Q4 2023 Annaly Capital Management Inc Earnings Call
Operator: Good day and welcome to the 4th Quarter 2023 Annaly Capital Management Earnings Conference. Please note that today's event is being recorded. I would now like to turn the conference over to Mr. Sean Kinsel, Director of Investor Relations. Please go ahead, sir.
Good day and welcome to the fourth quarter 2023 annually capital Management Earnings Conference. Please note that today's event is being recorded I would now like to turn the conference over to Mr. Sean Kensal Director and Investor Relations. Please go ahead Sir.
Sean Kensal: Good morning, and welcome to the fourth quarter 2023 earnings call for <unk> capital management.
Sean Kinsel: Good morning, and welcome to the fourth quarter 2023 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the risk factors section in our most recent annual quarterly SEC filing. Actual events and results may differ materially from these four we're looking at here.
Any forward looking statements made during today's call are subject to certain 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 disclaimer in our earnings release in addition to our quarterly and annual filings.
Sean Kinsel: We encourage you to read the 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 and is accurate only as of the date hereof. We do not undertake and specifically waive any obligation to update or revise this information.
Sean Kensal: Additionally, the content of this conference call may contain time sensitive information and is accurate only as of the date hereof.
Not undertake and specifically disclaim any obligation to update or revise this information.
Sean Kinsel: 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. Content referenced in today's call can be found in our fourth quarter 2023 investor presentation and fourth quarter 2023 supplemental information, both found in the presentation section of our website. Please also note this event is being recorded.
Sean Kensal: 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.
Sean Kensal: Content referenced in today's call can be found in our fourth quarter 2023, investor presentation, and fourth quarter 2023 supplemental information both bound under the presentations section of our website.
Sean Kensal: Please also note this event is being recorded.
Sean Kinsel: Participants on this morning's call include David Finkelstein, Chief Executive Officer and Chief Investment Officer; Serena Wolf, Chief Financial Officer; Mike Fannier, Deputy Chief Investment Officer and Head of Residential Credit; V. S. Green-Lawson, head of ASAMP; and Ken Adler, head of Mortgage Service and Rights. And with that, I'll turn the call over to David. Thank you, Sean. Good morning, everyone.
Sean Kensal: Participants on this morning's call include David Finkelstein, Chief Executive Officer, and Chief Investment Officer, Serena Wolfe Chief Financial Officer.
Sean Kensal: Danielle Deputy Chief investment officer, and head of residential credit.
Sean Kensal: And you've often heard of agency.
David Finkelstein: Ken Adler head of mortgage servicing rights and with that I'll turn the call over to David.
David Finkelstein: Thank you Sean good morning, everyone and thanks for joining us today I'll begin with a brief review of the fourth quarter market environment and our portfolio performance and then discuss the current macro landscape.
David Finkelstein: And thanks for joining us today. I'll begin with a brief review of the fourth-quarter market environment and our portfolio performance, then discuss the current macro landscape, followed by an update on our businesses and our outlook for 2024. Serena will then discuss our financials before opening up the call for Q&A. Now, as all are aware, fixed income markets exhibited considerable volatility in the fourth quarter, as evidenced by the 10-year Treasury trading in a 120 basis point range, peaking at 5% in mid-October before rallying throughout November and December. The second half of the quarter proved beneficial to mortgage assets as implied volatility declined, the yield curve modestly steepened, and agency spreads tightened meaningfully. We were well-positioned to take advantage of this environment, delivering a 10.1% economic return for the quarter, and we out-earned our dividend with earnings available for distribution of 68 cents per share. And we achieved these results with lower economic leverage, which declined to 5.7 turns at the end of the quarter.
David Finkelstein: Hello by an update on our businesses and our outlook for 2024.
David Finkelstein: Serena will then discuss our financials before opening up the call for Q&A.
David Finkelstein: It was all are aware of the fixed income markets exhibited considerable volatility in the fourth quarter as evidenced by the 10 year Treasury trading in 120 basis point range, peaking at 5% mid October before rallying throughout November and December.
David Finkelstein: Second half of the quarter proved beneficial to mortgage assets as implied volatility declined the yield curve modestly steepen and agency spreads tightened meaningfully.
Sean Kensal: We were well positioned to take advantage of this environment delivering a 10, 1% economic return for the quarter and we out earned our dividend with earnings available for distribution of <unk> 68 cents per share and we achieved these results with lower economic leverage which declined to five seven turns at the end of the quarter.
Sean Kensal: And as we reflect on 2023, we're pleased to have generated a 6% economic return in a year characterized by numerous unforeseen risk events, we believe that our performance on a year demonstrates the value of our diversified housing finance model and our disciplined portfolio and risk management now turning to.
David Finkelstein: And as we reflect on 2023, we're pleased to have generated a 6% economic return in a year characterized by numerous unforeseen risk events. And we believe that our performance this year demonstrates the value of our diversified housing finance model and our disciplined portfolio in risk management. Now turning to the macro environment, the primary driver of the strong demand for fixed income since November can largely be attributed to a shift in the Federal Reserve's communication. Moving away from the higher for longer narrative, Fed officials began to express comfort around the decline in inflation, suggesting that risks around the monetary policy outlook are more balanced. The normalization of policy is likely to begin in 2024, as long as inflation continues to moderate.
Sean Kensal: The macro environment. The primary driver of the strong demand for fixed income since November can largely be attributed to a shift in the federal Reserve's communications moving away from the higher for longer narrative fed officials began to express comfort around the decline in inflation, suggesting that risk surround the monetary policy.
Sean Kensal: Your outlook or more balanced.
Sean Kensal: A normalization of policy is likely to begin in 2020 for as long as inflation continues to moderate and while not declaring victory just yet as evidenced by chair powers. Recent statements policymakers are keen to ensure that a soft landing can actually occur.
David Finkelstein: And while not declaring victory just yet, as evidenced by Chair Powell's recent statement, policymakers are keen to ensure that a soft landing can actually occur. Powell also highlighted that future balance sheet discussions will occur at the upcoming March meeting, noting policy rates and the potential tapering of the balance sheet as independent tools. And while existing financing conditions remain ample, we're encouraged that the Fed appears to be signaling a conservative approach with regard to its balance sheet and liquidity in the financial system. Now, a second factor leading to the decline in yields in the fourth quarter is the change in debt issuance dynamics as the Treasury chose to issue incremental supply at the front end of the yield curve, taking advantage of the record amount of cash in money market funds while exerting less pressure on longer-term Now, the broader domestic economy remains strong, with T4 GDP at 3.3 percent, the unemployment rate at 3.7 percent, and consumers still exhibiting spending strength.
Sean Kensal: Now also highlighted the future balance sheet discussions will occur in the upcoming March meeting, noting policy rates and the potential tapering the balance sheet as independent tools and while existing financing conditions remain ample we're encouraged that the fed appears to be signaling a conservative approach with re.
Sean Kensal: Guard to its balance sheet and liquidity in the financial system.
Sean Kensal: Now a second factor leading to the decline in yields in the fourth quarter is the change in debt issuance dynamics as the treasury chose to issue incremental supply in the front end of the yield curve, taking advantage of the record amount of cash and money market funds, while exerting less pressure on longer term yields now the broader domestic economy.
Sean Kensal: <unk> strong with Q4 GDP at three 3% the unemployment rate at three 7% and consumers still exhibiting spending strength inflation. Meanwhile, has moderated meaningfully and absent a shock core PCE should benefit from base effects to bring year over year measures towards two and a half per se.
David Finkelstein: Inflation, meanwhile, has moderated meaningfully, and absent a shock, core PCEs should benefit from base effects to bring year-over-year measures towards 2.5 percent in the coming months. Now, looking at the housing sector, home prices have outperformed the market's expectations over the last couple of years, despite mortgage rates reaching 20-year highs. HBA has continued to benefit from existing homeowners experiencing the lock-in effect, resulting in low available-for-sale inventory, as borrowers who have struck below current market mortgage rates are unwilling to move or trade up.
Sean Kensal: In the coming months.
Sean Kensal: Now looking at the housing sector home prices outperform the markets expectations over the last couple of years, despite mortgage rates, reaching 20 year highs HBA has continued to benefit from existing homeowners experiencing lock in effect, resulting in lower available for sale inventory as borrowers who struck below current market more.
Sean Kensal: Rates are unwilling to move or trade up.
