Good morning and welcome to the Annaly Capital Management Quarterly Conference Call. All participants will be in listen-only mode. [Operator Instructions] I would now like to turn the conference over to Jillian Detmer, Head of Investor Relations and Marketing. Please go ahead.

Good morning and welcome to the First Quarter 2019 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 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. 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 first quarter 2019 investor presentation and first quarter 2019 financial supplement both found under the Presentation section of our website. Annaly intends to use our web page as a means of disclosing material nonpublic information for complying with the company's disclosure obligations 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 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; Mike Fania, Annaly Head of Residential Credit Group; Timothy Gallagher, Annaly Head of Commercial Real Estate Group; and Tim Coffey Chief Credit Officer. I'll now turn the conference over to Kevin Keyes.

Thank you, Jillian. Good morning everyone and welcome to the call. Today, we see the return of flashing red lights across markets. The environment is characterized by a flattening curve, the hunt for yield has compressed credit spreads with little differentiation of risk. Hypnotizing low volatility has resurfaced and trended 70% lower than the Christmas Eve high. The correlation between the S&P 500 and Treasury market has risen over 20% in the past two months. The last time across asset correlations increased this much was in advance of the spike in volatility and the Southern market correction that followed in the fourth quarter of last year. And IPO volume, always a leading indicator of a high-priced equity market already stands at approximately $30 billion for the year, a dangerously high level not seen since 2007. Within this challenging marketplace, there are three significant and expanding macro realities which substantiate Annaly's important position in any market environment: GSE mandatory shrinkage and potential reform, the Fed's exit from MBS purchases and banks reducing their footprint in the mortgage market. Going forward and over the long-term, Annaly's model, size, diversity and scalability provide the market a permanent capital solution for the REIT distribution of these assets and provide our shareholders a unique opportunity to participate in the growth of our relevance, not only in the mortgage markets, but also in the financial sector and the economy overall. So first, GSE mandatory shrinkage and potential reform. Over the more notable developments since our last call was the appointment of Mark Calabria as the Director of the Federal Housing Finance Agency. In his first interview in his role, he has stressed a renewed focus to return Fannie and Freddie to private hands. While GSE reform remains highly topical, the reality is, we have already been…

Thank you, Kevin. The Federal Reserve's meaningful policy shift drove financial markets in the first -- interest rates lower implied volatilities, spread tightening across fixed income sectors. Agency MBS retraced a portion of the spread widening the plagued the sector in the fourth quarter -- and other risk sectors. We added $14 billion in assets the vast majority of which allocated to the agency sector increasing our equity capital allocation agency to 76%. We generated a 6.2% economic return over the quarter with leverage in line with year-end at seven turns. Turning to portfolio activity and beginning with the agency business, our asset additions included both pools as well as TBAs, the majority of which were purchased coincident with our equity raise in January and levered returns in excess of 100 basis points above current levels. Higher-quality specified pools significantly outperform more generic collateral, given the renewed demand for call protection in light of lower rates. Investor preference for pools has also been motivated by concerns of a more negatively convex TBA deliverable as the Fed further unwinds its portfolio and originators continue to deliver higher loan rate loans into relatively lower coupon securities. While these concerns are certainly valid they appear to be now priced into the TBA market and thus we anticipate maintaining our holdings of TBAs over the new term. Further widening between pool and TBA pricing may suggest that expectations of the cheapest to deliver cohort are overly pessimistic in which case the option to take delivery of TBAs maybe a viable strategy. On the hedging side, the decrease in our hedge ratio is largely attributable to runoff of shorter date swaps. We opted to maintain this lower hedge ratio as the decline in interest rates reduced MBS durations and consequently our rate exposure remains well…

