Q4 2021 Annaly Capital Management Inc Earnings Call

Good morning, and welcome to the annual REIT capital management's fourth quarter 2021 conference call.

Speaker 1: Good morning and welcome to the Annalie Capital Management's fourth quarter 2021 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Sean Kensal Director of Investor Relations. Please go ahead.

Speaker 1: After today's presentation, there will be an opportunity to ask.

Speaker 1: To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sean Kintzel, Director of Investor Relations. Please go ahead.

Good morning, and welcome to the fourth quarter 2021 earnings call for <unk> capital management.

Speaker 2: Good morning and welcome to the fourth quarter 2021 earnings call for Annerley Capital Management.

Any forward looking statements made during today's call are subject to certain risks and uncertainties, including with respect to COVID-19 impacts which are outlined in the risk factors section in our most recent annual and quarterly SEC filings.

Speaker 2: Any forward-looking statements made during today's call are subject to certain risks and I'm sorry.

Speaker 2: including with respect to COVID-19 impacts, which are outlined in the risk factors section in our most recent annual and quarterly SEC filing.

Absolutely and results may differ materially from these forward looking statements.

Speaker 2: actual events and results may differ materially from these forward-looking states.

We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings.

Speaker 2: We encourage you to read the 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 only accurate as of the date hereof.

Speaker 2: Additionally, the content of this conference call may contain time-sensitive information that is only accurate as of the date you're up.

We do not undertake and specifically disclaim any obligation to update or revise this information.

Speaker 2: 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.

Speaker 2: 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, MLD routinely post important information for investors on the company's website.

Speaker 2: As a reminder, Analee routinely posts important information for investors on the company's website, www.analee.com.

Ww Dot dot com.

Content referenced in today's call can be found in our fourth quarter 2021, industrial presentation and fourth quarter of 2021 financial supplement both found under the presentation section of our website.

Speaker 2: Content reference in today's call can be found in our fourth quarter 2021 investor presentation and fourth quarter 2021 financial supplement, both found under the presentation section of our website.

And we intend to use our webpage 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.

Speaker 2: Anali intends to use our webpage as a means of disclosing material and non-public 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.

Participants on this morning's call include David Finkelstein, President and Chief Executive Officer.

Speaker 2: Participants on this morning's call include David Sinklestein, President and Chief Executive Officer, Serena Wolf, Chief Financial Officer, Yoko Urtas, Chief Investment Officer, Mike Fania, Head of Residential Credit, and other members of management. And with that, I'll turn it over to David Sinklestein.

So you know well Chief financial Officer.

Okay, ERCOT, Chief investment Officer, Mike Danielle head of residential credit and other members of management.

And with that I'll turn the call over to David.

Thank you Sean good morning, everyone and thank you for joining us for our fourth quarter earnings call. Today, I will provide an overview of the current macro environment briefly discuss our performance during the quarter and full year 2021, and close with our outlook for the year ahead. Ilker will then provide more detailed commentary on our investment portfolio.

Speaker 3: Thank you, Sean. Good morning, everyone, and thank you for joining us for our fourth quarter earnings call. Today I'll provide an overview of the current macro environment, briefly discuss our performance during the quarter in full year 2021, and close with our outlook for the year ahead. Ilker will then provide more detailed commentary on our investment portfolio, while Serena will discuss our financial results. And as noted, our other business heads are also here to provide additional color during Q&A.

While Serena will discuss our financial results and as noted our other business heads are also here to provide additional color during Q&A.

Now beginning with the macro landscape, we saw increasingly challenging market conditions in the fourth quarter and into 2022 is the robust performance of the U S. Economy has made it evident that a withdrawal of a pandemic era stimulus is imminent strong consumption and investment activity helped the U S economy grow five seven.

Speaker 3: Now beginning with the macro landscape, we saw increasingly challenging market conditions in the fourth quarter and into 2022 as the robust performance of the US economy has made it evident that a withdrawal of pandemic-era stimulus is imminent.

Speaker 3: Strong consumption and investment activity helped the US economy grow 5.7% in real terms in 2021, marking the best annual growth in nearly 40 years. Meanwhile, the labor market has seen a rapid recovery as employers added 6.4 million jobs last year and the unemployment rate fell to 3.9%.

Sent in real terms in 2021, marking the best annual growth to nearly 40 years. Meanwhile, the labor market has seen a rapid recovery as employers added $6 4 million jobs last year and the unemployment rate fell to three 9%.

Both measures suggest that the labor market has recovered significantly since the onset of the pandemic stimulus measures fueled this rapid recovery, which has also spurred inflation to generational highs as seen in December when the consumer price index reached 7% year over year.

Speaker 3: Both measures suggest that the labor market has recovered significantly since the onset of the pandemic. Stimulus measures fueled this rapid recovery, which has also spurred inflation to generational highs, as seen in December , when the consumer price index reached 7% year over year.

Although much of this increase in prices was initially seen as temporary ongoing elevated price gains across various categories of goods and services raise the risk that inflation could persist for some time accordingly current macroeconomic conditions have led to a meaningful shift by the fed which now views less accommodative monetary.

Speaker 3: Although much of this increase in prices was initially seen as temporary, ongoing elevated price gains across various categories of goods and services raise the risk that inflation could persist for some time. Accordingly, current macroeconomic conditions have led to a meaningful shift by the Fed, which now views less accommodative monetary policy as the primary way to ensure parts of its mandate. Full employment and stable prices are being met.

<unk> policy is the primary way to ensure parts of its mandate full employment and stable prices are being met.

In addition to an accelerated taper fed has begun to signal a larger number of higher than previously expected.

Speaker 3: In addition to an accelerated taper, the Fed has begun to signal a larger number of hikes than previously expected. Front-end rate markets are pricing roughly five 25 basis point rate hikes this year beginning in March, up from just two one quarter ago.

And rape markets are pricing roughly $5 25 basis point rate hikes. This year beginning of March up from just two one quarter ago.

Given the uncertainties around the economy, the fit is likely to direct market pricing and hike in line with it rather than provide forward guidance well ahead of time.

Speaker 3: Given the uncertainties around the economy, the Fed is likely to direct market pricing and hike in line with it rather than provide forward guidance well ahead of it.

The fed has also begun to discuss shrinking its balance sheet and we expect the fed will let assets run off at a pace faster than the prior taper of $50 billion per month.

Speaker 3: The Fed has also begun to discuss shrinking its balance sheet, and we expect the Fed will let assets run off at a pace faster than the prior taper of $50 billion per month.

Now this notable shift in policy expectations and higher volatility led to a tightening of financial conditions and an underperformance of assets. Most closely tied to monetary policy best seen through the spread widening in agency MBS in recent weeks.

Speaker 3: Now this notable shift in policy expectations and higher volatility have led to a tightening of financial conditions and an underperformance of assets most closely tied to monetary policy best seen through the spread widening in agency MBS and recent...

Turning to <unk> portfolio agency MBS underperformed given weaker demand following the initiation of fed taper and a flattening of the yield curve and anticipation of wider spreads we manage the portfolio to decrease leverage and optimize our asset allocation with total assets decreasing by approximately $5 billion to eight.

Speaker 3: Turning to Annalise's portfolio, agency MBS underperformed given weaker demand following the initiation of Fed taper and a flattening of the yield curve. In anticipation of wider spreads, we managed the portfolio to decrease leverage and optimize our asset allocation with total assets decreasing by approximately $5 billion to $89 billion in quarter.

9 billion in the quarter as.

As a result economic leverage declined slightly from $5 eight to five seven times and we were certainly not immune to the spread volatility as we experienced an economic return of negative two 4%. However, we generated earnings available for distribution of 28 cents unchanged from the prior quarter and exceeding.

Speaker 3: As a result, economic leverage declined slightly from 5.8 to 5.7 times.

Speaker 3: And we were certainly not immune to the spread volatility as we experienced an economic return of negative 2.4%. However, we generated earnings available for distribution of $0.28 unchanged from the prior quarter and exceeding our dividend by 6 cents per share.

Our dividend by six cents per share.

With respect to capital allocation in line with recent quarters, we increased the allocation to our credit businesses by approximately 200 basis points to 32% in the fourth quarter as prospective returns continued to favorite credit.

Speaker 3: With respect to capital allocation, in line with recent quarters, we increased the allocation to our credit businesses by approximately 200 basis points to 32% in the fourth quarter as prospective returns continued to favor credit.

Looking back on the full year, our credit allocation increased approximately 10 percentage points from December 2020, even with the successful sale of our commercial real estate business, which underscores the favorable fundamentals and strong execution from our resin credit in middle market lending businesses.