David Finkelstein: Housing activity remains subdued, although we have seen modest signs of an uptick in demand following the recent decline in mortgage rates, and all told, we're constructive on the housing sector should the labor market and the consumer remain resilient and in line with the soft landing scenario. Now, shifting to our portfolio and beginning with the agency sector, much of our agency reduction occurred at the very outset of the quarter, which left us well-prepared for the spread widening and volatility the market experienced as October progressed. And as volatility subsided and spreads normalized, we rotated out of lower coupons and TDAs and into higher coupon-specified pools. We remain disciplined in our selection of specified bull stories, favoring high-quality, prepaid protective securities, which represent the vast majority of our hired coupon purchases.
Sean Kensal: Housing activity remains subdued, although we have seen modest signs of an uptick in demand. Following the recent decline in mortgage rates and all told we're constructive on the housing sector should the labor market and the consumer remained resilient and in line with the soft landing scenario now.
Sean Kensal: Now shifting to our portfolio and beginning with the agency sector much of our agency reduction occurred at the very outset of the quarter, which left us well prepared for the spread widening and volatility the market experienced as October progressed, and as volatility subsided and spreads normalized we rotated out of lower coupons in T. B H.
Sean Kensal: And in the higher coupons specified pools.
Sean Kensal: We remain disciplined in our selection of specified pool stories favoring high quality prepay protected securities, which represented the vast majority of our higher coupon purchases.
David Finkelstein: In addition, we opportunistically grew our agency CMBS holdings by $1.2 billion as the sector did lag the move tighter on agency MBS, locking in attractive spreads and increasing the portfolio size to $3.2 billion in market value. Fixed-rate agency CMVS is a complementary asset to our agency portfolio as it provides a high-yielding, stable cash flow with minimal convexity exposure. Our agency strategy overall represented 62% of our dedicated equity at quarter ends, down from 64% the quarter prior as we further reallocated out-of-agency in favor of resi credit and MSR late in the quarter. As it relates to our hedges, our balanced liability position helped protect us from the elevated rate volatility experienced during the first half of the quarter. One adjustment we did tactically, however, was we rotated from Treasury futures into SOFR swaps at the very front end of the yield curve, given the particularly tight level of swap spreads experienced at year end.
Sean Kensal: In addition, we Opportunistically grew our agency MBS holdings by $1 2 billion as the sector did lag the move tighter in agency MBS locking in attractive spreads and increasing the portfolio size to $3 2 billion in market value.
Sean Kensal: Fixed rate agency MBS as a complementary asset to our agency portfolio as it provides a high yielding stable cash flow with minimal convexity exposure or.
Sean Kensal: Our agency strategy overall represented 62% of our dedicated equity at quarter end down from 64% the quarter. Prior as we further reallocated out of agency in favor of resi credit and MSR late in the quarter.
Sean Kensal: As it relates to our hedges are balanced liability position help protect us from the elevated rate volatility experienced during the first half of the quarter. One adjustment. We did make tactically. However was we rotated from treasury futures into Super swaps at the very front end of the yield curve, given the particularly type level of swap spreads.
Sean Kensal: Experienced into yearend and overall, we remain conservatively positioned as it relates to our rate exposure as seen through our 106% hedge ratio and rate shock tables. However, given the changing policy landscape. We may reach a point, where we would begin to feel more comfortable adding duration to the portfolio in the near.
David Finkelstein: And overall, we remain conservatively positioned as it relates to our rate exposure, as seen through our 106% hedge ratio and rate shock tables. However, given the changing policy landscape, we may reach a point where we begin to feel more comfortable adding duration to the portfolio in the near future. And as we begin 2024, with the Fed's pivot to a more neutral monetary policy, the distribution of future rate paths has narrowed, which has resulted in a decline in implied volatility.
Sean Kensal: Future.
Sean Kensal: And as we begin 2024.
Sean Kensal: With the fed's pivot to a more neutral monetary policy the distribution of future rate paths has narrowed which has resulted in a decline in implied volatility will likely see rate cuts materialize as we approach mid year, which historically have been a catalyst for inflows in fixed income funds and Furthermore, and earlier.
David Finkelstein: We'll likely see rate cuts materialize as we approach mid-year, which historically has been a catalyst for inflows into fixed income funds. Furthermore, an earlier end to QT should help stabilize deposits, which, along with incremental regulatory clarity, should support bank demand. In coincidence with these improving technical factors, NDSR and historically attractive spreads, particularly relative to fixed income alternatives, while convexity and prepayment risk in the market remain relatively low. Now turning to the residential credit markets, the non-agency sector participated in the broader fixed income risk-on sentiment to end the year, where AAA non-QM spreads were 20 basis points tighter, and below-investment-grade CRT was 60 basis points tighter Our Resi portfolio ended the year at $5.7 billion in market value, up 14% year over year, and currently comprises 20% of the firm's capital.
Sean Kensal: In Q T should help stabilize deposits, which along with incremental regulatory clarity should support bank demand and coincident with these improving technical factors MBS orange, historically attractive spread, particularly relative to fixed income alternatives, while convexity and prepayment risk in the market.
Sean Kensal: <unk> remains relatively low.
Sean Kensal: Now turning to the residential credit market. The non agency sector participated in the broader fixed income risk on sentiment to end the year with AAA non QM spreads 20 basis points tighter and below investment grade CRT 60 basis points tighter quarter over quarter resi portfolio.
Sean Kensal: We ended the year at $5 7 billion in market value up 14% year over year and currently comprises 20% of the firms capital.
David Finkelstein: The growth in the portfolio can be attributed to our organic on-loan acquisition and on-float-based securitization strategy. The OBS retained portfolio and on-loan position now account for roughly half of the total resume portfolio assets. Residential loan acquisitions continued to be strong in Q4, as we settled $1.8 billion in loans, of which $1.6 billion was sourced directly through our correspondent channel. Lock volume was robust in the fourth quarter at $2.7 billion, a 13% increase quarter-over-quarter, despite winter seasonals.
Sean Kensal: The growth in the portfolio can be attributed to our organic whole loan acquisition and Onslow Bay securitization strategy and the Ob expert team portfolio and whole loan position now account for roughly half of the total <unk> portfolio assets.
Sean Kensal: Residential whole loan acquisitions continued to be strong in Q4, as we settled 1.8 billion in loans of which $1 6 billion with source directly through our correspondent channel.
Sean Kensal: Lock volume was robust in the fourth quarter at $2 7, billion% to 13% increase quarter over quarter Despite winter seasonal.
David Finkelstein: And our quarter-end correspondent pipeline was $1.6 billion with strong credit characteristics as demonstrated by a 748 FICO and 70% CLTV. And since the beginning of the fourth quarter, we've securitized seven OBX transactions for $2.8 billion, inclusive of three transactions priced subsequent to quarter end. And these securitizations generated $290 million of assets at projected mid-teens returns, utilizing modest recourse leverage. Envelope continues to be a leader in the residential credit market, as we remain the largest non-bank securitizer and second largest overall over the past two years.
Sean Kensal: And our quarter end corresponded pipeline was $1 6 billion with strong credit characteristics as demonstrated by a 748, FICO and 70% C. L. T V.
Sean Kensal: And since the beginning of the fourth quarter, we securitized seven Ob X transactions for 2.8 billion inclusive of three transactions price subsequent to quarter end and these securitizations generated $290 million of assets are projected mid teens returns utilizing modest recourse leverage.
Sean Kensal: Onslow Bay continues to be a leader in the residential credit market as we remain the largest nonbank securitized and second largest overall over the past two years. In addition, we have the lowest delinquency rates across the 10 largest non QM issuers and also to note. We were just able to sell the tightest new issue AAA bond executed.
David Finkelstein: In addition, we have the lowest delinquency rates across the ten largest non-QM issuers, and also to note, we were just able to sell the tightest new issue AAA bond executed in 2024 year to date. And our correspondent channel remains our preferred investment option within residential credit, allowing us to organically manufacture assets while maintaining control over pricing, our partners, diligence, credit, and volume. Now shifting to MSR, our portfolio increased by 18% or $400 million in market value in the fourth quarter through the purchase of three bulk packages in addition to modest flow acquisitions. And our MSR portfolio, inclusive of forward-settling trades, increased nearly 50% throughout 2023 to end December at $2.7 billion in market value, making Onslope Bay a top 10 non-bank owner of servicing rights.