Thank you, David. While our earnings release discloses both GAAP and non-GAAP financial results, I'll be focusing this morning primarily on our non-GAAP core results and related metrics all excluding PAA. Additionally, a number of the themes for the year that Kevin has discussed were quite evident in the quarter, notably capital optimization and technology and I'll briefly touch on certain aspects of each of those. So, beginning with the financial results for the quarter, we generated core earnings of $433 million or $0.29 a share which compares to $417 million also $0.29 a share in Q4. We reported a GAAP loss of $0.63 versus the prior quarter GAAP loss of $1.74. Among the factors impacting the GAAP results were losses on the hedge portfolio and investment sales both of which improved from the prior quarter. Comprehensive income which includes fair value changes in our agency portfolio running through equity was $811 million or $0.56 per share and resulted in a 3% increase in book value. Interest income was up modestly in the quarter, but was largely offset by a decline in dollar roll income and interest expense increase driven by both higher rates and balances with our average repo rate for the quarterly increasing roughly 21 basis points. The higher interest cost was fully offset by the interest component of our swaps portfolio which remains in a net receipt position and resulted in our overall cost of funds declining modestly. However, we expect this benefit to diminish given current LIBOR and repo funding rates and maturing swaps that have contributed to net receipt position, so while our net interest margin was 151 basis points for the quarter, these factors coupled with a persistently flat yield curve will exert pressure on our net interest margins going forward. During the quarter,…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bose George with KBW. Please go ahead.

Hey good morning. Actually I wanted to ask about returns in the agency market it sounds like that's where you see the best opportunities, but can you talk a little bit more specifically about spreads and what kind of leverage are you targeting for the agency business?

Sure. Hi, Bose. This is David. In terms of returns the current yield on agency MBS is around 330 with funding costs in the low 260s and you get a hedge benefit of about 20 to 25 basis points. And that leads to at eight turns of leverage a little over 10.5% levered nine turns is a little bit over 11.5%. The way we look at agency leverage we do have a bar-belled approach we're very under-levered in the credit businesses, the average is about one turn and we do use the agency portfolio to help fund the portion of those assets. So, agency leverage is somewhat artificially higher to about nine turns currently. Does that answer your question?

Yes. Yes, that's helpful. Thanks. And then just wanted to get your thoughts on agency spreads and in the scenario where rates rally or potentially go the other way just how do you think spreads are set up for the year?

Sure. So, we did experienced a bit of a rally in late March which did sort of questioned the callability of agency MBS there were some fears that refis would pick up when we got into the 230s on the 10-year note. And so Agency MBS did underperform. To the extent that the market does rally back and it's in a parallel fashion without being influenced by a rate cut by the Fed or rate cuts by the Fed and the curve doesn't steepen, then you would expect agency to underperform in that environment because of prepays. And to the extent we sell off modestly, agency should do just fine, because we get away from sort of that callability of the sector.

Okay, great. Thanks.

You bet.

The next question comes from Mark DeVries with Barclays. Please go ahead.

Yeah. Thanks. So I heard your comments about flattening yield curve and compressing spreads and also expecting kind of additional pressure on NIM going forward. But when I look at, kind of, the returns available that you described in your different strategies, it didn't seem like it moved that much from last quarter. So I'm wondering if you can give me a better sense of kind of what's changed on your outlook for earnings power here that led to the dividend cut.

Hey, Mark. Well, what's changed, I mean, I think – look, the way we approached this quarter is not just this quarter, it's really for the foreseeable future. And my commentary around the last five years and the stability that we've -- that we demonstrated was we were the only company who didn't cut dividends for over five years. In fact, there were multiple cuts 60 over 60 dividend cuts in the mortgage REIT sector, 29 dividend cuts in the agency sector and the average cut was about 30% over time. And in the agency sector the average cut was about 44%. So we put that into context to the past and now we're here with the future outlook. We want to manage this company, again, for the next five years at a level of, not just leverage or positioning for any one business, but overall for this entire business. How we think capital allocation should unfold and what our goals are. And our goals are to basically continue the diversification strategy and become a less levered longer-term cash flow company. So in saying all that, this quarter's reduction was really a function of frankly things we can't control in the marketplace. And I started my commentary with some of that. So my -- the one qualification I would make is, I think, this market, we are in the threshold of a lot more risk in all asset classes than the peers. This is entirely a momentum market and it's not a fundamentally driven market. So by definition, we could continue the dividend. We could maintain or be close to it by increasing leverage, but in this world with so much leverage already in the system, with the latency out there and the correlations, as I mentioned, pointing to a…

Yes. Mark, I'll just add. We did talk a lot about the return environment last quarter, as Kevin noted, and returns have obviously compressed, but one of the areas of focus in terms of understanding why it is on the liability side of the balance sheet, you've obviously heard a lot this quarter about the compression in LIBOR versus financing rates, which have probably declined from 282 LIBOR peak to 257 this morning. So 25 basis point decline in LIBOR, which impacts our receive rate on our swaps, but also we did have swaps that were, with pay rates, set at lower rate environment which have runoff and so that also hurts the returns somewhat. And so going forward, we're comfortable with the return profile but it's -- in this curve environment, in this spread environment it's just not what it has been in the past.

