Good morning. And welcome to the Annaly Capital’s Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jillian Detmer, Head of Investor Relations and Marketing. Please go ahead.

Thank you, Garry. Good morning, and welcome to the fourth quarter 2018 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 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 contents 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. 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. As a reminder, Annaly routinely posts important information for investors on the company's website, www.annaly.com. Content referenced in today's call can be found in our fourth quarter 2018 investor presentation and four quarter 2018 financial supplement, both found under the Presentations section of our website. Annaly intends to use our website as a means of disclosing material nonpublic information for complying with the Company's disclosure obligation under Regulation FD and to post and update investor presentations and similar materials on a regular basis. Annaly encourages investors, analysts, the media and others interested in Annaly to monitor the company's website in addition to following Annaly's press releases, SEC filings, public conference calls, presentations, webcasts and other information it posts from time to time on its website. Please also note that this event is being recorded. Participants on this morning's call include Kevin Keyes, Chairman, Chief Executive Officer and President; David Finkelstein, Chief Investment Officer; Glenn Votek, Chief Financial Officer; and other members of the management. I'll now turn the conference over to Kevin Keyes.

Thanks, Jillian. Good morning, everyone, and welcome to Annaly's fourth quarter earnings call. This quarter we decided to change it up a little bit in terms of the format of our call. We'll start with Glenn, who will provide an overview of our financials stressing certain operating benchmarks. David will follow by offering update on portfolio activity, while also discussing certain investment trends and comparable return parameters and some very curious assumptions in the sector. I will then finish our prepared remarks with broader comments on our strategies and the critical themes we'd like to highlight as we think about 2019 and beyond. So now I'll turn the call over to Glen to start us off.

Thanks Kevin, and good morning. I'll provide brief financial highlights for the quarter and full year 2018. And while our earnings release discloses both GAAP and non-GAAP core results, I'll be focusing this morning primarily on our core results and relating metrics, excluding PAA. 2018 was a year Annaly again demonstrated the strength and stability of its business model. Our diversification strategy continue to advance, supported by an operating platform, providing efficiencies of scale and a funding model offering attractive and diverse financing sources to support our continued growth. We generated core earnings per share excluding PAA of $0.29 for the quarter, $1.20 for the full year and a full year GAAP loss of $0.06. Core earnings supported the cumulative 2018 dividend distributions made in the year of $1.20 per share. The portfolio generated 149 basis points of NIM, relatively flat versus Q3. And trends in both our core earnings and NIM illustrate the stability of our model. For example, over the past three years, the standard deviation of our quarterly core EPS and NIM is about $0.01 and four basis points respectively. Now over that same period, comparable peer earnings have been three times more volatile and NIM 50% more volatile. Core ROE for the quarter was just under 11.5% for the quarter, and approximately 11% for the full year. Our core ROE per unit of leverage, which was 164 basis points in Q4, is another indicator of the stability of our performance with a standard deviation of just six basis points over the past three years, while peer results have been over two times more volatile. Now in addition to the stability of these metrics, they're also attractive on an absolute basis and the performance of our investment groups have been quite impressive over this period given the…

Thank you, Glenn. At this point in the earning cycle presumably everyone is aware of the volatility that characterize markets over the fourth quarter and we were certainly not immune to this turbulence as the [risk off] [ph] sentiment led both agency and credit spreads meaningfully wider to end 2018. Leverage on our portfolio increased modestly quarter-over-quarter, but we maintain a relatively high hedge ratio of 94%. Capital allocated to our credit businesses declined to 28% as we applied slightly more financing to credit given the more favorable terms as Glen discussed. Turning to portfolio activity and I will begin with the agency sector. We continue to rotate out of lower yielding age securities which improved our asset yield by 16 basis points and helped offset higher financing costs. We made a sizable and timely rotation into higher coupon MBS later in the quarter coincident with the material under performance of that sector. We also increased our Fannie Mae guaranteed multifamily position by roughly 50% with low double-digit returns and attractive convexity profile. Although we continued adding to our multifamily portfolio into 2019 recent spread retracement has brought that sector back to levels that we view as fair relative to core agency assets. On the liability side, we replaced our interest rate swap runoff with longer dated contracts, which also explains the modestly higher pay rate on our swaps portfolio. We also extended the average days on our repo position by roughly 40%. As the premium preterm in the repo market dissipated in the fourth quarter, a trend that has continued into 2019 given reduced expectations for Fed hikes going forward. In Residential Credit, our whole loan strategy maintained its pace last quarter and in addition to our securitization in October, we just recently completed a $394 million transaction in…