Speaker 3: Looking back on the full year, our credit allocation increased approximately 10 percentage points from December 2020, even with the successful sale of our commercial real estate business, which underscores the favorable fundamentals and strong execution from our Resi credit middle market lending business.

And I'll touch more on our outlook, shortly but notably both market and business specific tail wins remain favorable for our credit businesses.

Speaker 3: I'll touch more on our outlook shortly, but notably both market and business specific tailwinds remain favorable for our credit businesses.

2021 was a transformative year for <unk> marked by the sale of our CRE business. The launch of our mortgage servicing rights platform and the expansion of our residential credit business. The collective impact of these initiatives has increased our presence throughout residential housing finance and allow us to allocate capital effectively.

Speaker 3: Now 2021 was a transformative year for Analie, marked by the sale of our CRE business, the launch of our mortgage servicing rights platform, and the expansion of our residential credit business.

Speaker 3: The collective impact of these initiatives has increased our presence throughout residential housing finance and allow us to allocate capital effectively where returns are most attractive, a key differentiator for Annaly.

Where returns are most attractive a key differentiator for analysts.

I'd like to briefly touch on notable milestones in our businesses and how they are better equipped annually to be nimble in the midst of volatility.

Speaker 3: Now I'd like to briefly touch on notable milestones in our businesses and how they have better equipped Analee to be nimble in the midst of all of the tillage.

First our MSR business had a solid year with assets, increasing over 500 million throughout 2000 $21 million to $645 million. We successfully established our MSR platform last year through the addition of key hires procurement of strategic partnerships and build out of the operations and infrastructure necessary to scale the business.

Speaker 3: First, our MSR business had a solid year with assets increasing over 500 million throughout 2021 to 645 million. We successfully established our MSR platform last year through the addition of key hires, procurement of strategic partnerships, and build out of the operations and infrastructure necessary to scale the business efficiently.

Sufficiently as a result of these efforts we have proven to be a key player in the market ending the year as the fifth largest boat buyer of MSR and.

Speaker 3: As a result of these efforts, we have proven to be a key player in the market, ending the year as the fifth largest bolt buyer of MSR.

Now with over 200 billion of MSR commitments already through the end of January we're continuing to see progress towards fully scaling the platform and we expect to see increased market activity given diminished ridge nadir profitability.

Speaker 3: And with over 200 million of MSR commitments already through the end of January , we're continuing to see progress towards fully scaling the platform and we expect to see increased market activity given diminished originator profitability.

Our residential credit platform, which grew nearly 90% last year remains diversified with the ability to deploy capital efficiently and either whole loans were securitized markets.

Speaker 3: Our residential credit platform, which grew nearly 90% last year, remains diversified with the ability to deploy capital efficiently in either whole loans or securitized markets.

The generation of assets, bringing lease balance sheet, while controlling strategy diligent and servicing outcomes remains paramount to our investment approach business activity was enhanced by the launch of our whole loan corresponded channel, which expanded our sourcing capabilities through the addition of new strategic partners and product offerings.

Speaker 3: The generation of assets for Annelies balance sheet while controlling strategy, diligence and servicing outcomes remains paramount to our investment approach. Business activity was enhanced by the launch of our whole loan correspondent channel which expanded our sourcing capabilities through the addition of new strategic partners and product offers.

We've also benefited from new bulk partnerships established outside of our correspondent channel and altogether. These efforts helped drive the group's record $4 5 billion in whole loan purchases last year, which exceeded the amount of originations in both the prior two years combined.

Speaker 3: We've also benefited from new bulk partnerships established outside of our correspondent channel, and altogether these efforts helped drive the group's record $4.5 billion in whole-own purchases last year, which exceeded the amount of originations in both the prior two years combined.

Further Onslow Bay remains a programmatic issuer of Securitizations pricing 13 whole loan transactions totaling $5 3 billion since the beginning of 2021 with Ob Xb and the fourth largest nonbank issuer of prime Jumbo and expanded prime MBS over the past two years and with housing fundamentals.

Speaker 3: Further, Onslow Bay remains a programmatic issuer of securitizations pricing 13 whole loan transactions totaling $5.3 billion since the beginning of 2021, with OBX being the fourth largest non-bank issuer of Prime Jumbo and Expanded Prime MBS over the past two years. With housing fundamentals expected to stay strong, residential credit should remain a key driver of our overall portfolio growth in the year ahead as we build on our origination and securitization momentum.

Specs to stay strong residential credits should remain a key driver of our overall portfolio of growth in the year ahead, as we build on our origination and securitization momentum.

Now shifting to our 2022 outlook our portfolio is well prepared for volatility, which we anticipated would materialize as the fed normalizes monetary policy.

Speaker 3: Shifting to our 2022 outlook, our portfolio is well prepared for volatility, which we anticipated would materialize as the Fed normalizes monetary policy.

First we have thoughtfully reduced our economic leverage turn and a half since the onset of Covid to five seven times the lowest it's been since 2014 our.

Speaker 3: First, we have thoughtfully reduced our economic leverage to turn and a half since the onset of COVID to 5.7 times, the lowest it's been since 2014. Our defensive leverage profile is further supported by our low capital structure leverage, with 88% of our equity in common stock and minimal asset level structural leverage, as highly liquid agency MBS make up the vast majority of our portfolio.

Our defensive leverage profile is further supported by our low capital structure leverage with 88% of our equity and common stock and minimal asset level structural leverage is highly liquid agency MBS make up the vast majority of our portfolio.

Second we have substantial liquidity with $9 3 billion of unencumbered assets of $500 million year over year and this liquidity is complemented by a wide array of financing options, including our own broker dealer.

Speaker 3: Second, we have substantial liquidity with $9.3 billion of unencumbered assets, about $500 million year over year. This liquidity is complemented by our wide array of financing options, including our own broker-dealer.tracks.com

Finally, we are conservatively hedged to mitigate interest rate risk with a yearend hedge ratio of 95% and we expect to remain close to fully hedged over the near term.

Speaker 3: Finally, we are conservatively hedged to mitigate interest rate risk with a year-end hedge ratio of 95%, and we expect to remain close to fully hedged over the near term.

Now with ample liquidity and historically low leverage we were well positioned to take a more offensive posture, if and when the opportunity presents itself. While agency returns are increasingly attractive zilkha will elaborate on we believe there will be better tactical opportunities out the horizon, and we'll be patient given uncertainty around the market and the <unk>.

Speaker 3: Now with ample liquidity and historically low leverage, we are well positioned to take a more offensive posture if and when the opportunity presents itself. While agency returns are increasingly attractive, as Ilker will elaborate on, we believe there will be better tactical opportunities out the horizon and will be patient given uncertainty around the market and the Fed. But should assets continue to widen past current levels, which we deem close to fair value, we stand ready to add fundamentally desirable assets.

Fed, which should assets continue to widen past current levels, which we deem close to fair value, we stand ready to add fundamentally desirable assets.

Finally, before handing it off to Ilker to discuss our portfolio in greater detail I wanted to congratulate him on recently being named our Chief investment Officer, I've worked with Ilker at three different institutions for the better part of the past 20 years and I cannot think of an individual more knowledgeable about mortgages and prepayments were better suited.

Speaker 3: Finally, before handing it off to Ilker to discuss our portfolio in greater detail, I wanted to congratulate him on recently being named our Chief Investment Officer. I've worked with Ilker at three different institutions for the better part of the past 20 years, and I cannot think of an individual more knowledgeable about mortgages and prepayments, who are better suited to help us drive success brandly into the future.

To help us drive success brand lead into the future.

Thank you, Florida kind words, David is.

Speaker 4: Thank you for the kind words, David. As you discussed, the fourth quarter was challenging for agency MBS due to a combination of facts.

You discussed the fourth quarter was challenging for agency MBS due to a combination of factors.

<unk> initiated and then accelerated the tape it which in conjunction with risk off sentiment caused by delighting variant and geopolitical risks led to significant lessening and an uptick in interest rate volatility.

Speaker 4: The Fed initiated and then accelerated the taper, which in conjunction with risk of sentiment caused by the virus variant and geopolitical risks led to significant curve flattening and an uptick in interest rate over the last year.

Mortgage he missed theirs, notably banks turned their attention to 2022 without fed support and decrease the pace of their purchases.

Speaker 4: Mortgage investors, notably banks, turned their attention to 2022 without Fed support and decreased the pace of their purchases.

<unk> performance was broad based across the coupon stack with supply being onto enough sentries, well higher coupon struggled into the code.