Sean Kensal: In 2024 year to date.
Sean Kensal: And our correspondent channel remains our preferred investment option within residential credit, allowing us to organically manufacturer assets, while maintaining control over pricing our partners diligence credit and volumes.
Sean Kensal: Now shifting to MSR, our portfolio increased by 18% or 400 million in market value in the fourth quarter through the purchase of three bold packages. In addition to modest flow acquisitions in our MSR portfolio inclusive of forward settling trades increased nearly 50% throughout 2023 to <unk>.
Sean Kensal: December $2 7 billion in market value, making Onslow Bay of top 10, non bank owner of servicing rights.
David Finkelstein: The MSR market had an active Q4, with bulk transactions of modestly quarter over quarter, capping a record 2023 that saw over $800 billion in principal balance trade. Annaly was able to capitalize on this significant supply, and was the fifth largest buyer in the market, onboarding $42 billion in principal balance throughout the year. Consistent with our previous commentary, we continue to favor low note rates and high credit quality collateral. And given the lack of refinance incentives, the portfolio is exhibiting highly stable cash flows and historically low prepayment speed.
Sean Kensal: The MSR market had an active Q4 with bulk transactions are modestly quarter over quarter capping a record 2023 that saw over 800 billion in principal balance trade.
Sean Kensal: Italy was able to capitalize on this significant supply and we were the fifth largest buyer in the market Onboarding 42 billion in principal balance throughout the year.
Sean Kensal: Consistent with our previous commentary, we continue to favor low no rate high credit quality collateral and given the lack of refinance incentives. The portfolio is exhibiting highly stable cash flows and historically low prepayment speeds.
David Finkelstein: The MSR portfolio had a three-month CGR of 2.9% as of December, approximately 40% lower than the MBS universe. And with our unique positioning in the MSR market, as a preferred partner to originators in light of our scale and certainty of capital, we've been able to establish new relationships and expand our footprint. In particular, we've started to add flow sourcing partnerships, which we have begun selectively purchasing through this past quarter. And while low, no rate collaterals still are a preferred segment of the MSR market, we expect these flow relationships to add a source of more predictable supply. I'm looking ahead, and we anticipate the MSR market to be active this year, although those sales may moderate from 2023 to elevated levels.
Sean Kensal: Our portfolio had a three month CPR of two 9% as of December approximately 40% lower than the MBS universe.
Sean Kensal: And with our unique positioning in the MSR market as a preferred partner to originators in light of our scale and certainty of capital we've been able to establish new relationships and expand our footprint.
Sean Kensal: Particular, we've started to add flow sourcing partnerships, which we have begun to selectively purchasing through this past quarter, while low no rig collateral still a preferred segment of the MSR market. We expect these flow relationships to add a source of more predictable supply and <unk>.
Sean Kensal: Looking ahead, we anticipate the MSR market to be active this year those sales may moderate from 2020 threes elevated levels and we continue to be well positioned to add MSR with ample warehouse capacity minimal leverage and a desire to continue to allocate capital to this strategy.
David Finkelstein: And we continue to be well positioned to add MSR with ample warehouse capacity, minimal leverage, and a desire to continue to allocate capital to this strategy. Now, to wrap up before handing off to Serena, I wanted to note that, as always, we're cognizant of the risks on the horizon, and we remain prepared for additional market turbulence and vigilant as the operating environment evolves. That said, we're optimistic with respect to our outlook for each of our three businesses, and we believe that our three complementary, fully-skilled strategies should continue to provide Annaly shareholders superior risk-adjusted returns, a strong earnings profile, and stability across different interest rates and macro environments. And with substantial liquidity, including leverage, we remain ready to take advantage of opportunities where we believe capital will be most accretive. And now, with that, I'll hand it over to Serena to discuss the financials. Thank you, David.
Speaker Change: Now to wrap up before handing off to Serena I wanted to note that as always we're cognizant of the risks on the horizon and we remain prepared for additional market turbulence and vigilant as the operating environment evolves that said, we're optimistic with respect to our outlook for each of our three businesses and we believe that our three complement.
Serena Wolfe: <unk> fully scaled strategies should continue to provide analysts shareholders superior risk adjusted returns a strong earnings profile and stability across different interest rate and macro environments and with substantial liquidity and prudent leverage we remain ready to take advantage of opportunities, where we believe capital will be most occur.
Speaker Change: Greetings and now with that I'll hand, it over to Serena to discuss the financials.
Serena Wolfe: Thank you David today, I will provide brief financial highlights for the fourth quarter and select E statements exit. He ended December 31 2023.
Serena: Today I will provide brief financial highlights for the fourth quarter and select new state metrics for the year ended December 31, 2023. Consistent with prior quarters, while the 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.
Serena Wolfe: Consistent with prior quarters, while earnings release, discloses GAAP and non-GAAP earnings metrics My comments will focus on our non-GAAP AAD unrelated key performance metrics, which exclude a P. I.
Serena: As David mentioned earlier, 2023 was a year filled with substantial volatility, and our team managed the markets admirably, finishing the year strong, as demonstrated by our results for the quarter and full year. Our book value per share at year-end increased from the prior quarter to $19.44, and with our fourth-quarter dividend of $0.65, we generated an economic return for the quarter of 10.1% and 6% for the year ended December 31, 2023. In November and December, we experienced the inverse of the prior quarter with a sharp rally in rates and strong performance of mortgage-related assets, which led to a net dis-value contribution of $6.74 per share from our agency, residential credit, and NSR portfolio. These investment gains outweigh losses on our hedging portfolio of roughly $5.56 per share. Earnings available for distribution increased compared to the 3rd quarter by $0.02 per share to $0.68 for the 4th quarter.
Serena Wolfe: As David mentioned early in 2023, whether he favorably substantial volatility and our team managed the market admirably, finishing the year strong as demonstrated by our results for the quarter and full year.
Serena Wolfe: Our book value per share at year end, the increase from the prior quarter to $19 44.
Serena Wolfe: Our fourth quarter dividend of 65.
Serena Wolfe: We generated an economic return for the quarter of 10, 1% and 6% to be he ended December 31st 2023.
Serena Wolfe: In November and December we experienced the inverse of the prior quarter with a sharp rally in rates and strong performance of mortgage related assets, which led to a net book value contribution of $6 74 per share come out agency residential credit and MSR portfolio.
Serena Wolfe: He's investing gains outpaced the losses on our hedging portfolio of roughly $5 56 per share.
Serena Wolfe: Earnings available for distribution increased compared to the third quarter.
Serena Wolfe: <unk> 68 for the fourth quarter.
Serena: EAD benefited from a higher coupon on investments and lower repo expense due to lower average balances despite higher average repo rates, partially offset by a lower net interest income on plots and certain positions rolled off with favorable net receive rates. David referenced us in his new rotation offering coupon in AgencyMDX. We also saw an increase in the weighted average coupon for our residential credit investment. All together, this portfolio positioning continues to provide increased yields, as average yields XPAA rose again quarter over quarter, 18 basis points higher than the prior quarter at 4.64%. Similarly, NIMM followed the same trajectory as EAD for the quarter, with the portfolio generating 158 basis points of NIMM PAA, a 10 basis point increase from Q3.
Serena Wolfe: <unk> benefited from higher coupon on investments and lower repo expense due to lower average balances. Despite higher average repo rates, partially offset by a lower net interest income on swaps and certain conditions rolled off with favorable not received right.
Serena Wolfe: David referenced that continued rotation up in coupon and agency MBS.
Serena Wolfe: We also saw an increase in weighted average coupon for our residential credit investments.
Serena Wolfe: This portfolio positioning continues to provide increased yields and average yields ex PAA right again quarter over quarter 18 basis points higher than the prior quarter at $4 six 4%.
Serena Wolfe: Similarly, nymphalid the same trajectory with EIB for the quarter with a portfolio generating 158 basis points of NIM ex PAA, a 10 basis point increase from Q3.
Serena Wolfe: Net interest spread increased four basis points quarter over quarter at one.
Serena: The net interest spread increased four basis points, quarter over quarter, at 122 basis points compared to 118 basis points in Q3. As agency yields increased at a higher rate than repo rates, net of swap interest. The total cost of funds continues to increase quarter over quarter, albeit at a reduced pace in comparison to prior periods, rising 14 basis points to 3.42% of a quarter.
