Good morning. And welcome to the Fourth Quarter 2015 Annaly Capital Management 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 Ms. Jessica LaScala of Investor Relations. Please go ahead.

Good morning. And welcome to the fourth quarter 2015 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 filings. 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. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Participants on this morning’s call include: Kevin Keyes, Chief Executive Officer and President; David Finkelstein, Chief Investment Officer, Agency and RMBS; Michael Quinn and Jeffrey Thompson, Co-Heads of Annaly Commercial Real Estate Group; Glenn Votek, Chief Financial Officer; and Tim Coffey, Chief Credit Officer. I’ll now turn the conference over to Kevin Keyes.

Thanks, Jessica. Good morning. And welcome to the Annaly fourth quarter earnings call. On last quarter’s call, I compared and contrasted global macroeconomic conditions and framed certain market movements we had anticipated since the beginning QE3 back in September of 2012. As this quarter’s earnings season comes to an end, the realities of slowing growth and increased market volatility we’ve talked about, continued to persist. The fourth quarter’s negative 4% earnings growth for companies in the S&P 500 marks the worse quarter in over six years. And the VIX index, as one measure of market volatility, has spiked as much as 55% in the first two months of 2016. So, rather than reiterating market themes we talked about and lamenting the ever-challenging investment environment, I’d like to describe in more detail the platform and strategies we’ve put in place on this call, which have Annaly prepared now more than ever to maneuver in these demanding and volatile markets. I’ll begin by further framing our capital allocation and financing strategies over the past 12 months, now more comprehensively defined in our enhanced financial disclosure this quarter. Specifically, in addition to describing the improved and more sophisticated investing and financing approach in our core agency strategies, we have further detailed our three credit businesses: commercial real estate; residential credit; and middle market lending, which we have been managing for years and are now of the size and breadth on our balance sheet that maries this enhanced disclosure. Over the past 12 months with the relative and heightened volatility in the rates markets we anticipated, our allocation of capital into lower-levered floating-rate credit businesses, essentially doubled from 11% to 23% of our total equity capital. During 2015, we invested $1.5 billion by growing our commercial real estate business approximately 25%, launching our own…

Thank you, Kevin. The fourth quarter proved once again to be a challenging environment for mortgage investors as interest rates increased, yield curve flattened, and MBS exhibited further spread widening. In spite of this volatility, our low leverage and conservative positioning enabled us to generate a modestly positive economic return on a quarter. Prior to discussing our outlook for 2016, which is obviously of great interest to investors given the turbulence that has characterized all financial markets thus far this year, I’ll briefly recap the fourth quarter. I’ll being with residential credit where the more notable activity occurred in our portfolio last quarter as we added just over $500 million in non-agency assets. Residential credit spreads widened modestly in the fourth quarter and have further weakened thus far in 2016. We welcome this spread widening as we view it as primarily technical along with the decline in broader risk assets rather than reflective of the fundamentals of the U.S. housing market. Our credit portfolio is still relatively small which enables us to opportunistically take advantage of cheaper valuations. In other words, recent spread-widening more than compensates for the moderate shift in sentiment regarding the state of the U.S. economy, and housing fundamentals overall remain healthy. As it stands today, while we are certainly respectful of market volatility and elevated risk and liquidity premiums across the board, we do anticipate continuing to grow the residential credit portfolio in 2016. Turning the agency MBS, our position did not change materially over the quarter. We maintained our focus on call protected pools with stable cash flows in the form of both lower loan balances as well as seizing collateral. The continued spread-widening, left agency MBS LIBOR option adjusted spread at the widest levels since 2011. This is somewhat justified, given tighter swap spreads…

Thanks David. The fundamentals of the U.S. commercial real estate market remain strong. We’re seeing a growing dislocation between current property performance and the performance of the publicly traded capital markets. In the fourth quarter of 2015, CMBS spreads continued a widening trend that started in the summer and in 2015 both AAAs and triple BBBs have reached their widest levels since the last crisis. In addition, equity REIT share prices are also total of about 15% from peak levels reached in early 2015. We believe this is attributable to a combination of factors including one, a liquidity driven decline in a broader market that is shedding risk; and two, the market predicting slowing growth and a decline in fundamentals. 2015 saw volumes reach post-crisis record levels with 533 billion of property sales, up 23% over 2014 and 101 billion of CMBS issuance, up 7.5% over 2014. However, while previously announced deals continue to close, newly announced transactions have finally slowed considerably in the past three months as the volatility in the credit markets has disrupted acquisition activity. At this point, the pricing trend continues to be flat at historically low cap rate levels but as the path of any guide, the slowdown in activity does not bode well for sellers. Despite these challenges in the public markets, we still see significant investor demand for real estate in the private market with long-term sovereign yields at low levels including a sub 2% 10-year treasury. Global investors continue to look to U.S. real estate for yield and capital preservation. Although credit standards have tightened and spreads are moving wider, high -quality borrowers with good assets and good markets will still attract capital. As of the end of 2015, our commercial real estate portfolio stood at $2.5 billion. Net of leverage and…