Speaker 4: MBS underperformance was broad-based across the coupon stack, with supply weighing on 2 NFs and 3s, while higher coupons struggled into the curve.

Hudson.

Although our portfolio was not immune to these factors, we had been proactively reducing our MBS basis exposure throughout 2000 to a new one.

Speaker 4: Although our portfolio was not immune to these factors, we had been proactively reducing our MBS basis exposure throughout 2021. In Q4, we reduced our agency holdings by roughly $5 billion, primarily through TBA sales, bringing the total 2021 portfolio reduction to $10 billion.

In fourth quarter, we reduced our agency holdings by roughly 5 billion, primarily through TBA sales, bringing the total 2002 into one portfolio reduction to $10 billion.

Through these three sizing our portfolio construct remains well positioned they're close to coupon stack in lower coupons, we continued to favor tba's, which makes them is our liquidity profiles and despite the initiation of the tapers dollar roll financing remains special in the context of 30 to 40 basis points.

Speaker 4: Through this resizing, our portfolio construct remains well-positioned across the coupon stack. In lower coupons, we continue to favor TBAs, which maximize our liquidity profile, and despite the initiation of the taper, dollar-roll financing remains special in the context of 30 to 40 basis points.

Meanwhile, our specified portfolios by upping coupon up in quality and this is after 40 years season, which should provide resilient cash flows as we shift out of refinancing in one month and into one that favors extension protection.

Speaker 4: Meanwhile, our specified portfolio is biased up in coupon, up in quality, and is roughly four years seasoned. We should provide resilient cash flows as we shift out of a financing environment and into one that favors expansion protection.

In terms of our interest rate exposure.

Speaker 4: In terms of our interest rate exposure, we adjusted hedges toward the front end of the yield curve by selling additional short-term treasury futures, which increased our hedge ratio to 95% of our liability.

Hey, just the pages towards the front end of the yield curve by selling additional short term treasury futures, which increases out his vision to 95% of our liabilities.

We have also added short term sulfur swaps, which are an efficient tastes of our repo funding levels at a conservative patient profile portfolio is integral to managing high volatility market environments like the one we experienced recently.

Speaker 4: We have also added short-term software swaps, which are an efficient edge to our refunding level.

Speaker 4: Our conservative hedge portfolio is integral to managing high volatility market environments like the one we experienced recently.

The current rate levels. The comex the profile of the agency MBS market has improved meaningfully, but we continue to pursue a conservative approach to managing interest rate risk.

Speaker 4: At the current rate levels, the convexity profile of the agency MBS market has improved meaningfully, but we continue to pursue a conservative approach to managing interest rate risk.

This is the year end.

Speaker 4: Since the year-end, we have seen a swift move higher in rates and repricing in MBS as the market digests technical impact of Fed monetary policy tightening.

<unk> seen a civic move higher in rates and repricing in MBS as the market digests technical impact of fed monetary policy tightening.

We're hoping to move wider MBS spreads are within a few basis points of average 2018 levels, which was the last time, the fed was reducing balance sheet.

Speaker 4: Following the move wider, MBS spreads are within few basis points of their average 2018 levels, which was the last time the Fed was reducing balance.

Then drawing historical comparisons we believe mortgage cash flows are currently more attractive compared to 2018 for multiple reasons.

Speaker 4: When drawing historical comparisons, we believe mortgage cash flows are currently more attractive compared to 2018 for multiple reasons.

Other fixed income alternatives are relatively tight from a historical perspective.

Speaker 4: Other fixed income alternatives are relatively tight from a historical perspective.

More of the mortgage universe is locked away in fed and bank held to maturity portfolios and the prepayment outlook is much better for the mortgage universe.

Speaker 4: More of the mortgage universe is locked away in Fed and bank health to maturity portfolios, and the prepayment outlook is much better for the mortgage universe.

In high coupons remaining borrowers did not refinance after months with historically low mortgage rates. So we anticipate they would be less reactive to changes in rates going forward.

Speaker 4: In higher coupons, remaining borrowers did not refinance after months with historically low mortgage rates, so we anticipate they would be less reactive to changes in rates going forward.

Meanwhile, due to very high realized home price depreciation case, Sharp's refinancings should alleviate extension risk and lower coupon mortgages.

Speaker 4: Meanwhile, due to very high realized home price depreciation, cash-out refinancing should alleviate extension risk in lower-coupon mortgages.

All of these factors should materially improve the profile and predictability of mortgage cash flows consistent with these trends our portfolio paid two and a 1.4 CPR in Q4, 7% slower than in Q3, and we expect a further deceleration of approximately 15% in Q1 of 2000.

Speaker 4: All these factors should materially improve the profile and predictability of mortgage cash flows. Consistent with these trends, our portfolio paid 21.4 CPR in Q4, 7 percent slower than in Q3, and we expect a further deceleration of approximately 15 percent in Q1 of 2022.

Between the two.

With respect to our MSR platform, our fourth quarter purchases brought the portfolio up to nearly 650 million in market value net of runoff.

Speaker 4: With respect to our MSR platform, our fourth quarter purchases brought the portfolio to nearly $650 million in market value net of runoff.

Additionally, as David mentioned with over $200 million in bulk MSR commitments in January and the recent price appreciation due to the selloff in rates.

Speaker 4: Additionally, as David mentioned, with over $200 million in bulk MSR commitments in January and the recent price appreciation due to the sell-off in rates, our current MSR portfolio has reached nearly $1 billion in market value.

Our current MSR portfolio has reached nearly $1 billion in market value.

The sector remains very active due to consistent disposition of MSR Baidu originator culminated cup.

Speaker 4: The sector remains very active due to consistent disposition of MSR by the originator community.

Coupled with wider spreads we see this as an attractive growth opportunity for our MSR business, we just complementary to our core agency strategy.

Speaker 4: Coupled with wider spread, we see this as an attractive growth opportunity for our MSR business, which is complementary to our core agency strategy.

Turning to residential credit <unk>.

We continued to execute our primary strategy of acquiring expanded residential whole loans to loans low base there.

Speaker 4: We continue to execute our primary strategy of acquiring expanded residential hall loans through Anzalo Bank.

The economic value of residential credit portfolio grew by approximately 330 million quarter over quarter, primarily through the additional $1 7 billion of whole loans. The retention of us. It's manufactured throughout will be X securitization platform and the deployment of capital into short spread duration securities.

Speaker 4: The economic value of residential credit portfolio grew by approximately $330 million quarter over quarter, primarily through the addition of $1.7 billion of whole loans, the retention of assets manufactured through our OBX Securitization Platform, and the deployment of capital into short-spread duration security.

Return on our securitization strategy remains in the low double digits with minimal recourse leverage.

Speaker 4: Return on our securitization strategy remains in the low double digits with minimal recourse leverage.

The residential credit portfolio ended Q4 with $4 6 billion of US, it's representing 3.1 building off the firms capital.

Speaker 4: The residential credit portfolio ended Q4 with $4.6 billion of assets, representing $3.1 billion of the firm's capital.

Our view on housing fundamental strength remains intact, despite mortgage rates, increasing as the shortage of 124 units of single family housing in the United States continues to be a long term structural issue that theres no near term resolution.

Speaker 4: RV1 housing fundamental strength remains intact despite mortgage rates increasing, as the shortage of 1 to 4 unit single-family housing in the United States continues to be a long-term structural issue that has no near-term resolution.

The supply demand imbalance, so pausing stock comp combined with the strength of the consumer spelling sheet has continued to play out in outsized home price appreciation posted for dilution out of orbit and say agreements and stable delinquency roll rates, all benefiting our existing portfolio.

Speaker 4: Supply-demand imbalance of housing stock combined with the strength of the consumer's balance sheet has continued to play out in outsize home price appreciation, positive resolution out of forbearance agreements, and stable delinquency roll rates, all benefiting our existing portfolio.

Lastly.

Our middle market lending portfolio had an active quarter closing nine deals totaling over 325 million commitments, while five borrowers repaid.

Speaker 4: Our middle market lending portfolio had an active quarter closing nine deals, totaling over $325 million in commitments, while five borrowers repaid.

Middle market lending ended the fourth quarter with nearly 2 billion in assets up 4% from the prior quarter. The portfolio's strong credit profile as demonstrated through a 10% increase in underlying borrowers average EBITDA since closing and a nearly 30% reduction in seasonal results.

Speaker 4: Middle market lending ended the fourth quarter with nearly $2 billion in assets, up 4% from the prior quarter. The portfolio's strong credit profile is demonstrated through a 10% increase in underlying borrowers' average EBITDA since closing and a nearly 30% reduction in CISL reserves throughout the year with no loans on non-accruals.