Serena Wolfe: 122 basis points compared to 118 basis points in Q3, and the agency yield increased at a higher rate than repo rate net of interest.
Serena Wolfe: The total cost of funds continued to increase quarter over quarter, albeit at a reduced pace in comparison to prior periods rising 14 basis points to 342% in the quarter.
Serena Wolfe: Meanwhile, our average repo rate for the quarter was 556 basis points compared to 544 basis points in the previous quarter.
Serena: Meanwhile, our average repo rate for the quarter was 556 basis points compared to 544 basis points for the previous quarter. Despite this increase, our total economic interest expense was only marginally higher at $665 million compared to $652 million in the prior quarter, primarily due to the decrease in average repo balances from $66 billion to $62 billion. As noted above, our swaps impact on the cost of funds further normalized due to the maturity of specific contracts, resulting in the net interest component of interest rate swaps declining by $15 million, which negatively impacted our cost of funds by approximately $4 billion. Turning to details on financing, notwithstanding the modest pressure we have noted in funding markets around quarter ends, funding markets remain ample and liquid.
Serena Wolfe: Despite this increase our total economic interest expenses only up marginally at 665 million compared to 652 million in the prior quarter, primarily due to the decrease in average repo balances from 66 billion to 62 billion.
Serena: As noted above our swaps impact on the cost of funds that are normalized she said maturity of specific contracts, resulting in the net interest component of interest rate swaps declining by $15 million, which negatively impacted our cost of funds by approximately four basis points.
Serena: Turning to details on financing notwithstanding modest pressure, we had noted in funding markets around quarter and funding markets remains ample and liquid.
Serena: We continue to see strong demand the funding for our agency and non agency security portfolio and while we keep an eye on RFP volumes and treasury supply noise that the fed is very focused on liquidity and funding markets.
Serena: Our repo strategy is consistent with prior quarters, and our Q4 reported weighted average repo days were 44 days down from 52 days in Q3 due to the roll down of longer term trades completed in prior quarters.
Serena: We continue to see strong demand for funding for our agency and non-agency security portfolios, and while we keep an eye on RRP volumes and treasury supply, we acknowledge that the Fed is very focused on liquidity in funding markets. Our repo strategy is consistent with prior quarters, and our Q4 reported weighted average repo days were 44 days, down from 62 days in Q3, due to the roll-down of longer-term trails completed in prior quarters.
Serena: Our treasury team continued to source additional funding options for our credit businesses and had another busy quarter, focusing on expanding warehouse capacity and achieving competitive financing terms for existing and new warehouse lenders.
Serena: During the quarter, we upsized, our committed MSR financing by $500 million and renewed a 400 million residential how long facility incorporating a non mark to market somewhat.
Serena: Our treasury team continues to source additional funding options for our credit businesses and had another busy quarter focusing on expanding warehouse capacity and achieving competitive financing terms for existing and new warehouse lenders. During the quarter, we upsized our committed MSR financing by $500 million and renewed a $400 million residential polling facility, incorporating a non-marked market sub-bonus. As of December 31, 2023, we have $2.6 billion of warehouse capacity at a 38% utilization rate, leaving substantial capacity. Market fundamentals for the quarter aided our liquidity profile with unencumbered assets of $5.2 billion compared to $4.7 billion in Q3, including cash and unencumbered agency assets of $3.8 billion, an increase of $1 billion compared to the prior quarter. In addition, we have approximately $1 billion in fair value of MSR that has been pledged to committed warehouse facilities that remain unbuilt.
Serena Wolfe: As of December 31st 2023, we have $3 6 billion of warehouse and a 38% utilization rate, meaning substantial capacity.
Serena: Market fundamentals for the quarter eight of that liquidity profile with unencumbered assets of $5 2 billion compared to $4 7 billion in Q3, including cash and unencumbered agency assets of $3 8 billion, an increase of 1 billion compared to the prior quarter.
Serena: In addition, we have approximately $1 billion in fair value of Amazon that has been pledged committed warehouse facilities that remain undrawn.
Serena: Together, we have roughly $6 2 billion of assets available for financing.
Serena: Our disciplined approach to financing our credit businesses on credit risk and cash management strategies have resulted in a very comfortable liquidity position to end the year.
Serena: And lastly, despite continued growth in our operating businesses. During 2023, we efficiently managed our expenses, resulting in no opex to equity ratio of 1.42% for the year.
Serena: On page a one 4% for the year ended December 31st 2022.
Serena: Together, we have roughly 6.2 billion assets available for financing. Our disciplined approach to financing our credit businesses and career risk and cash management strategies have resulted in a very comfortable liquidity position to end the year. And lastly, despite continued growth in our operating businesses during 2023, we officially managed our expenses, resulting in an OPEX to equity ratio of 1.42% for the year, compared to 1.4% for the year ended December 31st, 2022. That concludes our prepared remarks, and we will now open the lines for questions. Thank you, all three of you.
Serena: That concludes our prepared remarks, and we will now open the line for questions. Thank you operator.
Serena Wolfe: Right.
Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: If you at anytime your question has been addressed and you would like to withdraw. Your question. Please press Star then to you and at this time, we'll pause momentarily to assemble our roster.
Serena: And your first question will come from Bose, George with K B W. Please go ahead.
Speaker Change: Hey, everyone. Good morning, just wanted to start with a question just about the sort of the best place for allocating new capital you seem to lean into credit a little more and just curious if you could see that continue in 2024.
Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press the star and then one on your touch-tone phone.
Speaker Change: Sure. Good morning, Bose, Yeah, we could see that continuing I think the one of the points. We noted is just the acceleration in activity in the conduit channel and ultimate financing through a securitization. So so we do feel good about growing the credit portfolio.
Operator: If you're using a speakerphone, please pick up your handset before pressing a key. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Bose George with KBW. Please go ahead. Hey, everyone. Good morning.
Bose George: Primarily through the Onslow Bay channel and we'll look for more opportunities to do so I think.
Bose George: I just wanted to start with a question about the sort of best place for allocating new capital. You seem to lean into credit a little more. I'm just curious if you could see that continue in 2020. Good morning, Bose.
Bose George: The market share that Mike is has captured as it relates to the non QM market I think it's been impressive.
Bose George: Had our highest lock volume and.
Bose George: Purchase volume last quarter in a quarter, where our origination declined so we feel really good about it and we would expect to increase capital towards that effort.
David Finkelstein: Yeah, we could see that continuing. I think, you know, one of the points we noted was just the acceleration in activity in the conduit channel and ultimate financing through securitization. So we do feel good about growing the credit portfolio primarily through the Encore Bay channel, and we look for more opportunities to do so. I think, you know, the market share that Mike has captured as it relates to the non-QM market has been impressive.
Speaker Change: Okay, but.
David Finkelstein: In terms of incremental Roe's are they still a bit better than the agency versus the channel or how does it compare.
David Finkelstein: For agency has a better headline.
David Finkelstein: But you got to consider volatility and.
David Finkelstein: The overall capital allocation and still makes sense on a risk adjusted basis to continue to work to further into both Reza and MSR on a risk adjusted basis.
Speaker Change: Okay great.
David Finkelstein: You know, we had our highest lock volume and purchase volume last quarter in a quarter where origination declined, so we feel really good about it, and we would expect to increase capital towards that effort. Okay, but just in terms of incremental ROEs, are they still a bit better in the agency versus that channel, or how does that compare? Well, agency has a better headline ROE, but, you know, you've got to consider volatility and, you know, the overall capital allocation and whether it still makes sense on a risk-adjusted basis to continue to rotate further into both Reg E and MSR on a risk-adjusted basis.
David Finkelstein: I get an update on book value quarter to date.
Speaker Change: Sure you know, we actually just closed the books for January yesterday, So I'm, good month, and number 40, which was up 2%.
David Finkelstein: Rates have drifted a little bit higher over the last couple of days. So we've softened a bit since then but nothing to write home about.
Speaker Change: Okay, great. Thanks.
Speaker Change: You bet.
David Finkelstein: The next question will come from Crispin Love with Piper Sandler. Please go ahead.
Speaker Change: Thanks, and good morning, everyone. I. Appreciate you taking my questions first can you just update us on your outlook for agency spreads just given the significant tightening we've seen over the last several months. So curious on your view there on potential spread ranges with with rate cuts likely coming in mid 'twenty, four and hopefully a less volatile rate environment here.
