in the second quarter, credit spreads widened materially and agency MBS performance was only loosely aligned with swap hedges. While these factors did make for a challenging environment, our conservative positioning led to a roughly flat total economic return for the quarter. Additionally, the excess liquidity, as a result of our low leverage, allowed us to further diversify into residential credit, given wider spreads. With respect to agency MBS, while our positioning did not change materially over the quarter, we did modestly adjust the composition of our portfolio by reducing our 15 year pool exposure and adding to a TBA position. Dollar roll specialness continued to moderate this past quarter, but there still remains an advantage over repo in certain instances, which we expect to persist over the near-term. On the hedging side, as swap spreads tightened across the yield curve, we converted a small portion of our treasuries to treasury features in the swapped, while leaving the remainder of the futures position intact, given the potential for further swap spread tightening. As we enter the fourth quarter, in spite of an agency spreads at the widest levels of the year, we have not changed leverage materially, as we still expect continued elevated volatility surrounding global markets as well as U.S. monetary policy uncertainty. And just one additional point regarding the agency portfolio, as it relates to our enhanced disclosure and specifically with respect to long-term CPR changes that result in variability in our amortization expense. The stability of our normalized core earnings should…

Thank you, David. The third quarter saw continued improved in U.S. commercial real estate fundamentals with healthy demand across all property types. Vacancy rates across all asset types declined compared to last quarter, with office and industrial continuing a trend of 22 consecutive quarters of positive demand. Commercial real estate markets overall were maintaining a healthy equilibrium, with supply held and checked solid demand and positive rent growth. Investment sales volume was up 3% to $115 billion compared to this quarter last year and up 25% on a year-to-date basis, with values following fundamentals higher. While the pace of sales has more recently begun to slow down 10% in September, we don't see this as a weakening trend, as large take-private transactions continue to be announced with private equity taking advantage of the discount between listed markets and asset values. CMBS issuance was approximately $27 billion compared to about $23 billion in the third quarter of last year, an increase of 15%. Year-to-date volume is just over $77 billion, 12.6% increase over the $69 billion in 2014. Spreads, however, have a continued widening that started this summer, with AAAs now at about 120 basis points, 32 basis points wider than at the beginning of the year and 34 basis points wider than this time last year. In addition, BBBs are almost 200 basis points wider than this time last year. While, this type of rate expansion is significant, we have not yet seen cap rates move higher. The move up in the CMBS financing costs does however create opportunities for us as a balance sheet lender. CMBS is no longer the least costly financing vehicle for buyers in commercial real estate, increasing opportunities for us. As of the third quarter, the annually commercial real estate portfolio stood at approximately $2.4…

Thank you, Jeff. As Kevin mentioned earlier, in order to provide greater transparency, we have enhanced our financing disclosure this quarter, beginning with further granularity on our growing credit portfolio. You can find that information in our quarterly supplement that we filed. In addition, we have expanded our discussion of financial performance to include the concept of normalized core results, while also disclosing the estimates of long-term CPRs. These results are adjusted for the component of premium amortization that relate to period-over-period changes in estimates for long-term CPRs. The market volatility we experienced this year has quite a bit of movement in our long-term CPR estimates, which has also resulted in significant volatility in premium amortization going from period-to-period. And we understand that this has made a quite difficult to analyze and estimate our financial results, one need only to look at the latest few quarters to look at this. So providing the normalized core results, we're at looking to isolate the effect of those changes in the long-term CPRs, so that you can better understand the results of the company. And we'll point out that both core and normalized core results, while not a replacement for GAAP results, are intended to provide very useful supplemental information to assist you in better understanding the overall performance of the business going forward. So with that, beginning with GAAP results, we reported a net loss of $627.5 million or $0.68 a share in the quarter, which compares against $900 million of earnings or $0.93 a share in Q2. Unfavorable mark-to-market changes on interest rates swap were the primary cause of the quarterly change. Our core earnings declined sequentially to $217.6 million or $0.21 a share versus $0.41 the prior quarter. And changes in estimated long-term CPRs for the obvious factors that impacted…

[Operator Instructions] The first question comes from Steve DeLaney from JMP Securities.

I think, I'd like to start with the expanded CRE strategies, especially since you've got the leadership of the team there. In the past, the investments have been, I would say, maybe a little eclectic, a little bit of everything from mezz loans, preferred equity, et cetera. Just based on what we've seen in this recent large Blackstone loan, would it be reasonable for us to think that the largest growth opportunity, say, over the next 12 to 24 months would be in these senior floating rate loans on institutional quality real estate?