Throughout the year to be no loss on non accruals.

And as discussed last quarter the closer of our private closed end fund allows for increased kept the location flexibility and provides recurring fee revenue to the REIT.

Speaker 4: And as discussed last quarter, the close of our private closed-end fund allows for increased capital allocation flexibility and provides recurring fee revenue to the REIT.

As David discussed the current environment is marked by challenging conditions as the fed begins to remove its accommodative policy that has supported asset prices and financial conditions since the onset of the pandemic nearly two years ago.

Speaker 4: As David discussed, the current environment is marked by challenging conditions as the Fed begins to remove its accommodative policy that has supported asset prices and financial conditions since the onset of the pandemic nearly two years ago.

We remain focused on protecting the portfolio through a defensive positioning and proactive hedging.

Speaker 4: We remain focused on protecting the portfolio through defensive positioning and proactive hedging.

In addition, a key focus will be to opportunistically grow our MSR and residential credit businesses, which should provide strong returns and diversification benefits to our broader portfolio.

Speaker 4: In addition, a key focus will be to opportunistically grow our MSR and residential credit businesses, which should provide strong returns and diversification benefits to our broader portfolio.

Although the the main patient in light of recent spread widening in agency MBS, the improving cash flow fundamentals and increased prospective returns on the sectors should provide attractive reinvestment opportunities and even potentially bring leverage back to levels more consistent with our historical average closer to the rest of <unk>.

Speaker 4: Although we remain patient in light of recent spread widening in agency MBS, the improving cash flow fundamentals and increased prospective returns on the sector should provide attractive reinvestment opportunities and even potentially bring leverage back to levels more consistent with our historical average, considerate of our overall capital allocation framework.

Our overall kept location framework.

With this I will hand, it over to Sandra to discuss our financials.

Speaker 4: With this, I will hand it over to Serena to discuss our finances.

Thank you Erica and good morning, everyone.

Today I'll provide brief financial highlights for the quarter and as of December 31st 2021, and discuss selected year to date metrics.

Speaker 1: Today I'll provide brief financial highlights of the quarter and as of December 31, 2021, and discuss select year-to-date metrics.

Consistent with prior quarters, well earnings release, discloses GAAP and non-GAAP earnings metrics My comments will focus on our non-GAAP AAD unrelated to key performance metrics, which exclude PAA.

Speaker 1: Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA.

As discussed earlier, the last quarter of the year exhibited challenging market conditions, resulting from a risk off sentiment and omicron variant and anticipation around the initiation of the fed tapering.

Speaker 1: As discussed earlier, the last quarter of the year exhibited challenging market conditions resulting from a risk-off sentiment over the Omicron variant and anticipation around the initiation of the Fed tapering.

Notwithstanding this more difficult economic return environment, we have again delivered solid earnings and ample coverage of approximately 125% of our dividend.

Speaker 1: Notwithstanding this more difficult economic return environment, we have again delivered solid earnings and ample coverage, approximately 125% of our dividend.

To set the stage with some summary information and book value per share was $7 97.

Speaker 1: To set the stage with some summary information, our book value per share was $7.97 for Q4, and we generated earnings available for distribution per share of $0.28.

Q4, and we generated earnings available for distribution per share of 28.

Book value decreased 42 cents for the quarter, primarily due to lower other comprehensive income of $680 million or 47 cents per share on higher rates and spread widening and the related decline in valuations on our agency positions as well as the common and preferred dividend declarations of $349 million or 24 cents per share.

Speaker 1: Book value decreased $0.42 for the quarter, primarily due to lower other comprehensive income of $680 million, or $0.47 per share, on higher rates and spread widening, and the related declining valuations on our agency's book value.

Speaker 1: as well as the common and preferred dividend declarations of $349 million or $0.24 per share, partially offset by GAAP net income of $418 million or $0.29 per share.

Offset by GAAP net income of 418 million of 2009 cents per share.

Our multifaceted hedging strategy continued to support the book value will be in a more immediate fashion this quarter due to the aforementioned spread widening with swap futures in MSR valuations contributing 16 cents per share to the book value during the quarter.

Speaker 1: Our multifaceted hedging strategy continued to support the book value, albeit in a more muted fashion this quarter due to the aforementioned spread widening, with swaps, futures and MSR valuations contributing $0.16 per share to the book value during the quarter.

Combining our book value performance in our fourth quarter dividend of <unk> 22 cents, Accordingly, and tangible economic returns were negative two 4%.

Speaker 1: Combining our book value performance with our fourth quarter dividend of $0.22, our quarterly and tangible economic returns were negative 2.4%.

Subsequent to quarter end as okra and David both mentioned earlier, we continue to see significant spread widening impacting the valuation of our assets, which is partially offset by the benefit of our MSR investments in rate hedging strategy through January without book value ending the month down 3% compared to December 31 2021.

Speaker 1: Subsequent quarter end, as Ilker and David both mentioned earlier, we continue to see significant spread widening, impacting the valuation of our assets, which is partially offset by the benefit of our MSI investments and rate hedging strategy through January , with our book value ending the month down 3% compared to December 31, 2021.

Diving deeper into the GAAP results, we generated GAAP net income for Q4 $418 million or 27 cents per common share net of preferred dividends.

Down from GAAP net income of 522 million or 34 cents per common share in the prior quarter the.

The most significant drivers of lower GAAP income for the quarter is the unrealized losses on investments measured at fair value through earnings of $15 million in comparison to unrealized gains of $91 million in Q3 and realized losses on disposal of investments in the quarter of 25 million as compared to gains of $12 million in Q3.

Speaker 1: The most significant drivers of lower gap income for the quarter is the unrealized losses on investments measured at fair value through earnings of $15 million in comparison to unrealized gains of $91 million in Q3, and realized losses on disposal of investments in the quarter of $25 million as compared to gains of $12 million in Q3.

Along with the previously referenced lower net gains on our swap portfolio by $42 million.

Speaker 1: along with the previously referenced lower net gains on the swaps portfolio by $42 million.

As I mentioned earlier the portfolio continued to generate strong income with <unk> per share of <unk> 28 cents consistent with Q3 earnings.

Speaker 1: As I mentioned earlier, the portfolio continued to generate strong income with EAD per share of $0.28 consistent with Q3 earnings.

And we continue to generate strong earnings while prudently managing lower leverage resulting in an AAV hourly pay you know there's a leverage of two 3%.

Speaker 1: and we continue to generate strong earnings while prudently managing lower leverage, resulting in an EAD ROE per unit of leverage of 2.3%.

We have previously communicated that we anticipate earnings can moderate notwithstanding this we expect earnings to sufficiently cover the dividend for the near term all things equal.

Speaker 1: We have previously communicated that we anticipate earnings to moderate. Notwithstanding this, we expect earnings to sufficiently cover the dividend for the near term, all things equal.

Average yield remained flat at 263% compared to the prior quarter. However, dollar roll income contributed to EBIT in Q4, reaching another record level at $118 5 million.

Speaker 1: Average yields remain flat at 2.63% compared to the prior quarter, however dollar roll income contributed to EAD in Q4, reaching another record level at $118.5 million.

<unk> also benefited from higher MSR net servicing income associated with the growth of the energy portfolio and lower G&A expenses, which I will cover later.

Speaker 1: EAD also benefited from higher MSR net servicing income associated with the growth of the MSR portfolio and lower G&A expenses, which I will cover further later.

The portfolio generated 203 basis points of NIM ex PAA down one basis point from Q3 <unk>.

Speaker 1: The portfolio generated 203 basis points of NIMX PAA, down one basis point from Q3, driven by the improved TBA dollar roll income offset by higher swaps expense on a lower average receive rate.

Given by the improved TBA dollar roll income offset by higher swap expense on a lower average receive rate.

Now turning to our financing as I noted in the prior quarter, we have benefited from our ample liquidity position and a robust financing market during 2021.

Speaker 1: Now turning to our financing, as I noted in the prior quarter, we have benefited from our ample liquidity position and the robust financing market during 2021.

With the previous quarter, marking nine consecutive quarters of reduced economic cost of funds for the company.

Speaker 1: with the previous quarter marking nine consecutive quarters of reduced economic cost of funds for the company and our year-to-date economic cost of funds being 79 basis points down 55 basis points in comparison to the prior year.

And our year to date economic cost of funds being 79 basis points down 55 basis points in comparison to the prior year.

During Q4, the market price in a more aggressive fed tightening cycle, resulting in repo rates increasing across the cash.