Serena: Great, great. And Jason, can I get an update on book value? Sure, you know, we actually just closed the books for January yesterday, so that's a good month-end number for you, which was up 2%. Rates have drifted a little bit higher over the last couple of days, so we've softened a bit since then, but nothing to write home about. Okay. Vivek?
Vivek: Sure Kristen will let Bos Greenfield that one high touch bank.
Speaker Change: Holdco bond spreads that the whole 50 basis points over the blended president garments medallion and tied them to widen as we saw in 2019.
Operator: Hello, the next question will come from Kristen Love with Piper Chandler. Please go ahead. Thanks. Good morning, everyone.
Vivek: But the economic environment is also very different.
Operator: David had mentioned above that it's most likely going to ease monetary policy and drive value for the Osborn became opportunity.
Kristen Love: I appreciate you taking my questions. First, can you just update us on your outlook for agency spread, just given the significant tightening we've seen over the last several months? I'm curious on your view there on potential spread, with Ray tests likely coming in mid-24 and hopefully a less volatile ray environment. Sure, Christian. We'll let Sreenivas do that one. Hi, Kristin.
Sreenivas: Obviously, the first three quarters of drag or anything Bob shed about over 200 million of law and.
Sreenivas: Although the fourth quarter, our broadband at Peabody and Metropolitan Paydowns, albeit it would have been able to continue to reinvest paydowns.
Kristen Love: Paul.
Sreenivas: But potentially some upside that might add MBS arm.
Speaker Change: The second half of the year, so all in all pretty good.
Kristen Love: All of these brands.
Sreenivas: The Cancer Board stressed that the 150-day support over the amended Treasury term is materially different than the ones we saw in 2023, but the economic environment is also very different. David mentioned that the Fed is most likely going to ease monetary policy in 2024. They're also going to pay for QE. In the first three quarters of 2023, banks shed about $200 billion in LBS, and in the fourth quarter of 2023, they reinvested all of their data, are the industry reviewers that they will continue to reinvestigate in 2024, and there's potentially some upside that they might add in the second half of the year. So overall, we are pretty constructive on AMOC's Fed. Even in a no-landing scenario where the Fed is forced to... HiPlace again, we do not expect MBS First to get back to the vibes that you saw in 2020. Overall, in 2024, I think MBS First will...
Sreenivas: Option.
Sreenivas: Flavio overall.
Sreenivas: When the patents fourth store.
Sreenivas: Hi, Great again, we do not expect that MBS spreads to getting back to the wide stopping following do anything at.
Sreenivas: Overall, a great quarter, I think MBS platform.
Sreenivas: And then find a range than they did in the last couple of years, although we have underperformed.
Sreenivas: Underperforming.
Sreenivas: Think about the buckets between New York and are lower and they're very helpful.
Speaker Change: Pardon me.
Sreenivas: Yes.
Sreenivas: Yeah.
Sreenivas: Great.
Speaker Change: For the color and second question for me just can you speak to how you're thinking about the dividend level right now and sustainability in the current environment Ya you lowered your return assumptions across your strategies in the presentation. So curious how that plays into how you think about the dividend level and core earnings power and returns.
Sreenivas: Relative to the 65 quarterly dividend.
Sreenivas: Sure we did moderate those return estimates given the tightening that did occur later in the quarter, but look Chris do we out earned the dividend modestly in the fourth quarter, but as it relates to the first quarter here, we do expect.
Sreenivas: Thank you very much. Great, thank you for the call, and second question from me: can you speak to how you're thinking about... www.thevenusproject.com? Curious how that plays out. How you think about the dividend level and core earnings power and returns, relatively, quarterly. Sure, we did moderate those return estimates given the tightening that did occur later in the quarter. But more crystallographically, we out-earned the dividend modestly in the fourth quarter. As it relates to the first quarter here, we do expect EAD to be in line with the dividend, which we feel good about. And at this time, our view is that it's not our recommendation to the board to make an adjustment to the dividend.
Sreenivas: The dividend, which we feel good about and at this time, our view is that it's not our recommendation to the board to make an adjustment to the dividend we will see how things progressed throughout the rest of the year, but.
Sreenivas: We feel good about this quarter.
Speaker Change: Thanks, David I appreciate you taking my questions.
Speaker Change: Thank you Kristen.
Sreenivas: The next question will come from Doug Harter with UBS. Please go ahead.
David Finkelstein: And we'll see how things progress throughout the rest of the year, but we feel good about this quarter. I think there's a...
Speaker Change: Thanks, Ken.
David Finkelstein: Can you talk about you know kind of what the target leverage level with.
Operator: Thank you, Christian. The next question will come from Doug Carter with UBS. Please go ahead. Thanks. Can you talk about, you know, kind of what the target leverage level can be going forward kind of given your current mix of assets? Sure. Obviously, our overall leverage is going to be a functional capital allocation, and the decline in leverage is attributable to some extent to agency, but also the fact that, look, when we look at the markets and what we've recently experienced, volatility is something that could persist for a little bit longer. We're still kind of living underneath the lion's paw as it relates to risk events in the market, and so we're playing it very To sum it up, we're comfortable with where we are at here. Our overall leverage is going to be a function of reallocation into either REGI or MSR, and we feel good about where we are. We're not of the mindset immediately to increase leverage or really take it down.
Operator: It can be going forward kind of given your current mix of.
Operator: <unk>.
Operator: Sure.
Operator: Obviously, our overall leverage is going to be a function of capital allocation and the decline in leverage.
Operator: Attributable to some extent a lower weighting to agency, but also the fact that look where we are.
Operator: When we look at the market what we've recently experienced volatility is something that could persist for a little bit longer we're still kind of living underneath the lion's ball as it relates to risk events in the market and so we're playing it very conservatively, but the good news is we're able to earn it.
Operator: Good return with the current level of leverage so to sum it up we're comfortable with where we're at here.
Operator: Our overall leverage is going to be a function of reallocation into either revenue or MSR.
Operator: We feel good about where we're at we're not.
Douglas Harter: The mindset immediately to increase leverage nor really take it down.
Douglas Harter: I guess, just a follow up on that.
Speaker Change: David you know kind of what what are the types of events or or.
Douglas Harter: Or markers, you're looking for that would you know kind of caused you to feel comfortable taking leverage up.
David Finkelstein: I guess just to follow up on that, David, kind of what are the types of events or, or markers you're looking for that would, you know, kind of cause you to feel comfortable taking leverage up? You know, and I guess how do you balance that with, you know, by the time you get those all clears, maybe spreads aren't as attractive, and then you're, you know, leveraging less attractive assets? You know, so I guess how do you balance that, and what are the signposts you're looking for?
David Finkelstein: And I guess, how do you balance that with you know by the time you get those all players you know maybe spreads aren't as attractive and then you're leveraging less attractive asset.
David Finkelstein: So I guess, how do you balance that and what are the sign posts you're looking for.
Speaker Change: Sure give us rate cuts give us at the end of Q T give us stability around the world and will certainly raise raise leverage but look at the end of the day here. If you look at our our spread shocks, we do experienced spread tightening we're still going to get very good returns as we saw in the latter half of last quarter.
David Finkelstein: Sure, give us rate cuts, give us the end of Q2, and give us stability around the world, and we'll certainly raise leverage. But look, at the end of the day here, if you look at our spread shocks, if you do experience spread tightening, you're still going to get very good returns, as we saw in the latter half of last quarter. Just in terms of the overall model, we are generating a more stable return with less leverage than what a monoline agency firm would deliver, and we feel very good about it. Now, to the extent there are some real green sheets out there as it relates to volatility in the market, yeah, we could increase leverage if spreads are attractive, and to the extent that we get a widening in spreads, we have ample liquidity in the balance sheet to allow leverage to organically increase without having to worry about selling to manage our leverage.
David Finkelstein: Just in terms of the overall model.
David Finkelstein: We are generating a more stable return with less leverage than what a monoline agency firm would deliver in <unk>.
David Finkelstein: We feel very good about it now to the extent there are some real green shoots out there as it relates to volatility in the markets, where we could where we could increase leverage its spreads are attractive and to the extent that we get a widening in spreads we have ample liquidity.
David Finkelstein: And the balance sheet to allow leverage to organically increase without having to worry about selling to manage our leverage. So it's it's a really good position to be in right here, Doug but to the extent things do change for the better and the market is priced to that soft landing scenario, it's priced to perfection across all assets.