I'll just quickly give you an overview then Jeff will respond with more detail. Overall, I think you're exactly right. I think our strategy has morphed over time. And I think the biggest frankly fundamental reason for this shift is we want to make the business more scalable. So by definition, we'd move to more institutional strategy. So this past transaction with Blackstone is the type of business, to your point, that not only are we going to be doing, but we're going to hopefully replicate that with other sponsors. I think the other thing I would say is, we have a very strong team and it got stronger. And I think it's not like we're discarding yield strategy, I think it's a complementary group of people that we're able to hire from GE that the marketplace was after. And I think the reason we were able to attract them, to bring them here is because of the platform. And I think our size, liquidity, and I really call it when we speak to the marketplaces, I think you know is, we almost act like Switzerland in the world of commercial real estate, which is highly competitive, but we don't have the agenda of a lot of the sponsors out there. So I think we can partner with firms like Blackstone, because we're not necessarily a competitive threat in other parts of their businesses. But I'll turn it to Jeff to add more details.

Steve, we're not only focused on institutional real estate, more importantly even institutional sponsors, that that's really we're going to turn up the notch and focus on that group of private equity players that are out there, similar to this transaction here, and our pipeline already reflects that field of players that we're going after.

And Jeff, your comment, I was interested your comment that the CMBS market is not the competition for balance sheet lenders that it may have been before the spread widening. Do you think you will see more demand for, I guess, what I would call, mini perm type loans, where sponsors are simply going to say, you know what, I'm just going to sit, get a two-year floating rate loan and then I'll lock up my 10-year financing when CMBS tightens back. So do you think that adds opportunity for you in the near-term beyond just transitional properties?

As a matter of fact, in our pipeline right now we have two deals that are exactly that. They would have gone CMBS in the past. They are currently talking to us about floating rate, with a tighter cap that might replicate a fixed rate product, but that's over $200 million those two deals themselves, that showed up in the last 30 days that would have been. So we do expect to see more of that. So volatility in that space is good for us.

Steve, I think one thing I would add just on the business, the size of it, and it leads to our decision to disclose more on the credit businesses, commercial and non-agency resi credit. If you carved out these credit businesses as a standalone companies in the marketplace, I mean our commercial business, I think we'd be the fourth largest commercial mortgage RIET out there, just based on our equity capital base in the business. Similar to this resi credit platform that we've launched this year, if you carve that out, the 20 or so hybrids that you follow or 15, however you want to define them, we're in the top-ten with the equity capital base of around $500 million or so. So I think this platform, we've been branding it. I think the Blackstone deal is a good example of the brand now not just patching on in the marketplace, but we're executing with these sponsors that we hadn't previously. And these businesses are sizable, which is again why we chose to disclose more about the portfolios.

Yes, no question. I mean, the Page 25, the detail laying out the CRE portfolio is fantastic. So we appreciate that. Thank you.

The next question comes from Joel Houck of Wells Fargo.

Again, just want to reiterate that I think over the last two quarters you guys have shown remarkable resilience. Now, that we're at the end of kind of earnings season, it's clear that you guys outperformed on a relative basis, so kudos for that. The question, and not so much a question, but it's more something that is really interesting is you guys have done probably the most in terms of share buybacks. A constant theme we've heard during this earning season and really for several is that the agencies complex doesn't look all that attractive. Certainly, the hedging proved to be more difficult this quarter, and you got the potential for further dislocation from Fed rate hikes, or not. What prevents Annaly from, saying, look, we're going to just buyback a lot of stock and delevering agency business to the point where you're still '40 Act compliant, and you've got massive accretion to book value, which then further differentiates your valuation and put you in a position of strength, so that when the agency business does normalize, a, you can take advantage of it; and b, you can potentially acquire others that are at huge discounts to book. So I'm really kind of curious as to what's the logic or the rationale behind not accelerating buybacks in a massive way, again, on the guys of being '40 Act compliant, realizing you have to have some agency exposure?