Speaker 1: During Q4, the market priced in a more aggressive Fed tightening cycle, resulting in repo rates increasing across the curve.

This upward trend along with higher swap rates impacted our overall cost of funds for the quarter rising by nine basis points to 75 basis points in Q4, and our average repo rate for the quarter was 16 basis points compared to 15 basis points in the prior quarter.

Speaker 1: This upward trend, along with higher swap rates, impacted our overall cost of funds for the quarter, rising by 9 basis points to 75 basis points in Q4, and our average repo rate for the quarter was 16 basis points, compared to 15 basis points in the prior quarter.

Moving now to operating expenses efficiency ratio has improved by seven basis points from the fourth quarter, but the opex to equity of 121%.

Speaker 1: Moving now to our operating expenses, efficiency ratios improved by 7 basis points in the fourth quarter, with OPEX to equity of 1.21%.

And for the entire year, the Opex to equity ratio was 135% compared to full year 2020 of $1 five 5% as we realize the benefits we projected from the reduction in compensation and other expenses following the disposition of our <unk> business and the internalization of our management.

Speaker 1: And for the entire year, the OPEX to equity ratio was 1.35% compared to full year 2020 of 1.55%.

Speaker 1: as we realize the benefits we've projected from the reduction in compensation and other expenses following the disposition of our acreage business and the internalization of our management.

As a result of our continued build out of our MSR and residential credit businesses, which are more labor intensive and additional vesting of stock compensation issued in prior years.

Speaker 1: As a result of our continued build-out of our MSR and residential credit businesses, which are more labour-intensive, and additional vesting of stock compensation issued in prior years,

We anticipate that the range of Opex to equity for 2022, and long range will be one four to $1 five 5%.

Speaker 1: We anticipate that the range of OPEX to equity for 2022 and long range will be 1.4% to 1.55%.

And to wrap things up and we maintained an abundant liquidity profile with $9 3 billion of unencumbered assets down modestly from the prior quarter at $9 8 billion, including cash and unencumbered agency MBS of $5 2 billion.

Speaker 1: And to wrap things up, Annalie maintained an abundant liquidity profile with $9.3 billion of unencumbered assets, down modestly from the prior quarter at $9.8 billion, including cash and unencumbered agency MBS of $5.2 billion.

Much of the reduction in unencumbered agency Securities was due to pressure on valuations, which is partially offset by increased unencumbered CRE team see MBS and non agency securities.

Speaker 1: Much of the reduction in unencumbered agency securities was due to pressure on valuations, which is partially offset by increased unencumbered CRT, CMBS, and non-agency securities.

That concludes our prepared remarks, operator, we can now open it up to Q&A.

Speaker 1: That concludes our prepared remarks. Operator, we can now open it up to Q&A.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the queue. Please press Star then two.

Speaker 1: We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw from the queue, please press star, then two. The first question is from Rick Shane of J.P. Morgan. Please go ahead.

The first question is from Rick Shane of Jpmorgan. Please go ahead.

Hey, good morning, everybody and Ilker congratulations.

Speaker 5: Hey, good morning, everybody, and, Ilker, congratulations. Look, I just have one sort of conceptual question. Historically, when we've looked at the space, environments like we're in now where there is a very clear expectation of rates moving higher.

Look I I, just have one sort of conceptual question.

Historically, when we've looked at the space environments like we're in now where there was a very clear expectation.

Rates are moving higher.

The actual risk to the industry, where people really get carried out is win rates unexpectedly trend lower.

Speaker 5: The actual risk to the industry, where people really get carried out, is when rates unexpectedly trend lower. And again, I realize this is a tail risk in the current environment, but it's also an important consideration. And I'm just curious, as you're positioning the portfolio, how do you defend against that tail risk?

And again I realize this is a tail risk in the current environment, but it's also an important consideration and I'm. Just curious as you are positioning the portfolio, how do you defend against that tail risk.

Yeah, Hi, Rick Great.

Speaker 3: Yeah, hi, Rick. Great question. And you are absolutely correct that that would be a risk should rates move lower. When we look at the forwards, we do see out the horizon, five-year, five-year, for example, in the range of around 210 or thereabouts. And we actually do a little on both sides. So our bias is a little bit towards higher rates. And we've certainly seen them. And you can see it in our hedge ratio and how we're hedged across the curve. But yes, you're right. There is that risk that rates, for some reason or another, whether it's geopolitical or something unexpected, do end up rallying. And as a consequence, even though our hedge ratio is 95%, there is some duration in the portfolio that we maintain for that eventuality, which is right now roughly around a half a year. Again, it's not our base case that rates rally from here. We think the forwards are priced relatively well with the possibility of slightly higher rates. Should the market rally, I think we'd manage through that just fine. And it would probably also suggest that a lot of the

Great question Ed.

You are absolutely correct that that would be a risk should rates move lower when we look at the forwards.

We do see.

The horizon five year five year for example in the range of around 210, or thereabouts and we actually do.

A little on both sides. So our bias is a little bit towards higher rates and we've certainly seen them and you can see it in our hedge ratio and how we're hedged across the curve, but yes, youre right. There is that risk that rates for some reason or another whether it's geopolitical or something unexpected due due end of rallying and.

As a consequence, even though our hedge ratio of 95%. There is there is some duration in the portfolio that we maintain for that eventuality, which is right now roughly around a half a year.

Again, it's not our base case that rates rally from here, we think the forwards are price relatively well with the possibility of slightly higher rates.

The market rally I think we've managed through that just fine.

And it would probably also suggests that a lot of the.

<unk>.

Expected actions on the part of the fed.

Speaker 3: expected actions on the part of the Fed may be delayed, which might create a little bit of a tailwind for us from the standpoint of earnings, as well as even balance sheet runoff out the horizon. So there's a silver lining in that eventuality as well, but we do keep a little bit of duration in the portfolio for that tail risk.

They may be delayed which might create a little bit of a tailwind for us from the standpoint of earnings as well as even balance sheet runoff out the horizon. So there's a silver lining in that eventuality as well, but we do keep a little bit of duration in the portfolio.

That tail risk.

Got it and I look I realize it's sort of then.

Speaker 5: Got it. And I look, I realize it is sort of an out of the blue question, but it's it's literally almost 20 years to the day where we saw some mortgage rates carried out.

Out of the Blue question, but it's it's literally almost 20 years to the day, where we saw some mortgage Reits carried out.

In that scenario there was a clear at each end of rates heading higher and you got the opposite it caused.

Speaker 5: in that scenario there was a clear expectation of rates heading higher and you got the opposite. It caused immense destruction in the.

Hence destruction in the space Yeah exactly exactly.

Speaker 3: Yeah, exactly, exactly. Thank you for the question, Rick.

Thank you for the question Rick.

Thanks, guys.

Okay.

The next question is from Doug Harter of Credit Suisse. Please go ahead.

Speaker 6: The next question is from Doug Harder of Credit Suisse. Please go ahead.

Thanks.

Speaker 7: Thanks. Can you talk about how the agency MDS portfolio paired with MSRs has performed versus your traditional swap hedges in the fourth quarter in January , just as that is growing as a percentage of your equity allocation?

Can you talk about how the agent.

Agency MBS portfolio paired with MSR is has performed versus.

Versus your your kind of.

Small swap.

As you know kind of in the fourth quarter in January just kind of adds that it's growing as a percentage of your equity allocation.

Hi, yes, its been at the Dovish Deluxe agency.

Speaker 4: Yes, it benefits obviously, like agency, like if hedging is constructed carefully, definitely like MSR part hedges the current coupon exposure.

The hedging is constructed carefully.

Definitely.

The MSR Portage as the current coupon exposures.

But as I said changes needed to construct carefully because when you are.

Speaker 4: But, as I said, hedges need to be constructed carefully, because when you are long MSR hedge with mortgages, your curve is, you have a really big curve steepening, so that part needs to be hedged. But hedge carefully, that benefited and will benefit.

<unk> agents that Youre long MSR hedge with mortgages Youll curve you have is really the curve steepening, so that part needs to be hedged, but th carefully that benefited and will benefit yes, yes, Doug I'll, just say that the component of the portfolio MSR paired with TBA output.

Speaker 3: Yeah, Doug, I'll just say that the component of the portfolio of MSR paired with TBAs outperform the equivalent component of the portfolio of swaps hedging TBAs.

Reform the equivalent component of the portfolio.

Swaps hedging Tpa's TBA since then and to your point about capital allocation.

We were 5% of capital at the end of the quarter with acquisitions, thus far or commitments thus far.

Q1, it brings us brings us up to about 7%, we said steady state we'd like to see it around 10%.