David Finkelstein: It's a really good position to be in right here, Doug, but to the extent things do change for the better, and the market is priced for that soft landing scenario, it's priced to perfection across all assets, with the possible addition of some mortgage-related assets. So we're a little bit cautious here, but that could change. Thank you. You bet, Doug. The next question will come from Jason Weaver with Jones Trading. Please go ahead. Hey, good morning.
Jason Weaver: Possible exception of bus some mortgage related assets so.
Jason Weaver: We're a little bit cautious here.
Jason Weaver: Could change.
Jason Weaver: Thank you.
Jason Weaver: You bet Doug.
David Finkelstein: The next question will come from Jason Weaver with Jones trading. Please go ahead.
Jason Weaver: Hey, good morning, Thanks for taking my question I'm kind of dovetail off both his question would have been a refinement I was wondering can you ballpark the incremental ROE range for new deployment across both agency and residential credit today.
Jason Weaver: Thanks for taking my question. I'm just going to dovetail off of Bose's question with a bit of refinement. I was wondering, can you ballpark the incremental ROE range for new deployment across both agency and residential credit today? Yeah, I think we'll go around the room here, but in agency, look, we can get mid-team returns, and upper-team returns on specified pools, for example, you know, moderate and low-balance production proof-of-concern pools, to the extent we can find them. There is some scarcity, but you can get upper-team items in those assets.
Jason Weaver: Yeah, I think we'll go around the room here, but in agency look we keep you at mid teens returns upper teens returns on specified pools for example.
Jason Weaver: Moderate loan balance.
Jason Weaver: <unk> coupon pools to the extent, we can find them. There are there are some scarcity, but you can get upper upper teens in those in those assets and then Mike you want to give a little rundown on the resi front sure Hey, Jason This is Mike.
David Finkelstein: And then, Mike, do you want to give a little rundown on the revenue front? Sure. Hey, this is Mike.
Mike: In terms of securitization the organic whole loan strategy, let's say, that's you know call it mid teens using a modest amount of recourse leverage.
Mike: In terms of, you know, securitization, the organic hold-on strategy, we'll say that's, you know, call it mid-teams, using a modest amount of recourse leverage. Within the security part of our portfolio, called CRT, that's probably high single digits on what we call two terms of leverage for below-IG M2s. And then, in terms of MPL, and RPL, we'll say it's low-teams on, you know, called two terms of leverage. The majority of our capital deployment within Revi has been in the hold-on and OVX strategies, given those returns. And that's all for today. But we can give you a little color on MSR as well.
Mike: And the security part of our portfolio called CRT, that's probably high single digits on you know call. It two turns of leverage we're below <unk>.
Mike: And then in terms of NPL RP Albert will say, it's low teens on you know call. It three turns of leverage so the majority of our capital deploying within RASM has been in our whole loan strategy given given those returns.
Mike: Okay.
Mike: We can give you a little color on MSR as well yeah.
R: Yeah. It's R.
Mike: Market is providing and we put it in the book around 10% to 12% return on those returns are a little bit lower because we do not employ a material amount of leverage on that strategy at this moment.
Mike: Now we have the liquidity lines, the ability to leverage that outfit and drive those returns higher but managing it with the context of the entire portfolio.
Kenneth Bruce: Yeah, I mean, the MSR margin is providing, like, you know, and we put it in the book, around 10 to 12 percent return. Now, those returns are a little bit lower because we do not employ material amounts that we leverage on that strategy at this moment. You know, we have the liquidity lines, the ability to leverage that asset and drive those returns higher. So, in terms of managing it in the context of the entire portfolio, you know, that return is added. It's a dual target.
Kenneth Bruce: You know that.
Kenneth Bruce: That return is adequate.
Speaker Change: Yeah, and Jason just to add to that on the MSR were running that portfolio four.
Kenneth Bruce: Tenths of a turn of leverage and given the low note rate nature of it and how benign the cash flows are.
Kenneth Bruce: Could it be levered to a greater extent, but if you think about it the agency portfolio is doing some of that library boring and so if you consider the benefit of that and that gets those returns up into the.
David Finkelstein: Yeah, and Jason, just to add to that on MSR, we're running our portfolio at four-tenths of a turn of leverage. And given the low, no-rate nature of it and how benign the cash flows are, it could be leveraged to a greater extent. But if you think about it, the agency portfolio is doing some of that levering for it. And so, if you consider the benefit of that, then that gets those returns up into the teenage portfolio. Alright, thank you for that. That's rightfully very important.
David Finkelstein: The teams.
Speaker Change: Alright, Thank you for that that's actually very helpful.
Speaker Change: You bet I know David you said in your prepared remarks about the shifting from <unk>.
David Finkelstein: Treasury base hedges over to Volker swaps.
David Finkelstein: Obviously, we've seen what's happened in swap spreads for the last I'll.
David Finkelstein: Call it two and a half months or citizens and in November.
Jason Weaver: Can you just elaborate on that shift in strategy, a little bit and that's what's behind it.
Speaker Change: Yeah sure so.
David Finkelstein: November and December month, and we did have a little bit of.
David Finkelstein: I know, David, you said in your prepared remarks about the shifting from treasury-based hedges over to broker-swaps. We've obviously seen what's happened in swap spreads for the last, you know, call it two and a half months or so since the end of November. Can you just elaborate on that shift in strategy a little bit and that's what's behind it?
David Finkelstein: Pressure in financing markets, which suggests that balance sheet assets.
David Finkelstein: Might be a little bit heavy and that's what led to a lot of the swap spread tightening that we that we experienced in for example in the very front end of the yield curve at the two year level two year rate, we got to negative 21 basis points on an on swap spreads versus treasuries so versus silver so.
David Finkelstein: Yeah, sure. So, you know, both the November and December month ends, we did have a little bit of pressure in the financing market, which, you know, suggests that balance sheet assets, you know, might be a little bit heavy. And that's what led to a lot of the swap spread tightening that we experienced. And, for example, at the very front end of the yield curve at the two-year level, the two-year rate, we got to negative 21 basis points on swap spreads versus traders, versus so forth. So, you know, the way we viewed it is that it would gravitate to zero through the passage of time over the two years.
David Finkelstein: We viewed it is that that will gravitate to zero through the passage of time over the two years and it made perfect sense to us.
David Finkelstein: Transition some of our two year futures over to paying on swap.
David Finkelstein: Since the end of the year those swap spreads have gone from negative 20 or thereabouts to negative 14. This morning. So it's been a good trade. We do still think that swap spreads are on the tight side, particularly even out the curve with 10 year swaps at negative 36 basis points that to us looks a little bit tight.
David Finkelstein: And it made perfect sense for us to transition some of our two-year futures over to paying on the swap. And, you know, just since the end of the year, the swap spread has gone from negative 20, and they're up to negative 14 this morning. So, it's been a good trade. We do still think that swap spreads are on the tight side, particularly on the curve, you know, with 10-year swaps at negative 36 basis points. That, to us, looks a little bit tight.
David Finkelstein: It has obviously begun discussing.
David Finkelstein: The tapering of Q T and as the chair noted last week that would be an active conversation at the March meeting to the extent that there.
David Finkelstein: They do move on that this spring then we will get a little bit of relief as it relates to balance sheet and that should help swap spreads widened back out.
David Finkelstein: That's helpful and maybe some of that through the last few months 200 billion of issuance, but nothing.
David Finkelstein: The Fed has obviously begun discussing the tapering of QT, and, as the Chair noted last week, that would be an active conversation at the March meeting. To the extent they're, you know, they do move on that this spring, then we will get, you know, a little bit of relief as it relates to the balance sheet, and that should help swap spreads widen back out. That's helpful, and maybe some of that's due to the last two months, $200 billion. So, that's a bit earlier.
David Finkelstein: Yeah, alright, thank you glad to accurately predict the time.
Speaker Change: You bet.
David Finkelstein: The next question will come from Rick Shane with J P. Morgan. Please go ahead.
Speaker Change: Hey, good morning, everybody.
David Finkelstein: Two questions one on each side of the balance sheet.
David Finkelstein: Well look at the growth.
David Finkelstein: In the fourth quarter in terms of the agency book.
David Finkelstein: Yeah. All right. Thank you for that. You bet. The next question will come from Rich Shane with J.P. Morgan. Please go ahead. Hey, good morning, everybody.