Thanks Mike and good morning everyone. As Kevin mentioned, we continue to enhance our financial disclosure, consistent with the expansion of our credit businesses, which is intended to provide a greater level of transparency in terms of both composition as well as performance of those businesses. For example, this quarter, we added financing and leverage profile to our business line; we also provide additional detail on our various financing sources including rates [ph] and maturity profiles. As well, we continue to include in our discussion of our financial performance both core and normalized core results in addition to our GAAP figures, which while not a replacement for GAAP, are intended to provide useful supplemental information to assist you in better understanding the performance of the business. So with that, beginning with our GAAP results, we reported net income of just under $670 million in the quarter or $0.69 a share that compares to Q3 net loss of just under $628 million or $0.68 a share. The favorable quarterly change was largely attributable to unrealized market value changes on interest rate swaps. Our core earnings increased sequentially to $0.33 a share that compares to $0.21 a share in the prior quarter. Changes in estimated long-term CPR impacted both quarters through premium amortization expense. The Q4 reported premium amortization was $160 million and that compares to $255 million for the third quarter. This was due to a decline in projected long-term CPRs to 8.8% in comparison to 9.2% in prior quarter. The component of premium amortization due to the change in estimated long-term CPR resulted in benefit in the quarter of $18 million compared to a cost in Q3 of $83 million. Our normalized core earnings which are adjusted for this component of premium amortization, was $311 million or $0.31 a share…

Thank you. [Operator Instructions] Our first question comes from Douglas Harter of Credit Suisse. Please go ahead.

Hi. This is Actually Same Sam Choe filling in. So, I was just interested in hearing about where you see the best opportunities for risk-adjusted returns. And maybe on a related note, how do you see leverage trending this year?

Hi, Sam, it’s Kevin. I’ll give you the bigger picture and then I’ll let David and Mike and the rest of the team fill in the gaps. I mean I think the good position that we’re in is that we’re not a monoline. And we have, as I mentioned in my prepared comments, a diversified strategy. The four businesses are agency, resi credit, commercial, and middle market lending. And I think I’d say a couple of things. First, how we prioritize is really done on a daily basis in terms of the market and in terms of the supply and in terms of valuations. And in this marketplace, given the volatility, when I say daily, that’s not exaggerating. So, I think the beauty of it is, is we have multiple options. If you want to corner me today and have me forced rank those options, I think it’s been demonstrated over the past couple of quarters that we think there is value in shifting into certain types of credit at certain times, given the nature of the cash flows and the lower leverage profile. And by the way, these businesses tend to protect book value quite well amidst this volatility. I think resi credit obviously grew the most last year. I think our outlook is that it will grow this year but not at the same pace. Obviously, we’re going to be starting from a bigger base in terms of capital. Middle market lending is a business we’ve had here since 2009 and we haven’t talked much about it. It’s been a patient grower, very similar to some other things that we’ve done here over the past. That business will grow consistently just based on what’s happening in the marketplace with other participants that by definition, the competition’s kind of coming to us. Commercial real estate, you heard Michael’s comment, we’ve grown that business nicely. We have really a strategy that’s institutional rather than retail. And the definition of institutional business is it tends to be larger, higher profile; and by definition, if you ask me, more higher quality. So, I kind of mention them in that order because I think that’s probably the order of growth, if we were sitting here today. But that being said, the agency business, as our core is always going to be our core. And the liquidity of that strategy and the government backed nature of those assets and those cash flows, we have to make sure we get a very good premium to that return in order to participate in Annaly’s credit strategies. So, I’d summarize it that way. It’s really -- I think the resi credit, middle market lending grew last year and they will continue to grow. Commercial will be relatively lumpy to those two businesses. But overall, these businesses have to compete with the agency strategies, which in this market have got a little bit more attractive than they were certainly in the fourth quarter.

Okay, thanks. That was really helpful. I got just one more. So, when you’re talking about your funding position and talking about the flexibility, you mentioned RCap. And, I was just wondering, I mean, because there has been a lot of talk within the industry about alternative financing sources. And just wondering how long it takes normally for a REIT to get that -- the broker dealer sub fully operational and what kind of first mover advantage does that offer for you guys?

I’m not going to comment on how long it takes people to do it. We have reestablished the broker dealer, like I said 2008. And it takes a lot of work; it takes a lot of expertise; it takes infrastructure, systems, legal, technology. So, I think in terms of a first mover advantage, I mean we’ve had it for eight years or so. So, I don’t know if that’s first mover or not, but that is decent period of time. I think we haven’t talked much about it, because it’s one of our many sources of financing. Part of the strategy to diversify frankly into complementary assets was, there is complementary financing out here from our relationships. And so, you can’t do one without the other. And I think RCap is -- it’s a critical element that -- put it this way, we are glad we’ve had it in place as long as we have.