Speaker 3: percent. We said a steady state. We'd like to see it around 10 percent. And, you know, we could overweight that or underweight that, depending on what the environment looks like. But thus far, 2022 is shaping up to be a vibrant environment in terms of MSR transactions. I think there's been thus far, we've seen about a billion and a half in market value transacted or priced thus far this year, and we've acquired about 20 percent of that. On that, you know, can you talk a little bit about who the sellers are and who makes kind of

Get overweight that are underway ending on what the environment looks like but thus far in 2022 is shaping up to be.

A vibrant environment in terms of MSR transactions I think there has been thus far we've seen about one 1 billion and a half in market value.

Transacted.

Price, thus far this year.

Speaker 3: priced thus far this year, and we've acquired about 20%

Acquired about 20% of that.

Just on that can you just talk a little bit about who the sellers are and who makes kind of an attractive partner to you.

Speaker 7: Can you talk a little bit about who the sellers are and who makes kind of an attractive partner to you for kind of the continued subservicing and good risk characteristics to those MSRs?

Yeah.

For for kind of the continued sub servicing and good risk characteristics to those I'm a source.

Sure most of the silver side nonbank originators as we predicted totally wrong and it's materializing and we are seeing some residual luck.

Speaker 4: Sure, most of the sellers are non-bank originators as we predicted earlier on and that's materializing and we are seeing some residual like portfolios who bought them for negative duration purposes.

Portfolio through both Florida negative duration purposes are selling but bigger chunk of the sale and going forward. We expect the goose juggled the sales will come from nonbank originators, yes, Doug that was the thesis as we as we.

Speaker 4: are selling but a bigger chunk of the sale and going forward we expect a bigger chunk of the sale will come from non-bank originators.

Speaker 3: Yeah, Doug, that was the thesis as we as we, you know, built the operations in house is that ultimately be a liquidity need from folks like us with with deep reservoir capital to to

<unk> built the operations in house is that simple.

<unk> be a liquidity need.

Folks like us with deep reservoir of capital too.

Finance MSR on the part of <unk>.

Speaker 3: finance MSR on the part of non-bank originators and what we expect is playing out or has played out and we expect it to continue to.

Non bank originators.

And what we expected is playing out or it has played out and we expect it to continue to.

Great. Thank you both.

You bet Doug.

The next question is from Kenneth Lee of RBC capital markets. Please go ahead.

Speaker 6: The next question is from Kenneth Lee of RBC Capital Markets. Please go ahead.

Hi, good morning, Thanks for taking my question.

Speaker 2: Hi, good morning, thanks for taking my question. Just wondering, at a higher level, could you talk about, in terms of adopting a more offensive approach towards investment opportunities, are there any specific market conditions or macro backdrop factors that you're looking for before you start getting a little bit more offensive there, thanks.

Just wondering at a higher level could you talk about.

In terms of adopting a more offensive approach towards.

<unk> opportunities are there any specific market conditions or a macro backdrop, our factories that are youre looking for before you start.

Getting a little bit more offense with FX.

Yes, sure Thanks, Ken so.

Speaker 3: Yeah, sure. Thanks, Ken. So, look, what we've talked about in the past and Ilker talks about every day is what we look for to add agency to the portfolio is the quality of earnings. Now, obviously, we're at the lowest leverage point we've been since 2014, and so we certainly have the capacity to add mortgages. And what's necessary is to make sure that the quality of earnings

Look what we've talked about in the past and Ilker talks about every day is what we look for.

To add agency to the portfolio as the quality of earnings now obviously, we are at the lowest leverage point, we've been since 2014, and so we certainly have the capacity to add mortgages and what's necessary to make sure that the quality of earnings associated with.

Speaker 3: associated with agency MBS is deemed to be high. And there's two components to that. First, with respect to the agency market is the spread.

Agency MBS is deemed to be high.

Theres two components to that first with respect to.

The agency market is the spread on the agency asset as well as the predictability of the cash flows.

Speaker 3: on the agency asset as well as the predictability of the cash.

Now when we look at the widening that's occurred over the over the last number of months spreads are ample in our view and look reasonably attractive in terms of the cash flow and predictability of the cash flow. The convexity profile of the agency market and our portfolio certainly has improved meaningfully since the beginning of the year in fact.

Negative convexity of the portfolio is down about 30%, 35% with the rate move in at current dollar prices. So from both the spread and the cash flow perspective mortgages look pretty good.

The other element that we have to consider when it comes to quality of earnings as expected volatility and that has to do with the macro environment and how much it will cost to hedge agency MBS and that is still yet a little bit uncertain, we got to get more clarity from the fed with respect to the pace of rate hikes as well.

Speaker 3: We've got to get more clarity from the Fed with respect to the pace of rate hikes as well as at what point we're going to see balance sheet runoff and what's that really going to look like. And so from a quality of earnings standpoint, the criteria is nearly met or met from an agency spread cash flow standpoint. We're still waiting for the macro environment to get a little bit more clear.

At what point, we're going to see balance sheet runoff and what is that really going to look like and so.

From a from a quality of earnings standpoint, the criteria is nearly met or mid from a.

Agency spreads and cash flow standpoint, we're still waiting for the macro environment to get a little bit more clear.

Yep very helpful very helpful.

Speaker 2: Yep, very helpful, very helpful. And then one follow-up, if I may, wondering if you could just talk about thoughts around how a potential flattening of the yield curve could impact our analytics.

And then one follow up.

If I may wondering if you could just talk about.

Thoughts around how a potential flattening the yield curve could impact annually. Thanks.

Yeah.

Speaker 3: Yeah, so always a good question. And I think our concern over a flattening of the yield curve is, I think, exemplified in the hedging that was done in the fourth quarter and even early into the first quarter. We do have a bias now towards a flattening with respect to our hedges. At 95% hedge ratio, we feel like that's

So always a good question and I think our concern over a flattening of the yield curve is I think exemplified in the hedging that was done in the fourth quarter and even early into the first quarter.

We do have a bias now towards a flattening with respect of our hedges at.

At 95% hedge ratio.

We feel like that's very strong and we've actually increased it to over 100%.

Speaker 3: very strong, and we've actually increased it to over 100% since the beginning of the quarter. Part of that is attributable to the fact that we have some swaps rolling off in the second quarter that we wanted to get ahead in, but it's also a little bit defensive. And so from the standpoint of the yield curve and protecting that, we feel like we're in good shape. From a hedging standpoint now, in terms of earnings, those front-end swaps and those front-end hedges will.

Since the beginning of the quarter part of that is attributable attributable to the fact that we have some swaps rolling off in the second quarter that we wanted to get ahead in but it's also a little bit defensive and so.

From the standpoint of the yield curve and protecting that we feel like we're in good shape.

From a hedging standpoint now in terms of earnings.

Those front end swaps and those front end hedges.

Offset.

Speaker 3: offset higher repo expenses, and that's the design of those hedges. So a flat yield curve is never a great environment for mortgages, but we've hedged it as well as you can, I think.

Higher repo expenses and that's the design of those hedges so.

A flat yield curve is never a great environment for mortgages, but we've hedged it as well as you can.

Great very helpful. Thanks again.

Hey, Ken.

The next question is from Bose George <unk>. Please go ahead.

Speaker 6: The next question is from both George of KBW. Please go ahead.

Hey, everyone. Good morning.

Speaker 8: Hey, everyone. Good morning. Can you just discuss current returns both on TBAs and pools and then just talk about what you're expecting for specialness into the back half of the year?

Can you just discuss current returns both on TBA and pools, and then just talk about what you're expecting for specialness into the back half of the year.

Oh sure sure.

Speaker 4: So, current returns improved quite a bit. In pools, you are talking about like a very low doubles at this point, conservatively hedged. On TBS, with still the special roles, you are expecting like 12% start returns, again, conservatively hedged. In terms of specials of the roles, it will be highly coupon dependent.

Total returns improved quite a bit.

Pools, you are talking about a very low doubles, it disappoints conservatively hedged on TBA with still the special enrolls youre expecting look 12% to start the tunnels again crossover too much in terms of specials of the rules this will be highly coupon dependent.

For example, right with this recent CLO.

Speaker 4: For example, with this recent sell-off, the market just skipped the 3% origination, so it moved from 2.5% to 3.5%. So we think that ROHS, depending on the coupon, will continue to be special, not as special as last year, but there will be pockets of specialness and we have intention to take advantage of those.

Market, just skip the 3% origination so multiple two to.

So we think that growth depending on the coupon will continue to be special mother's specialists last year, but there will be pockets of special listen we have intention to take advantage of dose.