Richard B. Shane: You guys were most of what was added appears to be up in coupon six six and a half.
Richard B. Shane: I'm curious at this point in the cycle, how you feel about adding premium securities give.
Richard B. Shane: I have two questions, one on each side of the balance. When we look at the growth in the fourth quarter in terms of the agency book, most of what was added appears to be up in coupons, sixes, and six and a half. I'm curious, at this point in the cycle, how you feel about adding premium securities given that, if we could have reached that inflection point, we could see pretty significant bifurcation in the book, and speeds could pick up in those coupons fairly quickly. Yeah, let me pass it to Srini to talk about what we're exactly doing in HireCoupon. So, I think we've highlighted this over the last two quarters. Our core strategy is to move up in the coupon in a specified force and cost prediction. And what we've done over the last two quarters is execute that strategy.
Srini: Given that it's we sort of reach that inflection point, we could see pretty significant bifurcation in the book and speeds could pick up.
Srini: <unk> composites fairly quickly.
Srini: Yes, let me passenger screening to talk about what we are exactly doing in higher coupons.
Srini: I think they have highlighted this over the last few quarters, our core strategy is to more up in coupon and specified pools of top production.
Srini: What we've done over the last two quarters in aggregate that strategy.
Richard B. Shane: Basically.
Srini: The coupon stack given the sharp move in gas the coupon stack gaining a lot of work.
Srini: In the fourth quarter that gave us an opportunity to move up in coupon at relatively attractive levels.
Srini: The pace at which they move up in coupon and somewhat dictated by our ability to source high quality specified pools.
Sreeni: Basically, the coupon factor, given the sharp move in rates, the coupon factor, there was a lot of volatility in the first quarter. The significance of this change is our ability to move up in coupon rates at relatively attractive levels. And the pace at which we move up in coupons is somewhat dictated by our ability to source high-quality specified coupons at reasonable valuations. So that's why the pace has been somewhat moderated at which we move up in coupons, but we continue to like specified pools up in coupons. I think if you look at CBA, it's striking the loan size that new production is. The new production loan size has gone up almost $35,000 over the last year or so, and it's now elevated around $450,000. So these pools are likely to have a very steep S-curve and a very poor conductivity profile.
Sreeni: Valuations.
Sreeni: That's why the pace has been somewhat.
Sreeni: Moderator.
Sreeni: And coupon, but we continue to like specify philosophical arm I think.
Sreeni: If you look at DBA in spite of all of them.
Sreeni: But long fight the roadblock shall open loop option multiple brought up almost $75000 over the last.
Sreeni: Last year or so and is now running at around 450000. So these pools are likely to have a very steep curve in very poor conduct any profile.
Sreeni: And so the payoffs are satisfied.
Sreeni: Let's say, it's one or week, one we see in the TBA.
Speaker Change: And one more point got it.
Sreeni: Oh I was just going to say that if you look at the overall portfolio. The average dollar prices still 98, notwithstanding the rally we experienced it.
David Finkelstein: And so the payout's potentially going to compensate for one of the weakening we see in the previous production. And one more point to make, Rick. I was just going to say that if you look at the overall portfolio, the average dollar price is still $98, notwithstanding the rally we experienced in the fourth quarter, and you do get the most spread in the higher coupons. So you take more convexity risk, but we try and mitigate that. As Sreeni said, we specified pool selection.
David Finkelstein: In the fourth quarter and you did get the most spread again.
David Finkelstein: The higher coupons, so you take more convexity risk, but we try and mitigate that as <unk> said to specified pool selection, but at the end of the day, we get paid to manage convexity risk and if you're way down the coupon stack and low dollar price securities Youre not going to get the spread you need so that informs the strategy.
Rick: Got it and it is.
David Finkelstein: But at the end of the day, we get paid for the managed convexity risk, and if you're way down the coupon stack in low dollar-priced securities, you're not going to get the spread you need. So that informs the strategy. Got it. And you make the point. I realize that one of the things that shifted was not only where to earn coupons, but the percentage of generics, to your point, also went down.
David Finkelstein: You make the point I realized that one of the things that shifted not only is where you are in coupon, but the percentage of generics to your point also went down so that that's consistent.
David Finkelstein:
David Finkelstein: Turning turning to the right side for a second.
David Finkelstein: If we look at the repo funding.
Richard B. Shane: So that's, from Turning to the right side for a second, if we look at the repo funding, from the third to the fourth quarter, the duration went down, or the funding time went down slightly. I'm assuming in the third quarter you extended funding with the idea that you didn't want to take risk into year-end balance sheet contraction and that some of that was just runoff of the 120s, the over 120s, and the longer duration borrowings rolling down. But I'm also wondering if what we're seeing here is a little bit more bullish positioning on rates with you shortening the funding at all. So, to your first point about adding term in the third quarter, you are correct in that, and that does reflect the roll down.
Richard B. Shane: From the third to the fourth quarter D.
Richard B. Shane: Duration wind downs or that the funding time went down slightly.
Richard B. Shane: Assuming that the third quarter, you extended funding with the idea that you were.
Richard B. Shane: We didn't want to take risk into year end balance sheet contraction and that some of that was just run off of the 100 <unk> the over 100, twenty's and the longer duration borrowings rolling down but I'm also wondering if what we're seeing here is a little bit more bullish positioning on rates with you shortly in the funding.
Richard B. Shane: It also.
Richard B. Shane: Yeah. So to your first point about adding a term in the third quarter. You are correct in that and that does reflect the roll down and I'll tell you. Another point to note about the repo market today, a rig relative to a number of years ago is that the vast majority of the liquidity is in the very front end of.
David Finkelstein: And I'll tell you, you know, another point to note about the repo market today, Rick, relative to a number of years ago, is that the vast majority of the liquidity is in the very front end of the curve there. And, you know, to really extract the value in the repo market, it's, as you can say, somewhat short. We did have some very good opportunities to put on some long-term trades last year that we benefitted from, but generally speaking, the term in the repo is going to remain relatively short because that's where the liquidity is, and to the extent that, you know, the Fed does ease, certainly, then you benefit from that by being able to capture those low rates. So, to a certain extent, that's the case as well, on your second point.
David Finkelstein: <unk> of the curve there.
David Finkelstein: To really extract the value in the repo market you do need to stay somewhat short we did have some very good opportunities to put on some long term trades.
David Finkelstein: Last year.
David Finkelstein: We benefit from.
David Finkelstein: But generally speaking the <unk>.
David Finkelstein: Some of the repo is going to remain relatively short because that's where the liquidity is.
David Finkelstein: And to the extent that.
David Finkelstein: The fed does does he's certainly been you benefit from that by being able to capture those low rates so to certain extent, that's the case as well to your second point.
David Finkelstein: Okay, thank you. In terms of the... The phrase I was struggling to find at 6.30 in the morning, I apologize. But thank you. Yeah, you understand how it was there.
Speaker Change: Perfect. Okay. Thank you and term was the.
Speaker Change: We understand that west there.
Richard B. Shane: Thanks, guys. Have a great night. Thanks, Rick. Again, if you have a question, please press star, then 1. Our next question will come from Trevor Cranston with J&T Securities. Please go ahead.
Trevor Cranston: Thanks, guys have a great day.
Trevor Cranston: Thanks, Rick.
Richard B. Shane: Again, if you have a question. Please press Star then one our next question will come from Trevor Cranston with JMP Securities. Please go ahead.
Trevor Cranston: Thanks. Thanks. Good morning.
Trevor Cranston: Alright, thanks, good morning.
David Finkelstein: David, I think you mentioned in your prepared remarks that you might consider adding duration to the portfolio in the near future, so I was wondering if you could maybe just talk a little bit about what kind of catalysts you'd be looking for for that and maybe just generally your outlook on rates, particularly in the long run. Yeah, sure. So duration has been added organically a little bit since the end of the quarter just through higher rates. But what we're looking for is more persistent signs that inflation has moderated to a point where the Fed feels good about cutting rates, and we think we'll get there. If inflation rates for the next three months are going to be consistent with what they were for the last three months, we do think the Fed will lose money beginning in May, irrespective of how the economy plays out.
David Finkelstein: David I think you mentioned in your prepared remarks.
David Finkelstein: Jim.
David Finkelstein: Sidor, adding duration to the portfolio in the near future.