Your next question will come from Bose George of KBW. Please go ahead.

Hi, good morning guys. It’s Eric [ph] on for Bose. How do you think about taking realized gains in certain areas of the portfolio as rotate into new strategies?

That’s a good question. When we think about accounting consequences of shifting the portfolio, we want to -- we generally want to preserve the yield in the portfolio. So, we try not to take gains when we do shift, simply because we want to preserve the yield. But nonetheless, if the economics suggest we do so, we absolutely will, but it’s the consideration nonetheless.

Okay, alright. That’s really helpful. Thanks. And is it your intention to run with the smaller hedge portfolio, as you transition into new strategies? And if so, do you think that would be -- you’d save anything on your swap expense?

You’re saying reduce the hedge position…

Right.

…given the diversification? It does go hand in hand. And to some extent, you can argue that some of the credit positions actually do act as a rate hedge. We also have a rather large IO portfolio, which has negative duration and positive yield. And to the extent that sector cheapens up, that’s an alternative to reducing the hedges. But our hedge position’s been relatively stable for the past year and there is no immediate plan to reduce that particularly given where rates are currently.

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

Thank you. Just to stay on that hedge theme for a second. So, what you’re saying is there haven’t been changes yet, theoretically there could be. But it sounds like, I don’t want to put words into your mouth, it sounds like given how low rates are right now, you’re kind of hesitant to lower the hedge in the agency book, even though conceptually, because your diversification strategy has played out, you still want to be cautious. Is that the thinking right now?

Yes. This is David, Joel. That’s a good way to think about it. In the current environment, we want to maintain enough duration in the portfolio, if the market should further rally, but not too much duration to where we won’t be in good shape for or in the event of a selloff. So, we’re very cautious with respect to rates here. And we’re playing it down the middle on that front. And we’ll look for alternative hedges, should the environment suggest we do so.

Okay. And then the follow-up, I mean if we saw better growth prospects out of U.S. and presumably higher rates, would that the kind of what you’re looking for to perhaps reduce the hedge on the agency book?

Yes, potentially and higher rates would naturally extend our duration. We were comfortable with where our duration profile was at the end of the year, which was a little over a year. And as rates have rallied, the mortgage markets contracted, and we’re still about half a year and so, some of that would come through extension of the portfolio. But there is certainly a level where we would take more rate risk, absolutely.

Okay. And lastly, given your comments about, I guess lower leverage on the non-agency stuff, is it -- does it make sense that as credit spreads and the overall health of the capital markets and liquidity improve that you would look to take leverage up and therefore the returns that you’re seeing in non-agency right now are kind of comparable to agency but they could be higher, it’s not something that you want to lever in this type of environment. Is that a fair characterization?

No. I would say we don’t have to lever as much in the non-agency space, currently. If you just take credit risk transfer for example where the most recent deal price, which show on the second last piece for the low LTV bucket with 675 basis points, you can fund that as about LIBOR plus 165, 175. One turn of leverage gets you to double digit returns. So, given where credit spreads are at, you’re not -- it’s not -- it’s necessary to take as much leverage. Now, should the fundamentals change, spreads tighten, and we’re much more comfortable, we’ll certainly add leverage to that business and also capital.

Joule, it’s Kevin. I think, the one thing I would add is just take a step back among all the credit businesses now that they’re of obviously more scale, this time versus where they were at this time last year. Our plan is to obviously optimize the capital and have incremental structural leverage put on, on these businesses that wasn’t there because we didn’t have the size. So, you’ll see, if we do our job, we’ll have more efficient use of our capital with underlying leverage in these businesses in any growth scenario going forward this year.

Our next question comes from Brock Vandervliet of Nomura. Please go ahead.

I’ve seen a huge amount of volatility just since December, one item is obviously the flattening of the curve -- going from 120 to about 100 today. How should we think about your normalized spread dynamics looking forward over the near term?

Hi, Brock, this is David. Also as the market’s rallying and the curve has flattened, agency spreads have widened a little bit. And I would think about it, currently in agencies yields up 280 to 285 or thereabouts, the hedge and financing costs are about 150 to 160 and you apply six times leverage to that and can still get low double digit returns in terms of absolute returns and spread.

Okay. Just as a follow-up, it appeared to us the third quarter normalized net interest spread was somewhat different than you showed in the current release. Was there a re-class or anything from the third quarter to the fourth?

No.

Okay, thanks. I’ll follow up offline.

This concludes our question-and-answer session. I’d now like to turn the conference back to Mr. Kevin Keyes for closing remarks.

Thanks everyone for dialing in this morning and your interest in Annaly. And we will talk to you next quarter. Thanks.