Okay, great. Thanks, and then.

Speaker 8: Okay, great. Thanks. And then the return on the MSR hedged with agency MBS, now how does that differ from the return just on your, you know, the rest of the portfolio?

The return on the MSR.

Hedged with.

And with agency MBS now how does that differ from the return just on your.

The rest of the portfolio.

So in terms of the return absolute return it is it's not that much different marginally higher but again, it's more stable luck as David was mentioning quality off the cash flows you forgot paving mortgages with MSR quality of the cash flows will be better but in terms of overall return, especially.

Speaker 4: In terms of the return, it's not that much different, marginally higher. But again, it's more stable, like David was mentioning, the quality of the cash flows. If you are pairing mortgages with MSR, the quality of the cash flows will be better. But in terms of overall return, especially if you are not levering MSR too much, it will not be that different. And you know, we are again applying too much leverage to the MSR portfolio. OK, great. Thanks.

Actually we are not labeling MSR too much it will not be that different than you know yet again.

Flying too much leverage to the MSR portfolio.

Okay, great. Thanks.

<unk>.

The next question is from Eric Hagen of <unk>. Please go ahead.

Speaker 6: The next question is from Eric Hagen of BTIG. Please go ahead.

Hey, Thanks, Good morning, I think a couple from me going back to the hedge portfolio and the short duration swaps I think I can appreciate wanting to manage to a core earnings figure, but with <unk>.

Speaker 2: Hey, thanks. Good morning. I think a couple from me going back to the hedge portfolio and the short duration swap I think I can appreciate wanting to manage to a core earnings figure but with Five or six Fed hikes already priced into the yield curve. I think the fair value of those swaps should already reflect that So just going forward. I mean are there any rebalancing? Efforts that you take towards that short duration swap portfolio, and then I it's really nice to see you guys so active

Five or six fed hikes or depression of the yield curve I think the fair value of those swaps should already reflect that.

So just going forward I mean are there any rebalancing.

Efforts that you take towards that short duration swap portfolio.

And then it's really nice to see you guys. So active.

As issuers of securitization would love to hear your view on how you think liquidity conditions develop for securitized assets as the fed withdrawals liquidity.

Speaker 2: as issuers of securitization, would love to hear your view on how you think liquidity conditions develop for securitized assets as the Fed withdraws liquidity.

Yes, so I'll start off and then Ilker and Mike jump in on the securitization. So look we yes.

Speaker 3: Yeah, so I'll start off and then Ilker and Mike can jump in on the securitization. So look, yes, the market has well-priced...

It has well priced.

Fed expectations, we have as of this morning, there is six sites right priced in for 2022, and we get to do more.

Speaker 3: Fed expectations. We have, as of this morning, there's six hikes priced in for 2022. And we get to two more out the horizon. And when you look at what the market's pricing versus what the Fed is pricing, the market's saying we peak at 2% when you look at OIS this morning at the end of next year. The Fed's saying they're going to get to 2.5% in the long run. So there still remains somewhat of a debate, even though the market over the very recent past has moved closer to the Fed.

The horizon and when you look at what the market is pricing versus what the fed is priced market, saying, we get to peak at 2%. When you look at OIS. This morning at the end of next year, the fed, saying theyre going to get to two 5% in the long run. So theres still remains somewhat of a debate even though the market over the very recent past has moved closer to the fed.

At some point, we would if we think the front end is too cheap we will absolutely lifted and I'll bring you back to a point at a similar time the last time the fed.

Speaker 3: At some point, you know, we would, if we think the front end is too cheap, we will absolutely lift it. And I'll bring you back to a point at a similar time, the last time the Fed was entering into a policy normalization period, which was 2014. We had a considerable amount of front-end swaps.

It was entering into a policy normalization period, which was 2014, we had a considerable amount of front end swaps.

Speaker 3: And we lifted $27 billion in front-end hedges. We're not there yet, but we will be proactive if we do think the front-end is too cheap.

And if we lifted $27 billion in front end hedges.

Not there yet, but we will be proactive if we do think the front end front end is too cheap and.

Speaker 3: and to the extent the market gets too far.

To the extent the market gets gets too far.

So, yes, we will manage that actively and non the securitization question Fannie can jump in.

Speaker 3: So yeah, we'll manage that actively. And on the securitization question, Fannie, you can jump in. Sure.

Thanks, Eric This is Mike.

In terms of securitization you've seen some of the numbers that we put out in terms of how active that we've grown in a lot of that is that.

Speaker 5: I think in terms of securitization, you've seen some of the numbers that we've put out in terms of how active that we've been. And a lot of that is that the capital markets have been conducive to securitizing. So, you know, since the beginning of 2021, we've done 13 deals, 5.3 billion in issuance.

The capital markets have been conducive to securitize itself since the beginning of 2021, we've done <unk>.

<unk> five 3 billion in insurance.

We've created about $450 million of <unk> securities through that but.

Speaker 9: We've created about 450 million OBX securities through that.

But I think most importantly for us if you look at year end.

Speaker 9: But I think most importantly for us, if you look at year-end...

82% of our whole loan portfolio is financed through securitization.

Speaker 9: About 82% of our whole loan portfolio was financed through securitization. If you fast forward to today, about 87% was financed. So we've locked in, and about 90% of that is fixed rates. So we've locked in a very low 2% cost of funds on our whole loan portfolio. So I think we've been able to be very opportunistic in terms of accessing the capital market.

Forward to today about 87% was from US. So we've locked in about 90% of that is fixed rate. So we've locked in a very low 2% cost of funds on our whole loan portfolio. So I think we've been able to be very opportunistic in terms of accessing the capital markets I think on a go.

Speaker 9: I think on a go forward, we just went through a year in which there was $210 billion of issuance in the non-agency market. You have to go back to 2019 to have anywhere near that level, and that was about $140 billion. So the market, I think, has done a fairly good job of digesting the technicals of increased supply over the past year and a half, two years.

Forward you just went through a year in which there was 210 billion of issuance in the non agency market.

You have to go back to 2019 to have anywhere.

Anywhere near that level and that was about 140 billion. So the market I think has done a fairly good job of digesting the technicals of <unk>.

Increased supply over the past year and a half two years I think on a go forward.

Speaker 9: I think on a go forward, we've built up the investor base for AAA non-agency investors. But in a market like this, there will be a lot of volatility. AAA spreads on non-QM are probably out 50 basis points since the end of Q3. But I think for us, we remain committed to...

We built up the the Investor base for AAA non agency investors, but in a market like this there will be a lot of volatility AAA spreads on non QM heavily out 50 basis points. Since the end of Q3, but I think for US we remain committed to.

Perm financing our portfolio and we will be opportunistic in doing so, but I think we've done a fairly good job of locking in financings on close to 90% of our portfolio.

Speaker 9: term financing our portfolio and we will be opportunistic in doing so, but I think we've done a fairly good job of locking in financing on close to 90% of that portfolio.

Got you. Thanks, so much.

Thanks, Eric.

The next question is from Rob Brock.

Speaker 6: The next question is from Brock Vandervliet of UBS, please go ahead.

Brock Vandervliet of UBS. Please go ahead.

Hi, good morning.

Speaker 7: Good morning. Thanks for the question. Just following up on that one regarding non-agency and clearly housing, anything housing related has been a great place to be with the freight train of home price appreciation and up until now, very low rates.

Thanks for the question just just following up on that one regarding <unk>.

Non agency and clearly.

Housing anything housing related there's been a great place to be with the freight train of home price appreciation and up till now very low rates.

There is a school of thought that once mortgages.

Speaker 3: There's a school of thought that, you know, once mortgages...

Tap around 4% Youre finally going to see some real real housing pressure in terms of potentially lowering.

Speaker 10: know tap around 4% you're finally going to see some real real housing pressure in terms of you know potentially lowering

You know, reducing the purchase market activity do you do you subscribe to that how do you know.

Speaker 10: the purchase market activity. Do you subscribe to that? How do you, you know, how are you feeling about...

How are you feeling about.

The housing market and especially non QM in the context of of higher rates.

Speaker 10: the housing market and especially non-QM in the context of higher rates.

Sure. So sometimes properties I. Appreciate your question I think in terms of higher rates, we've seen the mortgage rate go from a $3 20 mortgage rate at the end of Q3 to about 4% walking in here.

Speaker 9: Sure. So thanks, Brock. I appreciate your question. I think in terms of higher rates, we've seen the mortgage rate go from

Speaker 9: a 320 mortgage rate at the end of Q3 to about 4% walking in here today. If you look at just an aggregate 350K loan size, that mortgage payment is up about $150 given that 75, 80 basis point increase in mortgage rates. That's about a 10% increase in terms of the...