Thanks David. As I said in my introductory remarks, we decided to enhance the format of these calls. While continuing to address specifics in my commentary, I also want to elevate the conversation as well. Not just every quarter, but every day we have so much to talk about and strive to accomplish at this company. Certain other market participants are confined to only posturing about leverage and spreads have one, maybe two isolated asset classes. Our increasing leverage meaning risk is the only potential way to more profit. That's it, that's what they have to talk about. What we have here at Annaly is undeniably different, a much larger, more diversified and by definition more stable company that produces superior risk adjusted returns. We have built a yield manufacturing machine, loaded with optionality that no other company in our sector has. So as we begin 2019 I thought it would be appropriate to highlight some of the critical themes relevant and unique to us and our shareholders. I keep a list of about 50 strategic priorities, market themes and trends in three categories in my notebook that change as the year evolves. But for the purpose of this call I'll spare you. You all will be relieved to hear that I've narrowed it down to a top 10 list of themes for 2019. So here we go. First theme, the market backdrop has finally become more favorable for Annaly. After nine rate hikes since December, 2015 we believe the Fed is in the ninth inning of raising short-term rates. There's an obvious combination of economic, fiscal, political and macro pressures that contribute to a shift toward more accommodated monetary policy than we've been able to project for a very long-time. So with our cost of doing business peaking, our…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Doug Harter with Credit Suisse. Please go ahead.

Thanks. I know you guys talked about the fact that the capital was kind of initially deployed in agency, but could you talk about kind of how you see the relative risk return kind of across the broad bucket that you have and how we should think about that 29% credit allocation, how that could trend over the coming months and quarters?

Sure. Hi, Doug, this is David. Relative value across both credit and agency, each have their opportunities and challenges. I think with agency the sector has cheapened a fair amount, but we do have concerns over supply. So we think the cheapening is certainly warranted. We see levered returns in the agency sector at eight times leverage, roughly in the low to mid-11s, which is certainly reasonable given how flat the curve is right here. Commercial returns are a little bit lower than that mid-10s call it. Resi, the deal we just did had, as I said, had a levered return, the agency eligible securitization levered return to close to 12%. And then the transaction we did in the Middle Market space had a levered return with just over a quarter turn of leverage of over 11%. We're obviously, with respect to credit, we know we're late cycle and we certainly are aware of that. And so we have made a vigilant effort to make sure the portfolio is high in quality, which we will continue to do in 2019. But we think both credit has its advantages, given the continued diversification that it offers, as well as what we're able to accomplish with partnerships and the unique transactions we're able to achieve. And we think it balances well with the agency portfolio. So we would anticipate, as I said in the prepared remarks, that we’ll continue to allocate more into credit, but we'll be cautious of it because we can still achieve a better risk adjusted return over time by increasing our allocation to credit.

Sorry, what I would just add, it was in our written remarks. And I think we're a bit less direct than I would, well then I'll be now I would just say a couple of things. After the fourth quarter and especially after December of last year, how we talk about returns even though the market now has calmed down, we need to be direct with the market and shareholders both current and prospective. These returns that we're talking about have been consistently aligned with what our guidance has been aligned with what we've delivered. I think the volatility in the rest of the sector unfortunately reflects guidance that hasn't matched the actual returns. Companies talking now about 14%, 15%, or even higher than that gross or even net ROEs, it's just not achievable. And I think when the sector does that and they don't produce, and then we have volatility like we did in the fourth quarter and companies lose 8%, to 10%, to 12%, to 15% of book value and miss earnings and drop earnings by 13% or 15% after that there's a question of credibility. So your question is prudent. I think we've been consistent and the message is that when we say we're going to have returns on an asset class or an investment that's we've delivered. And I think there should be some – there's some ownership of that. And also, there are other points in my commentary just to put an end point on it, is it the returns we're delivering in any asset class, Agency there are three credit businesses are a lot less levered. And our credit businesses were 50% to 75% less levered. And yet we're delivering similar or better risk adjusted returns. So I don't mean to get on my soapbox, but I'm pretty proud of what we said is what we delivered. The problem with the rest of the sector is, not aligning their guidance with what is actually achievable in the marketplace.

I appreciate that commentary, Kevin. And then on the credit assets, how scalable are some of the relationships you have? Can those kind of be expanded to kind of deliver more credit product to you or they kind of is the pace that they're kind of delivering now kind of topped out? Kind of how do you think about that opportunity from a size perspective?