Okay. That’s very helpful. Thank you.

The next question comes from Doug Harter with Credit Suisse. Please go ahead.

Thanks. Given your commentary about the attractive -- the potential volatility out there and wanting to be cautious, what are your thoughts about leverage levels and any expectations that you might take down leverage during the periods that come?

Sure, Doug. This is David. And as I said in my prepared comments, the higher allocation to agency does allow us to increase leverage. We are relatively low levered. We're 76% allocated to agency, it's seven turns. We do have a little bit of room to move that higher. In terms of volatility, it's certainly something where you're concerned about. We have recently added to our swaps position and we'll manage that volatility. But in terms of rate volatility we're not as concerned about rate volatility as we are the potential for credit volatility. I think yesterday's discussion by Pau [ph] was relatively balanced. We do feel like the bar to cut interest rates is relatively high given what he said about inflation being transient et cetera. And also yield do somewhat have a ceiling given low inflation expectations as well as the global yield landscape. So rate volatility we're not as concerned about, which is supportive of Agency MBS, but credit volatility could pick up. And Kevin will add.

What I will just add to that there is the macro picture here Doug is – there’s a supply-demand imbalance on Agency MBS is an opportunity for us. I mean, there's -- the estimate for the issuers is about $430 billion of Agency MBS to come to market. About $80 billion of that has been out and there's $350 billion to come. So there is opportunity there for us on a risk adjusted basis assuming spreads aren't -- it's more likely they are going to lighten up here than contract with all supply not to mention the $1.2 trillion of treasuries yet to come out of the $1.6 billion -- trillion on the budget. So there is that opportunity in the agency market, which is foreseeable and it's liquid. To David's points on credit, I think we've been pretty consistent over the past couple of years to say we're picking our spots episodically and we're going to do probably bigger deals in credit, not necessarily industry focused but just go deeper in the credit and write bigger checks, which typically those types of financings are a lot less competitive, so we can maintain the returns with a lot less leverage on our competition because we can write the big check and that complements our -- the agency strategy, which will benefit from the supply to come, we believe relative to the returns of where we are today.

Great. Thank you, guys.

The next question is from Matthew Howlett with Nomura. Please go ahead.

Thanks. And Kevin just to follow-up on the credit, I mean long-term you've always said that you want to see a much bigger allocation to that I know you're picking your spots. What do you need to see the spreads widen out and relative to agencies to start picking up that exposure it sounds like it's got to go down a little bit in the near term? Or do we need to see the cycle play out or just better quality deals happen just sort of what's the long-term -- how should we think about the long-term picture on exposure to that market?

Hi, Matt this is David. I think all of the above. The spread widening we saw in December was encouraging and we certainly added in securitized form. We do still see quality deals in our lending businesses. And when they're priced appropriately and lending spreads have not contracted as much as security spreads certainly. But there's a lot of competition for those assets, but nonetheless we are aggressive and we would like to see some loosening. In terms of the resi business that does happen to be one area where we're certainly confident where and we're at in housing as well as where spreads are. Housing's probably better situated than some of the other credit sectors just given the technicals in favor of housing. In loan spreads, while security spreads have certainly contracted this year, loan spreads have remained relatively stable. So we're picking our spots, we can add assets in all of the businesses but runoff is also pretty robust and so we're hopeful to replace assets but we're going to be patient.

Are you getting any benefit from your propriety securitization shelf in terms funding costs? Are you seeing -- or is that potential to improve returns long-term?

You're talking about the resi business?

Yes.