And if you look at just in aggregate 350, K loan size that mortgage payment is up about $150. Given that 70 580 basis point increase in mortgage rates. So I'm kind of temper some increase in terms of the payment.

Speaker 9: Coupled with home price appreciation being up 18-19%, one of the tailwinds that we see within the resi market is potential affordability concerns. I think you have to go back to 2010 to kind of where we're at. However, the non-QM market, the expanded prime market,

Coupled with home price appreciation being up 18, 19%.

One of the tailwind that we see within the resin market is potential affordability concerns I think you got to go back to 2000 farmers kind of where we're at.

However, the non QM market expanded client market about 65% of that market of our purchases come from the purchase market. So I think angel Intuit selloff into mortgage rates, what we've seen we've seen significant interest from non bank originators that normally would not have interest in terms of moving.

Speaker 9: About 65% of that market and of our purchases has come from the purchase market. So I think into the sell-off, into mortgage rates, what we've seen, we've seen significant interest from non-bank originators that normally would not have interest in terms of moving towards non-QM and expanded prime, given their desire to claim some of that purchase business. So, you know.

Towards non QM and expanded client given.

And their desire to clean some of that purchase.

<unk>.

Yes.

That market is not.

Speaker 9: That market is not immune to higher rates, however, given that it is a high percentage of cash out and purchase business, we do feel that it will have strength going forward in terms of origination.

Not immune to higher rates. However, given that it is a high percentage of cash out and purchase business. We do feel that it will have strong going going forward in terms of originations.

Okay got it.

Speaker 10: I got it. And just flipping over to the MSR business also, clearly seeing plenty of pressure among the non-bank originators. The ramp up in this business looks very well timed. Can you give us a sense, you mentioned the 1.5 billion, I believe, in flow. You know, where do you think that?

And just flipping over to the MSR business also.

Clearly seeing plenty of pressure among the non bank originators ramp up in this business was it looks very well.

<unk> can you give us a sense you mentioned the $1 five.

Billion I believe in flow.

Where do you think that.

Could go.

Speaker 10: know could go the remainder of the year and kind of a part to know what what sort of price dislocation are you are you seeing in these

The remainder of the year and kind of a part too.

What sort of price dislocation or are you seeing in these in these transactions.

Yes, Brock so it's difficult to predict how much volume there could be this year, but we think it'll be it'll be elevated relative to years past in the.

Speaker 3: Yeah, Brock, so it's it's difficult to predict how much volume there could be this year, but we think it'll be it'll be elevated relative to years past and and, you know, the non bank origination.

The non bank origination community has taken up an increasingly greater share of overall origination and these are operating companies and our portfolio companies and when you look at the profitability of origination right now to get to get to a.

Speaker 3: get to a cash flow positive point, it does require selling the MSR. So a lot of it will be determined by origination. Origination will be much lower this year than it was last year, probably half on a gross basis. But there's also a lot of stock in the hands of non-bank originators. And a lot of it isn't hedged, and they've done quite well with the selloff. And so there's some monetization. There's new origination, which will be lower than it was last year, obviously. And there'll, in our view, be enough flow to satiate demand. And the buyers have been reasonably competitive. Multiples are elevated, but the OASs are certainly attractive. The barriers to entry in the sector are quite high, which gives us comfort that we're going to be able to acquire as much MSR as we need to acquire, and we feel like is advisable in relative value. So we feel like it'll be a healthy environment for us for this year. Got it. Okay. Thank you. Good talking to you, Brock. The next question is from Kevin Barker of Piper Sandler. Please go ahead.

Cash flow positive.

Point, you do it does require selling the MSR. So a lot of it will be determined by origination.

Origination will be much lower this year than it was last year, probably half on a gross basis, but theres also a lot a lot of a lot of stock in the hands of nonbank originators and a lot of it isn't hedged in they've done quite well with the sell off and so there are some monetization theres, new origination, which will be lower than it was.

Last year obviously.

In our view be enough flow to satiate demand and the buyers of <unk>.

Had been reasonably competitive multiples are.

They are elevated but the OAS as are certainly attractive.

The.

Barriers to entry in this sector are quite high which gives us comfort that we're going to be able to acquire as much MSR as we need to acquire and we feel like as advisors relative value. So we feel like it'll be it'll be a healthy environment for us for this year.

Got it okay. Thank you.

Speaker 10: Got it. Okay. Thank you.

Good talking to you Brock.

The next question is from Kevin Barker of Piper Sandler. Please go ahead.

Speaker 6: The next question is from Kevin Barker of Piper Sandler. Please go ahead.

Good morning. Thank.

Speaker 7: Morning. Thanks for taking my questions. I appreciate it. So most of my questions have been answered, but I wanted to check in, just given the MSR market.

Thanks for taking my questions I appreciate it.

So most of my question have been answered, but I wanted to check in and just given.

The MSR market.

I appreciate all the comments you've already already Kevin but.

Speaker 7: I appreciate all the comments you've already given, but what are the gross yields you're seeing on new MSRs today, just given the amount of liquidity that's being allocated to MSRs with rates moving higher? Are you seeing an increasing amount of competition for that asset class, even though non-banks are increasingly putting more MSR in the market?

What are the gross yields you're seeing on new MSR is today.

Just given the amount of liquidity that's.

Being allocated to msr's with rates moving higher.

Are you seeing an increasing amount of competition for that asset class, even though non banks are.

Increasingly putting more MSR in the market.

In terms of yields, let's say unhedged unlevered yields are high singles High singles, So which is pretty attractive in terms of competition for buying does says, yes, we are seeing still.

Speaker 4: In terms of yields, let's say unhedged, unlevered yields are high singles, which is pretty attractive. In terms of competition for buying the assets, yes, we are seeing still residual of the money that has been raised, and they have been like...

Still looking the jewel of the money that has been raised.

And they have been luck bidding into that but there was also like big player base or buying for the recapture for it so sorry to beat the origination business. So we expect that part of the buyer base will be gone, but so far it's a very healthy environment, the alto <unk> coming and buyers start taking it a little bit wider.

Speaker 4: bidding into that, but there was also like big buyer base of like buying for the recapture for it, so to feed their origination business. So we expect that part of the buyer base will be gone. But so far, it's very healthy environment, a lot of flow is coming and buyers are taking a little bit wider spread, so which be more than welcome. But so far, everything is healthy.

So we should be more than welcome, but so far everything yourself.

Okay rest of my questions have been answered thank you.

Speaker 7: Okay. All the rest of my questions have been answered. Thank you.

Thanks, Kevin.

The next question is from Kevin heel of Rguest Research. Please go ahead.

Speaker 6: The next question is from Kevin Heal of Argus Research. Please go ahead.

Yes.

Good morning, with regards to the MSR portfolio can you give some indication of the.

Speaker 7: Good morning. With regards to the MSR portfolio, can you give indication of the WAC at year end and also what you estimate the WAC given the additional purchases of $210 million in early June ?

The wack at year end and also what you estimate the whack given the additional <unk>.

Purchases of $210 million in early Jan.

Sure well, obviously look we have been buying very low gross Vic MSR. So.

Speaker 4: Sure. Obviously, like we have been buying very low-gross weight MSRs, so our...

Overall growth rates on this entire thing is look below 3%. So as you know the current mortgage rate is 4% right now.

Speaker 4: Overall gross rate on this entire thing is below 3%, so as you know, the current mortgage rate is 4% right now, it's well out of the money. The new MSR purchases, so obviously if it's coming from the flow side, it will be around 4% gross rate, but there is plenty of old MSR sitting in the originators' books that David mentioned, around low 3% gross rate that we will be competitive in. But our current gross rate on the overall book is less than 3%, which is a very attractive

Out of the money the new MSR purchases so obviously.

It's coming from the flow side, it will be around 4% growth rate, but there is plenty of old MSR sitting in the originated books that David mentioned at all it's like low teens growth rate that we will be competitive in what our total growth rate on the overall book is like less than 3%.

Which is like very attractive cash flows right now.

Thanks.

Speaker 11: Thanks.

Thank you Kevin.

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

Speaker 6: This concludes our question and answer session. I would like to turn the conference back over to David Finkelstein for closing remarks.

Thank you and thank you everybody for joining us.

Speaker 3: Thank you. Thank you everybody for joining us and let's talk next quarter. We wind down this pandemic and everybody stays safe.

Let's talk next quarter.

Wind down this pandemic and instantly Stacey.

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

Speaker 6: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.