Doug, well we certainly think they have grown. If you look over time, with respect to Residential Credit, for example, last quarter was our highest volume in terms of loan acquisition and this year has started out providing a fair amount of flow into that business. So we do expect to be able to certainly maintain the pacing and grow it. The transaction in December in Middle Market Lending is another example of that. The largest transaction we've done. And we continue to cultivate relationships that are very long relationships. And by conveying to the market and showing that we can certainly manage very large transactions, distribute risk as necessary, it feeds on itself. So business begets business, I think. And the same is true in the commercial business, in the commercial business where as I said, we doubled the capital allocated to that business. And again, we're very conscious of risk, it's not as if we're the best bid in the market at all, we’re highly discernible. But nonetheless we've penetrated relationships and sources of flow to where everything that we're doing in credit has demonstrated reasonably strong growth and we can maintain it.

What I would just add just over the top, big picture, I mentioned 20 joint ventures and we deal with another part of our origination business over a 100 sponsors. It's early innings with these joint ventures. So in terms of scaling them as David mentioned, we've been growing, but it's really just beginning. And I think probably as importantly or more importantly, the 100 sponsors so we do with the middle market lending and commercial real estate we really tier these relationships. And I think in the past five years we've come up with probably three or four tiers of quality, or size of these sponsors. So it's a really good compliment of joint ventures that we get proprietary flow for Resi Credit. And then equity sponsors that I said, we represent Switzerland to lending to their equity. But at the end of the day when credit is not easy, these deals are – a lot of these deals are highly risky that we stay away from. And I think the benefits of these relationships are just starting to kick in. But we're definitely – we're honing in on the higher quality larger sponsors when it comes to credit in commercial real estate and middle market lending. And the joint ventures will continue. And I think the way we can scale there is the larger partners will do more in alternative products. So we'll be scaling within some of the joint venture partners.

Great. Thank you.

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

Good morning guys. Thanks for taking my questions. Just wanted to ask there was a $3.5 million loan loss provision which asset class was that related to? And can you talk a little bit about the credit?

Sure Rick. So that is related to a very modest position that we had in our ACREG business. It was a loan where we had a mez position. And we provisioned appropriately for that. It's in the process of work out at this point in time.

Got it, okay. Second question again given the diversification your accounting is going to become, or how you look the world can become a little bit more complicated. As we move to a CECL environment next year, when you think about your middle market lending business, will you move to a lifetime loss reserves or will you be able to account for those on a fair value basis, like the BDCs?

I think we have the flexibility to go either course. It's something that we're still in the process of implementing and we're evaluating the alternatives there. But we will have some flexibility with respect to how we approach that.

Got it. And is that – will that be the same in the commercial real estate – in the commercial mortgage business as well?

Yes.

Great. Thank you guys.

The next question comes from Ken Bruce with Bank of America Merrill Lynch. Please go ahead.

Hi, thanks. Good morning. Thank you for all this information and perspective. I guess as I pull back and look at the business, you've clearly been making strides at diversifying the business and growing it and we've seen that across a number of other businesses. I guess it's not entirely clear that the market is differentiating it's valuation of your business in a corresponding way. I'm always interested in understanding how patient you are in terms of pursuing this particular strategy if it in fact is not necessarily generating a distinction valuation for your shareholders?

Thanks Ken. It's the never-ending search or quest for the Holy Grail, right? Look, I think valuations across the market have been distorted. We've talked about that in terms of valuing risk assets versus lower risk assets. So that's impacted us over the past five years just in the overall valuation arbitrage or lack thereof, but distinct to us. And we talked about it, I think last call, I'm really proud of what we've done, I'm proud of what we’ve built. The commentary I have today about our top 10 themes, I think we have 50 or I got a 100 in my mind, we're not necessarily smartest guys in the room we don't have to be and that's why we build – we built. And I think in terms of book value stability, core earnings stability, lower beta than anybody, higher NIM, risk adjusted returns performance. I'm convinced that we've seen a very good following and an increase in our institutional shareholders across the globe, than over time we'll be further rewarded. But at the same time we've been – we've rewarded our shareholders as we’ve said with this strategy. So, we're always driven to outperform and of course everyone always wants a higher valuation, but we're a defensive stock. We have a cyclical strategy and within that we have countercyclical strategies that cushion us like no other. And that allows us to really navigate just about anything. And look, when more volatile times hit, that's when our valuation premium shows up and that's when we've been able to be more opportunistic as I mentioned in the first quarter of 2016 or the first quarter of 2018. So, we're never comfortable. I sense a degree of hubris in the sector, while when companies talk about increasing leverage today because it's – because they're comfortable with that, after they just lost 10% of book and missed their earnings by 13% or 15%. We’re never comfortable. Our shareholders pay us to be paranoid and this strategy we put in place I think is one that can outperform, we can plug and play and I could go on and on and on. I think our valuation over time will be rewarded and has been rewarded in the form of growth capital like nobody else.