David Finkelstein: So I was wondering if you could maybe just talk a little bit about what kind of catalysts you'd be looking for for that and then maybe just generally your outlook on rates, particularly at the long run to occur.
David Finkelstein: Yeah sure. So so we have duration has has been added organically a little bit.
David Finkelstein: Since the end of the quarter just through higher rates.
David Finkelstein: But look what we're looking for is more persistent signs that inflation.
David Finkelstein: <unk> has moderated to a point where the fed.
David Finkelstein: Feels good about cutting rates and we think we'll get there.
David Finkelstein: You did.
David Finkelstein: Big inflation prints for the next three months are going to be consistent with what they worked for the last three months. We do think that fed will release beginning in may irrespective of how the economy plays out and once we see those signs we'd be more comfortable with duration because real rates still do look attractive and ultimately.
David Finkelstein: And once we see those signs, we'll be more comfortable with duration because real rates still do look attractive. And ultimately, we think where the long end of the yield curve should settle as we get through this is probably inside of 4%, and we'll look for those signs that volatility dissipates, and that might be beneficial to the portfolio.
Speaker Change: Thank you.
David Finkelstein: Where the long end of the yield curve should settle as we get through this as probably inside of 4% and <unk>.
David Finkelstein: We'll look for those signs, but volatility dissipates and that that might be beneficial to the portfolio.
David Finkelstein: Okay, that's helpful. You know, in the last several days, there have been a lot of headlines coming out about NYCB in particular. Can you guys talk about kind of how you think about the CRE market and if you see any sort of incremental risks coming out this year from banks or others potentially sitting on unrecognized CRE losses and sort of how you think that would impact markets overall? Yeah, certainly. Well, one point to notice is that we're certainly thankful that a little over two years ago, we did sell our commercial platform, so we're glad not to be in that sector. We also, you know, last year, for example, we sold all of our CMVX provisions to reduce that secure site exposure, and currently, what we own is roughly $220 million of AAA CLOs, which are almost exclusively multi-families, so very little exposure Now, as it relates to the broader CRE market, yeah, there are certainly some isolated risks out there. But we do think that, you know, this particular episode will be contained. There are other banks out there that will have to work off some of those CRE loans.
Speaker Change: Got it okay. That's helpful.
David Finkelstein:
David Finkelstein: Bought several days, there's been a lot of headlines coming out about N y C. B in particular.
David Finkelstein: Can you guys talk about kind of how you think about.
David Finkelstein: CRE market and if you see any sort of incremental risks coming out this year from from banks or others potentially sitting on unrecognized CRE losses, and sort of how do you think that would impact markets overall.
Speaker Change: Yeah, certainly we'll want to notice is we're certainly thankful that.
David Finkelstein: Little over two years ago, we did sell our commercial platform. So we're glad not to be in that sector.
David Finkelstein: Also last year for example, we took.
David Finkelstein: We sold all of our <unk> positions to reduce debt securitized exposure and currently what we own is roughly $220 million of AAA CLO, which are almost exclusively multifamily. So so very little exposure there now as it relates to the broader CRE Mark.
David Finkelstein: Yeah, Yeah, there's some certainly some isolated risks out there we do think that.
David Finkelstein: This particular.
David Finkelstein: Episode will be contained there are other banks out there that we will have to work off some of those CRE loans. The big banks are in good shape, but.
David Finkelstein: The big banks are in good shape, but, you know, it's something that's going to impact a lot of the regional banks over the near term, but we don't see it as being systemic to any extent, notwithstanding some of the volatility we're experiencing in markets as a consequence of New York Community Bank. So, long story short, we don't have exposure, and we're thankful of that, and we think this will be Okay, that's helpful. Thank you. Thanks, Trevor. The next question will come from Eric Hagen with DTIG. Please go ahead. Hey, thanks. Good morning.
Eric Hagen: It's something that's going to impact a lot of the regional banks over the near term, but we don't see it as being systemic.
Eric Hagen: To any extent notwithstanding some of the volatility we're experiencing in markets as a consequence of New York Community Bank. So.
Eric Hagen: Long story short, we don't exposure and we're thankful that.
Eric Hagen: We think this will be a relatively muted event in the market, but it is some factors that need to be worked through at the bank level.
Eric Hagen: Okay. That's helpful. Thank you.
Eric Hagen: Thanks Trevor.
David Finkelstein: Okay.
David Finkelstein: The next question will come from Eric Hagen with BTG. Please go ahead.
Eric Hagen: Hey, Thanks, Good morning, just continuing on the topic of the regional banks I mean, how do you feel like mortgage spreads and liquidity have responded as the pressure there over the last week and do you see that creating an opportunity to buy msr's potentially.
Eric Hagen: You know, just continuing on that topic of the regional banks, I mean, how do you feel like mortgage spreads and liquidity have responded to the pressure there over the last week? And do you see that creating an opportunity to buy MSRs, potentially? And then even, you know, tacking on to that, what's your outlook more generally? You know, for the supply of MSRs this year and how aggressive you expect to be in maybe bidding for bulk MSRs at different levels of interest rates. So I'll start off with just the overall mortgage market, and then Kent can talk about MSR specifically. There has been a little bit of volatility in spreads the past week, and it certainly does create opportunities, but it's not the type of event where we're looking to dive into the market.
Eric Hagen: And then even tacking on to that I mean, what's your outlook more generally.
Eric Hagen: For the supply of MSR is this year and how aggressive you expect to be and maybe bidding for bulk MSR is at different levels of interest rates.
Kent: Sure. So I'll start off with just the overall mortgage market and then Ken can talk about in the Saar specifically there has been a little bit of volatility in spreads over the past week and it certainly is as you know.
Eric Hagen: Does create opportunities.
Eric Hagen: But it's it's not the type of event.
Eric Hagen: Where we're looking to dive into the market, we've reinvested runoff at better levels and things like that.
Speaker Change: And we're watching.
Eric Hagen: We've reinvested runoff at better levels and things like that, and we're watching, but it's not a catalyst to necessarily jump into the market for MSR. Yeah, I mean, over the last year, regional banks have been buyers of MSR, and there are some regional banks that have been sellers of MSR, and the actual names are available in the transfer data. On the margin, I mean, we definitely think this will take some of those buyers out. The allocation of MSR to the regional banking sector, I mean, might it, you know, it doesn't seem like the whole reason for large corporations is these threats from institutions. So, you know, on the margin, it is a positive event for our strategy specifically because we are an opportunistic company. We'll also see how banking regulation plays out and what impact that may have, but generally speaking, we're reasonably optimistic on our ability to squeeze in the sun in a less competitive fashion.
Eric Hagen: But it's not a catalyst to necessarily.
Eric Hagen: Jump into the market.
Eric Hagen: On MSR, yes, I mean over the last year I mean regional banks have been buyers of MSR and there's been some regional banks that have been sellers of Amazon and the actual names are available.
Eric Hagen: In the transfer data on the margin I mean, we definitely think this will take some of those buyers are out.
Eric Hagen: The allocation of them, it's hard to the regional banking sector, I mean might it.
Eric Hagen: It doesn't seem like.
Eric Hagen: The holders of large portfolios that are distressed institutions. So.
Eric Hagen: On the margin.
Eric Hagen: To be a positive event for our strategy, specifically, because we are an opportunistic.
Eric Hagen: Participant.
Eric Hagen: At times.
Eric Hagen: So that you know more to come and we will also see how.
Eric Hagen: Banking regulation plays out and what impact that may have but generally speaking.
Eric Hagen: We're reasonably optimistic on our ability to source in the store.
Eric Hagen: Competitive fashion.
Kenneth Bruce: I appreciate you guys. Thank you. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. David Finkelstein for any closing remarks. Please go ahead, sir.
Kenneth Bruce: Alright.
David Finkelstein: Appreciate it guys. Thank you.
David Finkelstein: Thanks, Eric.
David Finkelstein: This concludes our question and answer session I would like to turn the conference back over to Mr. Dave David Finkelstein for any closing remarks. Please go ahead Sir.
David Finkelstein: Thanks, Chuck. And thank you, everybody. Good luck, and we'll talk to you in the spring.
David Finkelstein: Thanks, Chuck and thank you everybody.
David Finkelstein: Good luck and Bill will talk to you in the spring.
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Operator: ... The Bulletproof Executive, 2013, Copyright 2020, New Thinking Allowed Foundation
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