Well, yeah, so just giving you a little bit of history of that business. We started it predicated on FHLB financing, which is obviously highly beneficial relative to warehouse lines and even entails a lower cost than securitization. But what we're seeing in the securitization market over the last year to two has been a significant pickup in the securitization sector for resi credit. And spreads continue to tighten liquidity continues to improve. Net supply in residential credit is likely to be positive this year, where it's -- up until last year it was declining year-over-year from diminishing legacy RMBS. And now we actually do have what we think to be a healthy securitization market and that's indicated by the success of the last couple of deals we've done. So the financing rates are not quite as -- not as attractive as FHLB financing, but we do get a better advance rate, and its non-recourse leverage, and it allows us to be more nimble and further deploy our capital and continue to securitize.

Great. And just one question on the dollar rolls. Should we -- how should we think about that modeling sort of flat going forward given the pools just have the much better carry?

Yes. Dollar rolls, exactly, it's essentially coupon minus implied financing rates and the decline in our dollar roll income was a function of a couple of things. Number one, was the rate hike late last year, which increased implied financing rates from that standpoint, as well as a decline in specialness in the first quarter a pretty meaningful decline that we've experienced over the last number of quarters. This quarter however there is a little bit of specialness in the market, but we don't expect it to persist. And so you probably would think of dollar rate roll income to be somewhat flat so long as the Fed doesn't move.

Thanks a lot.

You bet.

The next question comes from George Bahamondes with Deutsche Bank. Please go ahead.

Hi. Good morning. Just a follow-up question on a response little while ago here. There were some comments around concern with volatility. Is this broadly just credit markets or they're specific pockets of the credit markets that you were referring to there just wanted to see if you can provide some additional either color or detail possible?

Well, George, I think my commentary was just overall in the market among virtually every asset class. I think, it's not like it's new news for us to see risks throughout the credit market. I think we just think that there is momentum money, which is non-fundamental that has continued to drive financings and valuations in terms and structures that on the credit side that we're wary of. I think the biggest thing though beyond that I think is just the disconnect. When I talked about correlations, the disconnect in risk assets, the value of risk assets versus lower risk assets. And we're a company that -- in times like these when there's no volatility and there is a rush to chase every kind of high growth IPO that's out there regardless of the value, people tend to not pay attention to us. And then in times like the fourth quarter of 2018 or the first quarter of 2018 or the about times of volatility that's when our valuation actually and our attention actually increases. So I think the thesis here is that, we're a market leader, we dwarf the size of most, no one is as diverse as we are, of course, there is risks. We have to manage just like everybody else. But we're not a one-trick pony. We're not over-levered in any sector by any means. And at the end of the day we're waiting for that volatility. When it hits that's when we pounce. And the two most volatile timeframes in the past couple of years, as I've said, over and over first quarter 2016, first quarter of 2018 is when we made some large acquisitions of companies that were not prepared and were not run in a conservative way. So I could go on and…

The next question comes from Rick Shane with JPMorgan. Please go ahead. Q – Rick Shane: Hey good morning guys and thanks for taking my question. Look, I really appreciate the focus on preserving capital. Is it fair to say that the dividend cut reflects a disconnect in terms -- a timing disconnect that from a longer-term perspective, you see risk in your credit-sensitive opportunities and not great risk-reward there for now and that ordinarily in this type of environment or that facing that environment you lean into the agency book, but given the flat curve and the expectation and so prepayments picking up, doesn't make sense to do that right now? A – Kevin Keyes: Yes. I think that's -- you're pretty much spot on Rick. And you know us better than anyone in how we operate. We're very proud of our track record and this whole diversification strategy allowed us to outperform in a market that wasn't without challenges. And looking forward, we just want to have the optimal flexibility with our capital to focus on the next phase and the next stage of this company. And the next stage of this company is going to be what we're telegraphing is continued diversity ultimately lower levered portfolio once credit cheapens up here. And in the last two months, it's tightened 30%. By the way, the equity market is up 30%. So that's the correlation that doesn't make sense to us in the near term. So what we're doing is we're setting the table for the longer term, optimize our flexibility. In this position now we're very confident that protecting our book value and producing this premium yield is achievable. Before a couple of years ago, as rates -- as the Feds lifting and even from liftoff on, the…

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 of Annaly and we look forward to speaking to you all again next quarter. Thanks.

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