Thank you. And I guess you've done a great job at diversifying the business, at growing it, at institutionalizing it. As you've kind of pointed out, you went through a whole lot of statistics in terms of what you've done on the governance side as well. And I'm going to come back on a theme that we've talked about before, but the one missing piece in terms of truly institutionalizing your businesses is in fact internalizing the manager. And I guess I'd like to – kind of get your most current thoughts on that? And that has always been and I think it's still – that internal structure tends to warrant a much better valuation in the market and in fact you would pursue that, if that make sense. Thank you.

Well yes, I'll answer it again. I mean, first of all, I'll just say three things. First, our structure as it is today, we're operating four complimentary businesses that we put in our presentation materials, if you carve them out it’s separately, publicly traded companies, they'd all be market leaders in their own rights. So when operating those four businesses relative to the peers, we are operating in an operating expense level to equity and assets, to equity it's 50% more efficient, on assets it's about two-thirds more efficient versus the overall market. So in this structure, we're still operating 50% or two-thirds more efficiently. Secondly, as it relates to – as it relates to other internally managed companies, those companies – there's been some fake news out there, right? When you restructure and you charge the shareholders there's cost to be borne for that and it's the shareholders costs since the management's benefit. So if you sell management company A, a couple of years ago for $500 million or $600 million, amortize that cost, I don't know, three, five or 10 years that just doesn't go away so the ratios of today don't really reflect – don't at all reflect, the cost the shareholders had to pay for pulling whatever gains you think are forward. So, we could straight line all these costs and we're still a lot less expensive than even the internally managed comps that run one or two businesses tops. And the last thing is look it – I think Ken you know I think better than anybody, the intellectual capital and the management here it's really been in place since 2013. We have a lot going on to increase value not for the manager. The value we increase goes right to the shareholder. And one of my comments carries about one of our top 10 themes about new product development, before we're going to go embark upon other strategies which were totally capable of the fee streams of those strategies don't go to the manager, they go to the shareholder and that's all part of the R&D that we are doing here and part of the future of this company that these strategies are not just scalable for the public shareholder, they're scalable for potentially private shareholders. And at the end of the day, the sum of the parts means a lot more. So we don't feel inhibited by a structure at all. I think as it relates to valuation, you heard my prior comments. I just think there's a lot of upside to this company, some of which we can't even talk about, I won't even talk about because there's lot of imitators out there, but we feel entirely good about what we're delivering to our shareholders and the relative value that we're delivering.

Thank you. That's helpful, appreciate it.

The next question comes from Bose George with KBW. Please go ahead.

Hey guys good morning actually I missed this, but can you give us your book value since quarter-end?

Hi Bose, this is David. As I said in the prepared remarks through the end of January up roughly 3%.

Okay, great. Thanks. And can you just talk about your outlook for agency spreads? You noted some concerns about supply can you just elaborate on that?

Sure, Bose. You know the biggest elephant in the room is the Fed, obviously they are net seller and we still have uncertainty about how long that will persist. Our view is that it will likely persist beyond the end of the quantitative tightening. So that is something that gives us caution, spreads do reflect supply in the market certainly, any incremental capital is coming into the agency sector but it very likely could require considerably more incremental capital. We think it's there, but potentially a wider spread. So we think the market is priced appropriately, but there's risk on the horizon in the agency sector from supply.

And to the extent the Fed, starts tapering at some point. Do you think they do it by continuing to let mortgages runoff by buying treasuries or how do you think that plays out?

Yes, continuing to let mortgages runoff and buying the front end of the treasury curve.

Okay, great. Thanks.

Yes.

This concludes our question and answer session. I would like to turn the conference back over to Kevin Keyes for any closing remarks.

Thanks everyone for joining the call today and for your support at Annaly. We look forward to speaking to you all again in next quarter. Thank you.

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