So maybe mezz should do a take-private transactions is what you're saying? Joel, we've talked about it individually or not individually -- and the market is really focused on the issue. I think to your question, look, over the history of this company, I think shareholders own us, they have us in their portfolio as a nice dividend paying, stable property, as either a hedge or a complement to the other parts of their portfolio. So I think first of all, you don't return 600% over life of a company really without doing something right, and what we've done is paid dividends in the form of a REIT structure. So in our minds, we're a yield manufacturer in a world of no yield. So you're asking more of a corporate finance question. I think for us it's a strategic question, really more so than a corporate finance question. So what I would tell you is, look, this past quarter is a very good example of the platform that we have now. So to your point of shrink the agencies and increase value, I mean that's essentially what we did at this quarter in the form of the $1 billion of equity capital underlying resi credit and commercial investments that frankly are north of our cost of capital and their half is levered. So we can produce that yield with more durable earnings, more predictable earnings and we can sustain hopefully this level of distribution in a marketplace. To your point, in the last couple quarters, as you can see, the performance is bifurcated. And I think a monoline strategy without our liquidity with leverage that's 30% higher than ours and no other option, then buying back stock probably makes sense. But for us, if we want to continue to be a yield manufacturer and continue to be owned by the ones that own us for that yield, we think this diversification strategy, that's the reason we've done it over the last three or four years. I hear you on shrinking down in the whole corporate finance restructuring. Look, if it comes to that, I think the world will look a lot different than it is today. I would say, before it comes to that, we just think we have a lot of room to run within these four business platforms. And I think, frankly, there is going to be opportunities for us to take advantage of this location in the sector in different ways. And we've talked a little bit about that, where I think we can perhaps kick-off some assets at well below book value, and that's how we can continue to grow our earning base and our company.

Just to talk briefly about agency leverage, as I mentioned in my comments, we're not inclined to increase leverage, certainly, because there are some near-term risks, which we need to get through. But as you well know, agency spreads are certainly at the cheapest levels of the year. Our view is that, we're not inclined to take the portfolio down and meaningfully, given how inexpensive mortgages are relative to our hedges, which are swap. So it's not the time to delever the agency book, unless there is better opportunities in some of the other complementary sectors is how we feel.

And if I could just ask you a follow-up, Dave. And that's a good point, I mean, it does seem like agencies are cheap relative to swaps. How are you viewing the swap spread narrowing? Is this more transitory or is this something that we could live with for quite a while or is it just hard to really know?

Well, I mean, it is difficult to know. But we think that it will persist over, certainly, for the rest of the year. But generally speaking, it's transitory; it doesn't reflect the structural change in the swaps market. And the way we view it is, what we're trying to do is hedge our long-term funding, and our long-term funding is obviously LIBOR based and that's the root of swap. So we're not inclined to shift our hedges, given what we think is a temporary dislocation in the agency swap basis. Now, we'll see how it plays out. If it persist for a very long time, which we think is a low probability event and you get other relative value participants beginning to view the agency mortgage versus swaps trade as not a tight fit and they look for other hedges, and then you do have that more longer-term structural shift, we can adjust hedges at that point. But we don't see the need to consider that over the near term, certainly.

The next question comes from Brock Vandervliet from Nomura.

I thought I'd get a chance to lead off on the swaps spread issue, but anyway. I'll ask a follow-up. There certainly seems to be a seasonal aspect of this. I guess 30 year swap spreads have been negative for a very long period of time. But what we saw is, 10 year going negative in September and continuing to tighten almost daily since then. Can you talk about what your perspective is on some of the specific drivers for this, whether it's just seasonality or big corporate CMBS calendar that's leading the aberrations in this market?

The seasonality does come into play. We're late in the year. A lot of the macro firms somewhat are very quite. And so when you do get sort of significant moves and what we'll think of to be dislocations, you're not going to have the relative value folks come into play that you might at other times. But generally speaking, I think we have all heard about the drivers of this trade, it's predominantly attributable to overseas selling of treasuries, which are loading the balance sheets of U.S. dealers and creating upward pressure on treasury rates. Additionally, as you alluded to, there is corporate issuance, which is compounding the problem. Primarily, financials will drive swap spreads tighter, as they tend to issue and swap that into floating rate. And then there are some regulatory issues. It's much more efficient to have swaps on the balance sheet, given liquidity coverage, et cetera, than treasuries. So there's a lot of factors at play. The primary driver is the technicals associated with overseas selling. We don't know how long that will persist, but it doesn't appear to be letting up. And we think it's going to continue for the remainder of the year. And to your point about 10 year swap spreads; yes, this has been a major flow. Swap spreads at 10 year point of the curve are 25 basis points tighter than they were at the end of the second quarter. And I think 30 year swaps this morning were somewhere in the neighborhood of negative 47 basis point, 48 basis point. So it's unusual and it's something we're certainly watching very closely.

I heard you on the foreign selling now, typically the calendar kind of peaks in October and begins to tail off November, December. Maybe we see that this year -- I guess, I'm asking a very tactical question. But do you think we're kind of close to the maximum pain pointer?

I'd like to hope so. But in terms of the calendar, I think we had $12 billion to $13 billion in announced issuance from corporates this morning, Halliburton, Shell, et cetera. So there's still a little ways to go this year.

Excuse me. This is clear, this concludes our question-and-answer session. I'd like to turn the conference back over to Kevin Keyes for any closing remarks. End of Q&A

Thanks everyone for joining and we will speak to you next quarter.